case: 13-1785 document: 88 page: 1 06/06/2013 …...13-1785-bk(l) in the united states court of...

13-1785-bk(L)

IN THE

United States Court of Appeals FOR THE SECOND CIRCUIT

In Re: Bernard L. Madoff Investment Securities LLC,

Debtor.

IRVING H. PICARD, Trustee for the Substantively Consolidated SIPA Liquidation of

Bernard L. Madoff Investment Securities LLC and the Estate of Bernard L. Madoff,

Plaintiff - Appellant,

SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor pursuant to the Securities Investor Protection Act,

15 U.S.C. § 78eee(d),

-against- Intervenor,

ERIC T. SCHNEIDERMAN, BART M. SCHWARTZ, RALPH C.

DAWSON, J. EZRA MERKIN, GABRIEL CAPITAL CORPORATION,

Defendant-Appellees.

On Appeal from the United States District Court for the Southern District of New York

BRIEF OF INTERVENOR SECURITIES INVESTOR PROTECTION CORPORATION

OF COUNSEL: JOSEPHINE WANG General Counsel KEVIN H. BELL Senior Associate General Counsel SECURITIES INVESTOR

For Dispute Resolution PROTECTION CORPORATION 805 Fifteenth Street, N.W., Suite 800

NATHANAEL S. KELLEY Washington, D. C. 20005 Staff Attorney Telephone: (202) 371-8300

Date: June 6, 2013 Washington, D.C.

Case: 13-1785 Document: 88 Page: 1 06/06/2013 957976 106

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure,

Intervenor Securities Investor Protection Corporation certifies that it has no

corporate parents, affiliates, and/or subsidiaries that are publicly held.


i

TABLE OF CONTENTS

PAGE

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

STATEMENT OF JURISDICTION.......................................................................... 2

STATEMENT OF THE ISSUES............................................................................... 3

STATEMENT OF THE CASE .................................................................................. 4

STATEMENT OF THE FACTS ............................................................................... 6

A. Initiation of the SIPA Liquidation ......................................................... 6

B. Avoidance and Recovery Actions Against the Merkin Defendants ..... 7

C. The New York Attorney General Action .............................................. 9

D. The Receiver Action ............................................................................ 11

E. Settlement Negotiations ...................................................................... 12

F. The Trustee’s Stay Application ........................................................... 16

G. The District Court’s Decision ............................................................. 17

STANDARD OF REVIEW ..................................................................................... 20

SUMMARY OF THE ARGUMENT ...................................................................... 20


ii

ARGUMENT ........................................................................................................... 23

I. SIPA PRIORITIZES THE PROTECTION OF BLMIS CUSTOMERS AND CUSTOMER PROPERTY ............................... 23 A. SIPA Creates a Federal Statutory Scheme Prioritizing the Protection of and Recovery for Customers of Failed Broker-Dealers ............................................................... 23 B. SIPA and the Bankruptcy Code Provide Expansive Protections for Customer Property ........................................... 26 C. In Allowing the NYAG and Receiver Actions to Continue, the District Court Inappropriately Prioritizes Feeder Fund

Investors over Customers Protected by SIPA ........................... 29 II. AN INJUNCTION IS NECESSARY TO PREVENT THE DISSIPATION OF CUSTOMER PROPERTY SOUGHT BY THE TRUSTEE ............................................................................ 33 A. Injunctive Relief is Appropriate to Avoid Impeding the SIPA Liquidation ................................................................ 33 B. The Trustee Has Established Good Cause for the Issuance of an Injunction .......................................................... 36 1. The Settlement Payment Involves Assets Fraudulently Transferred from BLMIS .......................... 38 2. The Merkin Defendants Would Be Unable to Satisfy the Settlement and a Judgment in Favor of the Trustee ........................................................ 40 III. THE TRUSTEE’S STAY ACTION IS TIMELY AND IS NOT BARRED BY THE DOCTRINE OF LACHES ................... 42 A. The Trustee Put the Defendants on Notice of the Trustee’s Claims ....................................................................... 44


iii

B. The Trustee Commenced the Stay Action in a Timely Manner Once He Learned that the Merkin Assets Were Threatened ....................................................................... 45 C. Enjoining the Settlement Pending Resolution of the Trustee’s Merkin Recovery Will Not Prejudice the Defendants ........................................................................... 48 CONCLUSION ........................................................................................................ 49

CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

ADDENDUM

CERTIFICATE OF SERVICE


iv

TABLE OF AUTHORITIES

CASES: PAGE

In re 650 Fifth Ave. & Related Props., 777 F. Supp. 2d 529 (S.D.N.Y. 2011) ............................................................................................. 38 A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F. 2d 1020 (Fed. Cir. 1992) ........................................................................................ 42–43 In re Adelphia Commc’ns, 298 B.R. 49 (S.D.N.Y. 2003) ....................................... 37 Adelphia Commc’ns Corp. v. Rigas, 2003 WL 21297258 (S.D.N.Y. June 4, 2003) ................................................................................ 29 Adelphia Commc’ns Corp. v. The America Channel, LLC (In re Adelphia Commc’ns Corp.), 2006 WL 1529357 (Bankr. S.D.N.Y. June 5, 2006)..................................................................... 28 Amalgamated Lithographers of Am. v. Unz & Co., 670 F. Supp. 2d 214 (S.D.N.Y. 2009) ....................................................................................... 43, 44 In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122 (Bankr. S.D.N.Y. 2010), aff’d, 654 F.3d 229 (2d Cir. 2011), cert. dismissed, 132 S. Ct. 2712 (2012), and cert. den., 133 S. Ct. 24 and 133 S. Ct. 25 (2012) .......................................................................... 23–24 In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422 (2d Cir. 2013) ..................... 31 Connecticut v. Physicians Health Services, 287 F.3d 110 (2d Cir. 2002) ............... 30 Cnty. of Nassau v. Leavitt, 524 F.3d 408 (2d Cir. 2008) ......................................... 20 DeSilvio v. Prudential Lines, Inc., 701 F.2d 13 (2d Cir. 1983) ............................... 44 Exch. Nat’l Bank of Chicago v. Wyatt, 517 F.2d 453 (2d Cir. 1975) ...................... 27 FTC v. Bronson Partners, LLC, 654 F.3d 359 (2d Cir. 2011) ................................ 39 Fisher v. Apostolou, 155 F.3d 876 (7th Cir. 1998) ............................................ 35, 36


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TABLE OF AUTHORITIES (cont.)

CASES: PAGE

Fox v. Picard (In re Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012) ..................... 34 Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999)....................................................................................... 19 Hutton Constr. Co. v. Cnty. of Rockland, 52 F.3d 1191 (2d Cir. 1995) .................. 44 IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689 (11th Cir. 2005) ............................................................................................. 38 Ivani Contracting Corp. v. City of New York, 103 F.3d 257 (2d Cir.), cert. den., 520 U.S. 1211 (1997) ............................. 20 Johns-Manville Corp. v. Asbestos Litig. Grp. (In re Johns-Manville Corp.), 26 B.R. 420 (Bankr. S.D.N.Y. 1983), aff’d in part, 40 B.R. 219 (S.D.N.Y. 1984), rev’d in part on other grounds, 41 B.R. 926 (S.D.N.Y. 1984) ............................................................................................. 28 Johns-Manville Corp. v. Colo. Ins. Guar. Ass’n (In re Johns-Manville Corp.), 91 B.R. 225 (Bankr. S.D.N.Y. 1988) ............ 35 Kagan v. St. Vincent’s Catholic Med. Ctrs. of N.Y. (In re Saint Vincent’s Catholic Med. Ctrs. of N.Y.), 449 B.R. 209 (S.D.N.Y. 2011) ...................................................................... 34 Landgraf v. USI Film Prods., 511 U.S. 244 (1994) ................................................. 25 In re Lloyd Sec., Inc., 75 F.3d 853 (3d Cir. 1996) ................................................... 27 MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir.), cert. den., 488 U.S. 868 (1988) ..................................................................... 29 Mogavero v. McLucas, 543 F.2d 1081 (4th Cir. 1976) ........................................... 46


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CASES: PAGE

People of the State of New York by Abrams v. 11 Cornwall Co., 695 F.2d 34 (2d Cir. 1982) ............................................................................ 30 Pfizer, Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co.), 676 F.3d 45 (2d Cir. 2012) ............................................................................ 28 Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC), 440 B.R. 243 (Bankr. S.D.N.Y. 2010) ............................................................................... 8–9 ProFitness Physical Therapy Ctr. v. Pro-Fit Orthopedic, 314 F.3d 62 (2d Cir. 2002) ............................................................................ 47 Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282 (2d Cir. 2003) ................................... 37 Schott v. Ivy Asset Management Corp., No. 10 Civ. 8077 (CM) (S.D.N.Y.) .... 29, 30 SEC v. American Bd. of Trade, Inc., 830 F.2d 431 (2d Cir. 1987), cert. den. sub nom., Economou v. SEC, 485 U.S. 938 (1988) ....................... 30 SEC v. Byers, 2009 WL 33434 (S.D.N.Y. Jan. 7, 2009) ......................................... 40 SEC v. Drexel Burnham Lambert Grp. (In re Drexel Burnham Lambert Grp.), 960 F.2d 285 (2d Cir. 1992), cert. den. sub nom., Hart Holding Co. v. Drexel Burnham Lambert Grp., 506 U.S. 1088 (1993) ...................................................... 36–37 SEC v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir. 1974) ................................... 41 Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (1975) .................................... 27 Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 285 (Bankr. S.D.N.Y. 2011), aff’d sub nom., In re Aozora Bank Ltd. v. Sec. Investor Prot. Corp., 480 B.R. 117 (S.D.N.Y. 2012), aff’d sub nom., In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422 (2d Cir. 2013) .......................................................................... 32


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CASES: PAGE

Sec. Investor Prot. Corp. v. Wise (In re Stalvey & Assocs., Inc.), 750 F.2d 464 (5th Cir. 1985) ......................................................................... 23 Stone v. Williams, 873 F.2d 620 (2d Cir.), vacated on rehearing, 891 F.2d 401 (2d Cir. 1989) .......................................................................... 46 The Lautenberg Found. v. Picard (In re Bernard L. Madoff Inv. Sec., LLC), 2013 WL 616269 (2d Cir. Feb. 20, 2013) ................ 21, 27, 28–29, 34, 36, 47 Unsecured Creditors’ Comm. Of DeLorean Motor Co. v. DeLorean (In re DeLorean Motor Co.), 755 F.2d 1223 (6th Cir. 1985) ........................ 36 Veltri v. Bldg. Serv. 32B-J Pension Fund, 393 F.3d 318 (2d Cir. 2004) ................. 44 STATUTES AND RULES:

Federal Rules of Appellate Procedure 4(a)(1)(A) ................................................................................................................... 2 New York Fraudulent Conveyance Act (N.Y. Debt. & Cred. §§) 270 et seq.................................................................................................................... 8 N.Y. C.P.L.R. 203(g) ......................................................................................................................... 8


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STATUTES AND RULES: PAGE

Securities Investor Protection Act, as amended, 15 U.S.C. ' 78eee(a)(3) ........................................................................................................... 5, 17 78eee(b)(2)(A) ................................................................................................. 2, 5, 17 78eee(b)(2)(B) .......................................................................................... 5, 17, 26–27 78eee(b)(2)(B)(i) .................................................................................................... 6-7 78eee(b)(4) ......................................................................................................... 2, 4, 6 78fff(a) ..................................................................................................................... 27 78fff(b) ................................................................................................................. 8, 27 78fff-1(a) .................................................................................................................... 8 78fff-2(b) .................................................................................................................. 24 78fff-2(c)(1) ............................................................................................................. 24 78fff-2(c)(3) ......................................................................................................... 8, 26 78lll(4) ................................................................................................................ 24, 26 78lll(4)(D) ................................................................................................................ 25 78lll(4)(E) ................................................................................................................. 25 United States Bankruptcy Code, 11 U.S.C. § 105(a) ................................................................................................................passim 362 .................................................................................................................. 7, 26, 28 362(a) ................................................................................................... 5, 6, 17, 20, 27 362(a)(3) ............................................................................................................... 7, 27 502(d) ................................................................................................................... 8, 42 502(h) ....................................................................................................................... 42 542 .............................................................................................................................. 8 544 ............................................................................................................................ 8 547 .............................................................................................................................. 8 548(a) ......................................................................................................................... 8 550(a) ......................................................................................................................... 8 551 .............................................................................................................................. 8


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STATUTES AND RULES: PAGE

28 U.S.C. § 158(d) ......................................................................................................................... 2 1291 ........................................................................................................................... 2 1334(b) ....................................................................................................................... 2 LEGISLATIVE MATERIALS: Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 929H, 124 Stat. 1376 (2010) ...................................... 25 H.R. Rep. No. 95-595 (1977) ................................................................................... 23 PUBLICATIONS AND TREATISES: Douglas Laycock, Modern American Remedies 673–74 (3d ed. 2002) ................. 39


This appeal arises in the context of the liquidation proceeding of Bernard L.

Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor

Protection Act, 15 U.S.C. §§ 78aaa–78lll (“SIPA”),1 substantively consolidated

with the estate of Bernard L. Madoff (“Madoff”). Under SIPA section 78eee(d),

the Securities Investor Protection Corporation (“SIPC”) is deemed to be a party in

interest as to all matters arising in a SIPA proceeding, with the right to be heard on

all such matters. SIPC submits this brief in support of the position of the Trustee

in this case (the “Trustee”).

In the underlying action, the Trustee seeks to enjoin a payment (the

“Settlement Payment”), pursuant to a settlement agreement among the Defendants

(the “Settlement Agreement”), which the Trustee alleges will impede his action

against certain of the Defendants to avoid and recover fraudulent transfers for the

benefit of the customers of the BLMIS estate (the “Recovery Action”). The

Defendants consist of Eric T. Schneiderman, as successor to Andrew M. Cuomo,

Attorney General of the State of New York (the “NYAG”); Bart M. Schwartz, as

Receiver for Ariel Fund, Ltd. and the Gabriel Capital, L.P. (the “Ariel & Gabriel

Receiver”); Ralph Dawson, as successor to David Pitofsky, as Receiver for Ascot

Partners, L.P. and Ascot Fund, Ltd. (the “Ascot Receiver”); and J. Ezra Merkin

1 References hereinafter to provisions of SIPA shall be to the United States Code and, for convenience, shall omit “15 U.S.C.”


2

(“Merkin”) and Gabriel Capital Corporation (together with Merkin, the “Merkin

Defendants”). Ariel Fund, Ltd.; Gabriel Capital, L.P.; and Ascot Partners, L.P. are

referred to as the “Funds.”

STATEMENT OF JURISDICTION

The United States Bankruptcy Court for the Southern District of New York

(the “Bankruptcy Court”) had jurisdiction over this contested matter pursuant to

SIPA section 78eee(b)(2)(A) and (b)(4) and 28 U.S.C. § 1334(b). The case was

brought by the Trustee in the Bankruptcy Court but later was withdrawn to the

United States District Court for the Southern District of New York (the “District

Court”) (Docket No. 12-cv-6733 (JSR)). (A-989.)2 On April 15, 2013, the District

Court dismissed the Trustee’s Complaint. (SPA-1.) The Clerk entered the

judgment on April 18, 2013. (SPA-27.) The Trustee filed a notice of appeal on

May 2, 2013.

Pursuant to Rule 4(a)(1)(A) of the Federal Rules of Appellate Procedure, the

appeal is timely. This Court has jurisdiction pursuant to 28 U.S.C. §§ 158(d) and

1291.

2 Documents in the Joint Appendix are referred to herein as “A-___” and in the Special Appendix as “SPA-___.”


3

STATEMENT OF THE ISSUES

SIPC addresses the following issues in this appeal:

Whether the district court misconstrued the standard that applies to injunctions under section 105 of the Bankruptcy Code.

Whether the district court erred in denying a preliminary injunction under section 105 of the Bankruptcy Code due to its finding that the Trustee has not shown that the fraudulent transfers sought by the Trustee would be used to satisfy a payment under the Defendants’ Settlement Agreement.

Whether the district court erred in denying a preliminary injunction under section 105 of the Bankruptcy Code due to its finding that the Trustee had failed to present a factual basis that the Merkin Defendants and Funds will be unable to satisfy both the amount sought by the Trustee’s claims and the Settlement Payment.

Whether the district court inappropriately dismissed the Trustee’s complaint under the doctrine of laches where (i) the Defendants were on notice of the Trustee’s intention to seek an injunction if the Defendants’ actions threatened the Trustee’s claims; (ii) the Trustee and Defendants had been in negotiations for a settlement which would protect the Trustee’s interests; and (iii) a stay of the Defendants’ Settlement Agreement pending resolution of the Trustee’s actions would not prejudice the Defendants.

SIPC respectfully submits that, because (i) the Defendants’ actions conflict

with SIPA’s remedial goal of channeling estate property and claims through the

SIPA proceeding in the Bankruptcy Court for the benefit of BLMIS customers, (ii)

the Merkin Defendants and Funds indisputably received fraudulent transfers from

the BLMIS estate, and (iii) disbursement of the Merkin Defendants’ and Funds’

assets under the Settlement Agreement would necessarily impede the Trustee’s

ability to recover the fraudulent conveyances claimed in the Recovery Action, the


4

Defendants should have been enjoined, pursuant to section 105(a), from

completing their settlement. Furthermore, SIPC submits that the District Court

erred in dismissing the Trustee’s complaint where the Trustee acted in a timely

manner as soon as he discovered that the Settlement Agreement would impede the

Recovery Action through its disbursement of assets sought by the Trustee.

STATEMENT OF THE CASE

On December 15, 2008, upon an application by SIPC, the District Court

entered an order (the “Protective Order”) which placed BLMIS in liquidation under

SIPA, appointed Irving H. Picard as trustee for BLMIS, and removed the

liquidation proceeding to the Bankruptcy Court, consistent with SIPA section

78eee(b)(4).

On May 6, 2009, the Trustee commenced the Recovery Action as an

adversary proceeding in the Bankruptcy Court against the Merkin Defendants and

the Funds, seeking to avoid and recover more than $500 million in fraudulent

transfers and preferences of stolen BLMIS customer property made by Madoff and

BLMIS to the Merkin Defendants and the Funds. (A-87.) The Recovery Action is

ongoing. The Trustee seeks the avoidance and recovery of the aforementioned

BLMIS customer property under SIPA, the Bankruptcy Code, and applicable

provisions of New York state law.


5

In April 2009, the NYAG commenced a separate action in the Supreme

Court of the State of New York (“NYAG Action”) against the Merkin Defendants,

asserting claims based upon the Merkin Defendants’ fraudulent conduct and

misrepresentations related to Madoff’s Ponzi scheme. (A-206.) On September 16,

2010, the Ariel & Gabriel Receiver also brought an action in New York State

Court (the “Receiver Action”) against the Merkin Defendants, asserting many of

the same allegations. (A-340.)

On June 25, 2012, the NYAG, on behalf of himself and the Receivers,

announced the Settlement Agreement, a $410 million settlement with the Merkin

Defendants. (A-61.) The Trustee contends that the payment under the Settlement

Agreement would substantially deplete the funds that the Trustee seeks to recover

from the Merkin Defendants for the benefit of BLMIS’s customers. Accordingly,

on August 1, 2012, the Trustee filed a complaint (the “Stay Action”) (A-24) and an

application to preliminarily enjoin the consummation of the Settlement Agreement

(the “Injunction Motion”). (A-46.) The Trustee sought the injunction and stay

pursuant to the Protective Order issued by the District Court, as well as sections

362(a) and 105(a) of the Bankruptcy Code and SIPA sections 78eee(a)(3) and

78eee(b)(2)(A) and (B).

On December 27, 2012, upon the Defendants’ motion, the District Court

withdrew the Stay Action and Injunction Motion. (A-989.) By order filed on


6

April 15, 2013 (the “Order”), following briefing and oral argument on the

Injunction Motion, the District Court (Rakoff, J.) denied the Injunction Motion and

dismissed the Stay Action. (SPA-1.)

STATEMENT OF THE FACTS

A. Initiation of the SIPA Liquidation

As is now widely known, Madoff, the former principal of BLMIS, used

BLMIS to engage in a Ponzi scheme of unprecedented scale. While the scope of

Madoff’s fraud had never been seen before, the mechanisms of his scheme were

time-worn: he took in investors’ money and, rather than investing it as represented,

used it for his own personal gain and to pay false returns to other investors. Thus,

the money that investors and feeder funds received from BLMIS, whether in the

form of withdrawals or management fees, was, in fact, stolen from other investors.

On December 11, 2008, Madoff’s scheme came to an abrupt halt with the

arrest of Madoff and the filing of a complaint against him by the Securities and

Exchange Commission. On December 15, 2008, upon an application by SIPC, the

District Court entered the Protective Order which, among other things, placed

BLMIS in liquidation under SIPA, appointed the Trustee and, consistent with SIPA

section 78eee(b)(4), removed the liquidation proceeding to the Bankruptcy Court.

In the Protective Order, the District Court also reaffirmed the stays that applied to

this case pursuant to Bankruptcy Code section 362(a) SIPA section


7

78eee(b)(2)(B)(i). Under Bankruptcy Code section 362, which by its terms applies

to a SIPA case, “any act to . . . exercise control over property of the estate” also is

stayed. See 11 U.S.C. § 362(a)(3).

B. Avoidance and Recovery Actions Against the Merkin Defendants

The Merkin Defendants managed several private investment partnerships,

including the Funds. (A-992.) Under the Merkin Defendants’ direction, and due

in no small part to Merkin’s close relationship with Madoff, the Funds invested

heavily in BLMIS. (A-992.) Specifically, Ascot Partners, L.P. and Ascot Fund,

Ltd. invested the vast majority of their assets with BLMIS, and Ariel Fund, Ltd.

and the Gabriel Capital, L.P. invested approximately thirty percent of their assets

with BLMIS. (A-992.) Following the collapse of BLMIS, the Receivers were

appointed to manage and wind down the Funds. (A-683.)

Because Madoff operated a Ponzi scheme, the money received by the

Merkin Defendants and Funds from BLMIS, whether in the form of withdrawals of

fictitious gains or principal or fees allegedly owed to the Merkin Defendants and

Funds from investors, was comprised of investments other customers had placed

with BLMIS. Thus, as part of his ongoing efforts to recover such stolen customer

property, on May 6, 2009, the Trustee filed an avoidance and recovery action

against the Merkin Defendants and Funds, seeking to avoid and recover over $500

million in avoidable transfers held by the Merkin Defendants and Funds pursuant


8

to SIPA sections 78fff(b), 78fff-1(a), and 78fff-2(c)(3); Bankruptcy Code sections

105(a), 502(d), 542, 544, 547, 548(a), 550(a), and 551; the New York Fraudulent

Conveyance Act (N.Y. Debt. & Cred. §§ 270 et seq.); and N.Y. C.P.L.R. 203(g).

(A-87.) The Trustee also sought the imposition of a constructive trust and the

disallowance of the Merkin Defendants’ and Funds’ claims in the BLMIS

liquidation. (A-119.) On December 23, 2009, the Trustee amended his complaint

in order to seek recovery from Merkin himself as the general partner of Ascot

Fund, based upon Ascot Fund’s insolvency. (A-124.)

In his complaint against the Merkin Defendants, the Trustee alleged that the

Merkin Defendants knew or should have known about the fraud perpetrated by

BLMIS. In particular, Merkin allegedly had close business and social ties with

Madoff and, through his leadership roles at the various Funds, funneled millions of

investor dollars into BLMIS. (A-97–99.) In return, the Funds and the Merkin

Defendants withdrew over $500 million from BLMIS from 1995 to 2008, and the

Merkin Defendants additionally received substantial fees and commissions from

BLMIS. (A-97–99.)

On November 17, 2010, the Bankruptcy Court denied most of the Merkin

Defendants’ motion to dismiss the Recovery Action, dismissing on narrow grounds

only those claims for immediate turnover of fraudulently transferred property and

for preferential transfers. Picard v. Merkin (In re Bernard L. Madoff Inv. Sec.


9

LLC), 440 B.R. 243, 273 (Bankr. S.D.N.Y. 2010). The Bankruptcy Court held that

the Trustee had sufficiently alleged claims for actual fraudulent transfers,

constructive fraudulent transfers, and subsequent transfers to the Merkin

Defendants, as well as for general partner liability for Merkin. Id.

C. The New York Attorney General Action

In April 2009, in a race to the courthouse, the NYAG placed himself in

competition with the Trustee when he commenced the NYAG Action in the

Supreme Court of the State of New York against the Merkin Defendants. (A-206.)

Purporting to promote the “economic health and well-being of investors” and

“financial well-being” of non-profit organizations, the NYAG sought to enjoin the

Merkin Defendants from participating in the securities industry in New York.

(A-211, 259.) Additionally, the NYAG sought restitution and compensatory

damages on behalf of investors in the Merkin Funds, as well as attorney’s fees and

other expenses. (A-259.)

The NYAG based his claims against the Merkin Defendants upon the

Merkin Defendants’ fraudulent conduct and misrepresentations related to Madoff’s

Ponzi scheme. In particular, the NYAG alleged that the Merkin Defendants

violated the Martin Act when Merkin invested a substantial portion of his

investors’ funds in BLMIS without disclosing such investment and without

conducting due diligence regarding Madoff’s operations. As alleged in the NYAG


10

Action, “Merkin collected hundreds of millions of dollars in fees for managing

investors’ funds, while turning all, or a substantial portion, of those funds over to

Madoff and others . . . whom Merkin failed to adequately oversee, audit, or

investigate.” (A-210.) The NYAG further alleged that Merkin engaged in

“reckless” conduct and “ignored numerous warning signs that investing with

Madoff presented a high risk of fraud.” (A-247–48.)

The NYAG filed a motion for summary judgment on October 18, 2010.

(A-262.) The parties to the NYAG Action subsequently agreed to a stay of a

decision on the motion for summary judgment pending settlement negotiations

which eventually resulted in the Settlement Agreement, discussed below. (A-419.)

No action has been, or is expected to be, taken on the motion for summary

judgment.

While the NYAG Action did not specify a damages amount, the NYAG has,

in his motion for summary judgment, claimed to seek the recovery of nearly $729

million in fees received by the Merkin Defendants. (A-293–94.) Importantly, the

NYAG also seeks to recover investor losses stemming from Madoff’s Ponzi

scheme, arguing that “Merkin knew of highly troubling information surrounding

Madoff’s operations” yet steered the Funds’ investments to Madoff anyway.

(A-296–97.) This is the same conduct upon which the Trustee argues that the


11

Merkin Defendants and Funds must return fraudulent transfers to the BLMIS

estate.

D. The Receiver Action

On September 16, 2010, the Ariel & Gabriel Receiver also brought an action

in the Supreme Court of the State of New York (the “Receiver Action”)3 against

the Merkin Defendants, asserting many of the same allegations as the NYAG and

the Trustee. (A-340.) The complaint asserts claims arising from the same

operative facts as those presented in the Trustee’s Recovery Action. (A-340–43;

357–59.) Similar to the NYAG Action, the Receiver Action seeks unspecified

compensatory, consequential, and punitive damages, as well as attorney’s fees and

other expenses. (A-369.) Significantly, the Receiver Action also seeks “a

constructive trust over all assets, property, and/or cash currently in the custody and

control of each Defendant,” including “all assets or compensation received by the

[Merkin] Defendants in connection with the business of the Funds.” (A-369.) This

constructive trust naturally would include the amounts of the fraudulent transfers.

As with the NYAG Action, the Receiver Action alleges that the Merkin

Defendants made material misrepresentations to investors in the Ariel & Gabriel

Funds regarding the role of Madoff and BLMIS in managing their investments, and

3 The Ascot Receiver never commenced an action against the Merkin Defendants.


12

that the Merkin Defendants failed to investigate and monitor Madoff’s activities.

(A-357–59.) In other words, like the NYAG Action, the allegations in the

Receiver Action, as well as the damages claimed, arise out of the same fraudulent

activity surrounding Madoff and the BLMIS Ponzi scheme.

E. The Settlement Negotiations

As early as June 2009, and in the months that followed, the Trustee

communicated with the NYAG regarding the Trustee’s interest in the Merkin

Defendants’ and Funds’ assets as customer property. (A-1922.) At or around that

time, the NYAG had agreed to modify the freeze placed upon Merkin’s assets in

order to allow Merkin and his wife to monetize the Merkins’ substantial artwork

collection in order to pay for Merkin’s defense costs. (A-1921.) Thus, in

discussions with the NYAG, the Trustee expressed his desire to reach an

agreement to preserve the money obtained from the sale of the artwork so as not to

impede the Trustee’s recovery of stolen customer property. (A-1922.)

While the parties never finalized an agreement to that effect, the Trustee

continued to assert the priority of his claim for fraudulently-transferred assets held

by the Merkin Defendants. Thus, in November 2009, counsel for the Trustee

notified the NYAG that the NYAG Action violated the automatic stay and that the

Trustee would take appropriate action to enforce the stay for the protection of

customer property. (A-1922.) Counsel for the NYAG responded on November 5,


13

2009, stating that a stay would harm investors and that “the best course of action is

to try to enter into a global resolution.” (A-1922.) In this regard, counsel for the

NYAG proposed a draft agreement calling for a period of good faith negotiations

regarding the parties’ claimed interest in the same property. (A-1922.)

By letter dated November 10, 2009, the Trustee responded that, “as with

other third party litigants, the Trustee intends to seek to stay the ability of the

[NYAG] to collect money damages on behalf of only a subset of Madoff victims.

The Trustee cannot afford the [NYAG] more favorable treatment with respect to

the collection and distribution of assets than other investors or those acting on their

behalf.” (A-1922–23.) That same day, the NYAG responded by defending his

right to bring the NYAG Action as an exercise of police power while nevertheless

professing interest in a mutually-satisfactory resolution. (A-1923.)

Both parties subsequently continued to litigate their respective actions. The

NYAG completed discovery and filed for summary judgment in October 2010.

(A-262.) The NYAG action effectively came to a standstill while the parties

awaited a ruling—which the NYAG requested that the state court withhold

pending settlement negotiations. (A-419.) In the Trustee’s Recovery Action, the

Bankruptcy Court denied in substantial part motions to dismiss the Recovery

Action in November 2010, and a motion for leave to appeal was denied in August


14

2011. (A-1923–24.) The Recovery Action is ongoing and in the midst of

discovery.

In the interim, the Trustee engaged in settlement negotiations with the

Receivers for the Funds, beginning in August 2009 with the Ascot Receiver and in

November 2009 with the Ariel & Gabriel Receiver. (A-1924.) A period of intense

negotiations in March 2011 resulted in the exchange of a proposed settlement term

sheet in June 2011. (A-1924.)

The Trustee and the NYAG continued their settlement negotiations in

November and December 2010. (A-1924.) Meanwhile, beginning in early 2010

and continuing through December 2011, the NYAG engaged in settlement

negotiations with Merkin. (A-1924–25.) As the Trustee came to learn in late

2010, Merkin insisted that any settlement with the NYAG include the resolution of

the Trustee’s claims against Merkin. (A-1924–25.) In mid-2011, the Trustee

reminded the NYAG, in light of the NYAG’s negotiations with Merkin, that the

Trustee would seek to enjoin the implementation of any settlement between the

NYAG and Merkin and that the Bankruptcy Court had jurisdiction over disputes

between the NYAG and Trustee. (A-1925.) While counsel for the NYAG did not

agree to submit to the Bankruptcy Court’s jurisdiction, he offered to discuss the

matter further with the Trustee. (A-1925.)


15

In December 2011, counsel for the NYAG met with the Trustee’s counsel to

invite the Trustee to participate in a settlement agreement reached between the

NYAG and Merkin. (A-1925.) As was the Trustee’s prior understanding, this

settlement agreement was conditioned upon Merkin obtaining a release from the

Trustee. (A-1925.) Negotiations continued among all parties until May 2012.

(A-1926.) At that time, the Trustee reached the conclusion that the current round

of negotiations had reached a standstill, but he nevertheless expected a global

resolution of claims against Merkin to be forthcoming. (A-1926.)

On June 25, 2012, however, the NYAG, on behalf of himself and the

Receivers, announced the Settlement Agreement with the Merkin Defendants

calling for a Settlement Payment of $410 million by the Merkin Defendants and

Funds, reached and executed without the Trustee’s knowledge. (A-1926.) To the

Trustee’s surprise, however, the Defendants did not condition the Settlement

Agreement upon the resolution of the Trustee’s claims, as the Trustee had been led

to believe for a long time. (A-1926.) At best, the Settlement Agreement sets aside

an amount which may be used by the Merkin Defendants to cover legal expenses

in defense against, and to satisfy, third-party claims, including those brought by the

Trustee. (A-1781.) The Trustee has received no satisfactory assurance that this

hold-back provision is sufficient to satisfy the Trustee’s Recovery Action, let alone


16

(i) the other third-party claims against the Merkin Defendants and (ii) the Merkin

Defendants’ legal expenses.

Only after August 17, 2012, and only after signing a confidentiality

agreement, did the Trustee receive a redacted copy of the Settlement Agreement.

(A-1926.) The Trustee has never seen an unredacted copy of the Settlement

Agreement, and no such copy is in the Record on Appeal. The exact terms of the

Settlement Agreement are not subject to court approval and have not been, and

may never be, made public, despite involving a public official—the NYAG.

F. The Trustee’s Stay Application

Given the amount of the Settlement Payment and the known assets of the

Merkin Defendants and the Ascot Fund, the Trustee believes that the Settlement

Payment will draw substantially upon stolen customer property fraudulently

transferred to the Merkin Defendants from Madoff and BLMIS. Thus, the

Settlement Payment would significantly deplete the funds that the Trustee seeks to

recover for the benefit of BLMIS customers who have not received back the

principal that they invested with Madoff and BLMIS. (A-56–57.) Because the

NYAG and Receiver Actions seek, on behalf of some select persons indirectly

harmed, the same stolen customer property sought by the Trustee for the benefit of

all BLMIS customers directly harmed, the Trustee moved to enjoin the

Defendants’ Settlement Agreement.


17

The Trustee filed the Stay Action pursuant to sections 362(a) and 105(a) of

the Code and SIPA sections 78eee(a)(3) and 78eee(b)(2)(A) and (B), to enjoin the

Settlement and preserve the stolen customer property sought by the Trustee.

(A-24.) Through the Stay Action and Injunction Motion, the Trustee argued that

the NYAG and Receiver Actions, and the resulting Settlement Agreement, violated

the automatic stay. The Trustee sought to have the Settlement Agreement enjoined

pursuant to Bankruptcy Code section 105(a) until the Trustee’s own action against

the Merkin Defendants and Funds could be resolved for the benefit of the BLMIS

customers under SIPA.

G. The District Court’s Decision

On December 27, 2012, upon the Defendants’ motion, the District Court

withdrew the Stay Action and Injunction Motion. (A-989.) By order filed April

15, 2013 (the “Order”), following briefing and oral argument on the Injunction

Motion, the District Court denied the Injunction Motion and dismissed the Stay

Action in its entirety. (SPA-1.)

After determining that the Trustee’s Injunction Motion fell within the

District Court’s bankruptcy jurisdiction, the District Court held that the doctrine of

laches “provide[d] a complete defense not only to the issuance of the preliminary

injunction, which must therefore be denied, but to the entirety of the Trustee’s

action, which must therefore be dismissed.” (SPA-6–7.) Despite the Trustee’s


18

warnings to the Defendants that the NYAG and Receiver Actions violated the

automatic stay, the District Court concluded that “it was far more reasonable for

these parties to have concluded that the Trustee, for all his rhetoric, was not

prepared to follow through on his threat to attempt to stay the NYAG’s action.”

(SPA-10.) The District Court likewise discounted the Trustee’s ongoing settlement

negotiations with the Defendants (SPA-11–12.) Thus, according to the District

Court, “the burden was on [the Trustee] to take action to enforce the stay . . . .”

(SPA-10.) The District Court found the Trustee’s delay in bringing the Stay

Application particularly inexcusable in light of the perceived prejudice to the

Defendants who, in defiance of the Trustee’s warnings, had proceeded with the

NYAG and Receiver Actions pending the settlement discussions among

themselves and the Trustee. (SPA-12–14.)

Further, the District Court found that, even if laches did not bar the Trustee’s

action, the Trustee had not met the requirements for imposition of the automatic

stay or for an injunction pursuant to Bankruptcy Code section 105(a). (SPA-14.)

In the view of the Court, the NYAG and Receiver Actions did not implicate the

automatic stay because the claims brought therein “are independent claims based

on separate facts, theories, and duties than the Trustee’s fraudulent transfer claims

against Merkin” and are therefore not property of the estate. (SPA-15–16.) The


19

Trustee likewise failed to demonstrate that the NYAG and Receiver Actions sought

property which belonged to the estate. (SPA-17.)

Regarding the Trustee’s request for relief under section 105(a), the District

Court concluded that a section 105(a) injunction was unavailable because the

Trustee purportedly had not shown that the Settlement would cause irreparable

injury or prejudice to the estate by drawing down assets sought by the Trustee.

(SPA-22.) Thus, the Court held that (i) the Trustee had failed to establish that the

Settlement Payment included property belonging to the BLMIS estate (SPA-18–

19); and (ii) the Trustee had failed to show that the Merkin Defendants would be

unable to satisfy both the Settlement Payment and a judgment on the Trustee’s

fraudulent conveyance claims in the Recovery Action. (SPA-19–20, 22–23.)

Finally, the District Court held that the statutory priorities created by SIPA

do not preempt the NYAG’s and Receiver’s state law claims, even if such claims

conflict with SIPA. (SPA-24–25).4 For these reasons, the District Court dismissed

the Injunction Motion and, sua sponte, the entire Stay Action.

4 The Defendants had also argued (i) that under the Barton Doctrine, the Bankruptcy Court did not have jurisdiction to entertain the Trustee’s suit against the Receivers, and (ii) that the Supreme Court’s decision in Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), barred an injunction freezing assets prior to a judgment awarding those assets to the Trustee. In footnotes 4 and 6, the District Court declined to consider the application of either the Barton Doctrine or Grupo Mexicano, respectively, finding it unnecessary to do so in light of its other holdings. (SPA-8, 22.)


20

STANDARD OF REVIEW

When reviewing a district court’s denial of a preliminary injunction, the

district court’s legal holdings are reviewed de novo and its ultimate decision is

reviewed for abuse of discretion. Cnty. of Nassau v. Leavitt, 524 F.3d 408, 414 (2d

Cir. 2008). This Court reviews the dismissal of an action based upon laches de

novo. Ivani Contracting Corp. v. City of New York, 103 F.3d 257, 259 (2d Cir.),

cert. den., 520 U.S. 1211 (1997).

SUMMARY OF THE ARGUMENT

In the underlying proceeding, the Trustee sought to enjoin the Defendants

from consummating the Settlement Agreement in violation of SIPA, the Protective

Order issued by the District Court, and the automatic stay imposed under section

362(a) of the Bankruptcy Code, 11 U.S.C. § 362(a). In its brief as intervenor,

SIPC specifically addresses herein the necessity of an injunction to stay third-party

claims that conflict with and undermine the protections given to a debtor’s

customers under SIPA. Put simply, the injunction is needed here to carry out

Congress’s intent.

Under SIPA, the right to recover fraudulently-conveyed property from the

Merkin Defendants and Funds belongs uniquely to the Trustee. In the case at

hand, the NYAG and Receivers seek the same funds simultaneously sought by the

Trustee—stolen customer property converted by BLMIS and fraudulently


21

transferred to initial transferees and then to subsequent transferees. By structuring

a settlement drawing from the Merkin Defendants’ limited resources, the

Defendants interfere with and impede the Trustee’s claims, thereby threatening to

render these claims futile by preventing any recovery. Indeed, instead of aiding the

Trustee, the Settlement Agreement sets aside funds which can be used by Merkin

to fund his defense against the Trustee. Because the Defendants’ actions conflict

with SIPA’s central goal of channeling estate property and claims through the

SIPA proceeding in the Bankruptcy Court for the benefit of all BLMIS customers,

as well as the District Court’s protection and preservation of such property through

SIPA, the Protective Order, and automatic stay, the Defendants should have been

enjoined, under Bankruptcy Code section 105(a), from completing their settlement.

See The Lautenberg Found. v. Picard (In re Bernard L. Madoff Inv. Sec., LLC),

2013 WL 616269, at *1 (2d Cir. Feb. 20, 2013) (summary order) (“Lautenberg”).

Instead, the District Court incorrectly held that the Trustee had not satisfied

the standard for an injunction, based upon two factors. The District Court

concluded that the Trustee had failed to demonstrate, first, that the Settlement

Payment included assets fraudulently-transferred from the BLMIS estate, and

second, that the Merkin Defendants and Funds would be unable to satisfy both the

Settlement Payment and any judgment the Trustee obtained. Yet, the Merkin

Defendants and Funds indisputably received fraudulent transfers from the BLMIS


22

estate, and the District Court improperly required perfect tracing of fungible assets

between these transfers and the assets to be used for the Settlement Payment.

Moreover, the Trustee’s evidence that the Merkin Defendants could not satisfy

both the Settlement Payment and a judgment in the Recovery Action was not

rebutted by the Defendants. The District Court also ignored the factual and legal

bases for the Trustee’s assertion that satisfaction of the Settlement Payment would

necessarily impede the Trustee’s ability to recover the fraudulent conveyances

claimed in the Recovery Action.

Finally, the Direct Court incorrectly held that the doctrine of laches barred

the Injunction Motion and the Stay Action. To the contrary, the doctrine of laches

has no bearing upon the Trustee’s action where the Trustee repeatedly warned the

Defendants that the NYAG and Receiver Actions run afoul of the statutory scheme

created by SIPA and the Bankruptcy Code, and where the Trustee engaged in

settlement negotiations with the Defendants under which any settlement with the

Merkin Defendants would also resolve the Trustee’s claims. The Trustee acted in

a timely manner as soon as he discovered that the Settlement Agreement would

impede the Recovery Action through its appropriation and disbursement of assets

sought by the Trustee. Moreover, the Trustee’s requested injunction will not

prejudice the Defendants but will merely stay the Settlement Agreement pending

the resolution of the Trustee’s Recovery Action.


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ARGUMENT

I. SIPA PRIORITIZES THE PROTECTION OF BLMIS CUSTOMERS AND CUSTOMER PROPERTY

A. SIPA Creates a Federal Statutory Scheme Prioritizing the Protection of and Recovery for Customers of Failed Broker-Dealers

Stays made applicable to a SIPA case are imposed for customer and other

creditor protection. Without them, “certain creditors would be able to pursue their

own remedies against the debtor’s property. Those who acted first would obtain

payment of the claims in preference to and to the detriment of other creditors.”

H.R. Rep. No. 95-595, at 340 (1977). The stays ensure that property is available to

be distributed to customers and general creditors in accordance with SIPA, thus

furthering Congress’s intent to establish “an orderly liquidation procedure under

which all creditors are treated equally.” Id.

SIPA establishes “a comprehensive statutory scheme governing the rights of

creditors and brokers,” Sec. Investor Prot. Corp. v. Wise (In re Stalvey & Assocs.,

Inc.), 750 F.2d 464, 468 (5th Cir. 1985). As this Court has noted, “SIPA serves

dual purposes: to protect investors, and to protect the securities market as a whole.”

See e.g., In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir. 2011).

Thus, SIPA creates a special class of claimants—”customers”—and accords to

members of that class relief not available to other claimants or under the

Bankruptcy Code. See, e.g., In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122,


24

133 (Bankr. S.D.N.Y. 2010), aff’d, 654 F.3d 229 (2d Cir. 2011), cert. dismissed,

132 S. Ct. 2712 (2012), and cert. den., 133 S.Ct. 24 and 133 S.Ct. 25 (2012). The

“customer” protection provisions of SIPA lie at the heart of the statute and are the

principal expression of Congress’s intent to create in SIPA a unique liquidation

scheme applicable exclusively to registered securities broker-dealers. SIPA’s

efficacy depends critically on the presiding court’s power to marshal “customer

property” and to return it to customers—not only for the sake of the customers but

also in order to maintain investor confidence in the securities markets.

In particular, in a SIPA liquidation, “customers” have priority in the

distribution of “customer property,” a fund of assets generally consisting of the

cash and securities “received, acquired or held” by the debtor for its “customers” in

the ordinary course of its business, along with the proceeds of any such property

transferred by the debtor. See SIPA §§ 78fff-2(b) and (c)(1); 78lll(4). Customers

generally share ratably in this fund to the extent of their “net equity” on a priority

basis, to the exclusion of general creditors. See SIPA §§ 78fff-2(b) and (c)(1).

Furthermore, and consistent with Congress’s emphasis in SIPA on the

priority treatment of customers, Congress defined “customer property”

expansively, including in SIPA several provisions designed to maximize the fund

of customer property available for distribution to customers. Of particular

significance here, SIPA defines customer property, in pertinent part, as


25

cash and securities . . . at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted.

SIPA § 78lll(4) (emphasis added). The specific inclusion of “property unlawfully

converted” clarifies and emphasizes that Congress intended SIPA to encompass

and protect property which has been fraudulently removed from the estate.

Furthermore, “customer property” includes any property of the debtor “which,

upon compliance with applicable laws, rules, and regulations, would have been set

aside or held for the benefit of customers,” regardless of whether such property

was, in fact, set aside and so held. See SIPA § 78lll(4)(D).5

With this expansive concept of customer property in mind, Congress

significantly enhanced the power of a SIPA trustee to use the avoidance provisions

of the Bankruptcy Code to recover customer property. SIPA provides that where

customer property is insufficient to pay certain statutorily-defined claims, “the

trustee may recover any property transferred by the debtor which, except for such

transfer, would have been customer property . . . [and] the property so transferred 5 SIPA section 78lll(4) was amended under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 929H, 124 Stat. 1376, 1856 (2010), in part, to add a new subsection (D). This revision moved the prior subsection (D) to subsection (E) but otherwise left it unchanged. Because the amendment applies only to SIPA cases filed on or after July 22, 2010, cf. Landgraf v. USI Film Prods., 511 U.S. 244, 272 (1994), which does not include the BLMIS liquidation, the citation here is to the prior subsection (D), which can presently be found at SIPA section 78lll(4)(E).


26

shall be deemed to have been the property of the debtor.” SIPA § 78fff-2(c)(3)

(emphasis added). The language of this provision indicates that, whether or not

property sought by a SIPA trustee in an avoidance or recovery action actually

qualifies as property of the debtor’s estate, Congress intended that such property be

treated as such for purposes of the action.

Here, Madoff perpetrated a Ponzi scheme which paid earlier investors with

money taken from later investors in order to create the illusion of profitability.

Pursuant to SIPA section 78lll(4), the customer assets received by BLMIS that

were converted by BLMIS and Madoff and transferred are “customer property”—

”unlawfully converted” or stolen—which the Trustee is entitled to pursue and

recover. The Recovery Action seeks just that—to protect and recover stolen

customer property for distribution to BLMIS customers, in accordance with SIPA

and the Bankruptcy Code.

B. SIPA and the Bankruptcy Code Provide Expansive Protections for Customer Property

When SIPC files an application with the United States District Court for a

customer protective decree at the commencement of a SIPA liquidation, the

Bankruptcy Code puts into effect automatic stays that protect the debtor and its

property, including the property that the debtor holds for customers. 11 U.S.C.

§ 362. Moreover, under SIPA, the filing of a protective decree “shall stay . . . any

other suit against any . . . trustee of the debtor or its property.” SIPA


27

§ 78eee(b)(2)(B). As recognized by the Supreme Court, “[t]he mere filing of an

SIPC application gives the court in which it is filed exclusive jurisdiction over the

member and its property, wherever located, and requires the court to stay ‘. . . any

other suit against any . . . trustee of the (member) or its property . . . .’” Sec.

Investor Prot. Corp. v. Barbour, 421 U.S. 412, 416 (1975) (quoting SIPA

§ 78eee(b)(2)(B)).

In the liquidation of a failed broker-dealer, SIPA and the Bankruptcy Code

emphasize and enhance the protection of estate and customer property in order to

carry out SIPA’s unique policy goals. A SIPA liquidation is an outright

bankruptcy proceeding for many practical purposes, as has been consistently

recognized. See SIPA § 78fff(a); see also Exch. Nat’l Bank of Chicago v. Wyatt,

517 F.2d 453, 457–59 (2d Cir. 1975); In re Lloyd Sec., Inc., 75 F.3d 853, 857 (3d

Cir. 1996). In order for the SIPA liquidation to be conducted “in accordance with”

Title 11 as required by SIPA section 78fff(b), provisions of Title 11 such as

sections 105(a) and 362(a), relied upon here, must be given their full effect in a

SIPA liquidation. See Lautenberg, 2013 WL 616269, at *1.

Thus, under Bankruptcy Code section 362(a), the filing of the application

under SIPA, “operates as a stay, applicable to all entities of,” inter alia, “(3) any

act to obtain possession of property of the estate or of property from the estate or to

exercise control over property of the estate . . . .” Section 362(a)(3) is designed to


28

prevent the dismemberment of the bankruptcy estate through direct or indirect

interference with the trustee’s control over estate property. See Adelphia

Commc’ns Corp. v. The America Channel, LLC (In re Adelphia Commc’ns Corp.),

2006 WL 1529357, at *3 (Bankr. S.D.N.Y. June 5, 2006).

Importantly, courts have held that Bankruptcy Code section 105, also

applicable to SIPA liquidations, may be used to extend Section 362’s automatic

stay to non-parties. See, e.g., Johns-Manville Corp. v. Asbestos Litig. Grp. (In re

Johns-Manville Corp.), 26 B.R. 420, 427 (Bankr. S.D.N.Y. 1983) (“[B]ankruptcy

courts have extended the Section 362 automatic stay pursuant to Section 105 to

enjoin acts against nondebtors which would frustrate the statutory scheme or

impact adversely on a debtor’s ability to formulate a plan or on the debtor’s

property.”), aff’d in part, 40 B.R. 219 (S.D.N.Y. 1984), rev’d in part on other

grounds, 41 B.R. 926 (S.D.N.Y. 1984). As this Court has held, an independent

claim against a third party that “poses the specter of direct impact on the res of the

bankrupt estate may just as surely impair the bankruptcy court’s ability to make a

fair distribution of the bankrupt’s assets as a third-party suit alleging derivative

liability.” Pfizer, Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co.), 676

F.3d 45, 58 (2d Cir. 2012).

Thus, “Section 105(a) is to be ‘construed liberally to enjoin suits that might

impede’” the process of a SIPA liquidation. Lautenberg, 2013 WL 616269, at *2


29

(quoting MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir.), cert.

den., 488 U.S. 868 (1988)). As the District Court for the Southern District of New

York has held, “Section 105 of Title 11 provides the bankruptcy courts with a

broad range of equitable powers over cases within its jurisdiction,” including

“issu[ing] a pre-judgment order preventing a party from disposing of assets.”

Adelphia Commc’ns Corp. v. Rigas, 2003 WL 21297258, at *4 (S.D.N.Y. June 4,

2003).

C. In Allowing the NYAG and Receiver Actions to Continue, the District Court Inappropriately Prioritizes Feeder Fund Investors over Customers Protected by SIPA

If a SIPA trustee is to perform his duties, he must be able to do so without

interference by parties resorting to their own remedies to the detriment and at the

expense of customers and other creditors. The fact that one of the parties

competing with him for assets is a State Attorney General makes this no less so. A

government official should not be allowed to shield himself under the cloak of his

police power in order to benefit the select few. In that regard, the remarks of the

District Court in a different Madoff-related suit in which a global settlement

among the parties was approved are apposite. In its Amended Decision and Order

Approving Settlement And Granting Plaintiffs’ Counsels’ Joint Motion for Award

of Attorneys’ Fees, filed on May 15, 2013, in Schott v. Ivy Asset Management

Corp., No. 10 Civ. 8077 (CM) (S.D.N.Y.), the District Court stated:


30

There is a serious question whether the NYAG even had standing to pursue the lawsuit he filed. The action was brought in parens patriae, but the NYAG cannot bring claims for damages on behalf of private citizens; a state that sues in parens patriae must seek to redress an injury to an interest that is separate from that of individuals. Connecticut v. Physicians Health Services, 287 F.3d 110 (2d Cir. 2002); People of the State of New York by Abrams v. 11 Cornwall Co., 695 F.2d 34, 38 (2d Cir. 1982). So having failed to obtain a pre-suit settlement that could have been used to satisfy at least some of the claims of the Private Plaintiffs, the NYAG had no real ability to recover through litigation the money that plaintiffs had lost—even on behalf of citizens of the State of New York (and not all the class members and Private Plaintiffs are citizens of the State of New York). The NYAG could have attempted to obtain injunctive relief to forestall future violations of law in the public interest, but since Ivy was in the process of winding down its operations . . . when the NYAG filed its lawsuit, the request for injunctive relief may very well have been moot. This issue need not be decided, but the weakness of the NYAG’s position as a party to litigation might well explain its failure to take even a single step to move its lawsuit forward.

Doc. 78, at p. 28 n.4. (See Addendum at Add-028.)

The comments of the District Court in Ivy are no less applicable here. This

Circuit Court has previously admonished that the proper forum for a liquidation is

the bankruptcy court, and that a district court should not “transform[] itself into a

court of bankruptcy aided by a receiver performing the tasks of a bankruptcy

trustee” by, among other things, “setting priorities among classes of creditors.”

SEC v. American Bd. of Trade, Inc., 830 F.2d 431, 437–38 (2d Cir. 1987), cert.

den. sub nom., Economou v. SEC, 485 U.S. 938 (1988). But that is precisely what

the District Court, the NYAG, and the Receivers have done here. Customers who

invested through BLMIS will be protected in the SIPA liquidation. But the


31

persons who invested in the feeder or hedge funds are not “customers” under

SIPA. In re Bernard L. Madoff Inv. Sec. LLC, 708 F.3d 422, 426–27 (2d Cir.

2013). Instead, having invested in the Funds, they are limited partners of the

Funds. (A-213.) Nevertheless, they are the principal beneficiaries of the

settlement.

As discussed below, the District Court disregarded the Trustee’s sworn

affidavit that the Merkin Defendants could not satisfy both the Settlement Payment

and a judgment in the Recovery Action, which was not rebutted by evidence from

the Defendants. The consequences of this failure are multifold.

One, the persons to benefit from the settlement, namely, the Fund investors,

are persons to whom federal law accords no priority in the distribution of customer

property.

Two, the District Court will have set a higher priority for the Fund investors

than for BLMIS customers by allowing them to be first in line in the distribution of

the Merkin Defendants’ and Funds’ assets. Although the assets clearly include

stolen customer property, BLMIS customers are at risk of not recovering their

monies if the distribution to the Fund investors exhausts the portion otherwise

owed to the Trustee for the benefit of BLMIS customers. As the Bankruptcy Court

explained in denying customer status for hedge fund investors:

[E]nsuring that only genuine “customers” of the debtor share in the fund of customer property maximizes their recovery, as well as


32

furthers and preserves SIPA’s remedial character. Extending customer status to the [hedge fund investors], who lack any fiduciary relationship with the broker-dealer and any property interests in assets held and invested there, would significantly reduce the recoveries of the claimants whom SIPA was enacted to protect, and would therefore severely erode SIPA’s remedial foundations.

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 285, 305

(Bankr. S.D.N.Y. 2011), aff’d sub nom., In re Aozora Bank Ltd. v. Sec. Investor

Prot. Corp., 480 B.R. 117 (S.D.N.Y. 2012), aff’d sub nom., In re Bernard L.

Madoff Inv. Sec. LLC, 708 F.3d 422 (2d Cir. 2013). In seizing stolen customer

property before resolution of the Trustee’s Recovery Action, the NYAG and

Receiver Actions undermine SIPA’s remedial goals in the same manner as if the

Fund’s indirect investors had been allowed to bring customer claims directly

against the BLMIS estate.

Three, although the Fund investors are not customers, to the extent the

Trustee allows the customer claims of the Funds, the Fund investors will benefit as

limited partners in the Funds. Thus, unlike the BLMIS customers in the liquidation

proceeding, the Fund investors will have recovered from two sources.

Four, the Funds received stolen customer property which the Trustee is

entitled to recover. Nevertheless, the NYAG champions the limited partners in

those Funds notwithstanding that the Funds are liable in avoidance under both

Federal and state law. Moreover, the Fund investors may or may not be New

Yorkers (A-437) and their claims, at best, are for damages.


33

Five, the Settlement Agreement provides for a distribution to the Fund

investors, and the payment of “$5 million to the State of New York to cover fees

and costs.” (A-55.) Notwithstanding the uncertainty of the amount that will

remain for BLMIS customers, the monies that belonged to BLMIS customers,

instead of potentially being returned to them, to a certainty, will be used to pay the

fees and costs of the NYAG.

Six, to endorse the decision of the District Court is to invite a multiplicity of

similar actions to the detriment of BLMIS customers, and to undermine the

Bankruptcy Code and SIPA.

II. AN INJUNCTION IS NECESSARY TO PREVENT THE DISSIPATION OF CUSTOMER PROPERTY SOUGHT BY THE TRUSTEE

A. Injunctive Relief is Appropriate to Avoid Impeding the SIPA Liquidation

To avoid disrupting consequences such as those described above, SIPA and

the Bankruptcy Code work in tandem in order to protect a debtor’s assets—and in

particular customer property entrusted to the debtor—so that securities customers

are assured that the custody of their property is sound, thereby bolstering

confidence in brokers and the securities markets. Recognizing as much, this Court

has held that in a SIPA liquidation, as in bankruptcy, the Bankruptcy Court may

preliminarily enjoin, under section 105(a) of the Code, third-party claims against

assets that the Trustee seeks to recover in a fraudulent conveyance action for the


34

benefit of the debtor’s customers. Lautenberg, 2013 WL 616269, at *2. The

Court’s reasoning in Lautenberg bears repeating:

Appellants pursue the Third-Party Actions against defendants whose every asset (or the vast majority thereof) is claimed by the Trustee as a fraudulent transfer from BLMIS. Under these circumstances, we conclude that the Preliminary Injunction serves the legitimate purpose of “preserving the debtor’s estate for the creditors and funneling claims to one proceeding in the bankruptcy court.” Were it not for the Preliminary Injunction, there would ensue a chaotic rush to the courthouse—or rather, multiple courthouses—of those seeking assets that the trustee claims are properly part of the BLMIS estate. This would run counter to SIPA’s objective of furthering “the prompt and orderly liquidation of SIPC members.” Moreover, the Third-Party Actions would have an “immediate adverse economic consequence for the debtor’s estate” if allowed to proceed, inasmuch as, if successful, they would draw down assets almost all of which could otherwise be expected to return to the BLMIS estate as a consequence of the Trustee’s fraudulent transfer action. Injunctive relief was therefore properly granted to avoid impeding the SIPA liquidation.

Id. (internal citations omitted); see also Fox v. Picard (In re Madoff), 848 F. Supp.

2d 469, 486 (S.D.N.Y. 2012) (“Under Section 105, bankruptcy courts may extend

the automatic stay to enjoin suits by third parties against third parties if they

threaten to thwart or frustrate the debtor’s reorganization efforts.” (quoting Kagan

v. St. Vincent’s Catholic Med. Ctrs. of N.Y. (In re Saint Vincent’s Catholic Med.

Ctrs. of N.Y.), 449 B.R. 209, 217 (S.D.N.Y. 2011)).

Importantly, this Court’s reasoning in Lautenberg applies regardless of

whether the assets held by the Merkin Defendants have been adjudicated to be

property of the estate, and regardless of whether the NYAG’s and Ariel & Gabriel


35

Receiver’s causes of action are independent of the Trustee’s claims against the

Merkin Defendants. Where third-party actions seek assets simultaneously claimed

by a SIPA Trustee in a fraudulent conveyance action, those third-party actions

must be enjoined pending determination of the Trustee’s claims in the SIPA

liquidation. Cf. Johns-Manville Corp. v. Colo. Ins. Guar. Ass’n (In re Johns-

Manville Corp.), 91 B.R. 225, 228 (Bankr. S.D.N.Y. 1988) (“[T]he bankruptcy

court may enjoin proceedings in other courts when it is satisfied that such a

proceeding would defeat or impair its jurisdiction with respect to a case before it.”

(internal quotation marks omitted)).

Case law from other circuits produces the same result. As the Seventh

Circuit Court of Appeals has stated,

The jurisdiction of the bankruptcy court to stay actions in other courts extends beyond claims by and against the debtor, to include suits to which the debtor need not be a party but which may affect the amount of property in the bankrupt estate, or the allocation of property among creditors. To protect this jurisdiction, “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” 11 U.S.C. § 105(a), including a stay.

Fisher v. Apostolou, 155 F.3d 876, 882 (7th Cir. 1998) (internal case citations and

quotations omitted). Thus, the Seventh Circuit upheld the issuance of an order

enjoining third-party “claims to the same limited pool of money, in the possession

of the same defendants, as a result of the same acts, performed by the same

individuals, as part of the same conspiracy.” Id. at 882. The court noted that if the


36

bankruptcy court’s “related to” jurisdiction did not extend to these circumstances,

then the result “would be to amend the Bankruptcy Code to eliminate § 105 from

Chapter 7 proceedings.” Id.

Similarly, in Unsecured Creditors’ Commitee Of DeLorean Motor Co. v.

DeLorean (In re DeLorean Motor Co.), 755 F.2d 1223 (6th Cir. 1985), the Sixth

Circuit Court of Appeals affirmed the bankruptcy court’s issuance of a section 105

injunction prohibiting third parties from disbursing the proceeds of a third-party

company’s asset and stock sale where such assets could be traced back to the

debtor’s estate. Id. at 1225-26; 1230-31.

Because the third-party actions here interfere with the Trustee’s action in

just this manner, those actions must be enjoined.

B. The Trustee Has Established Good Cause for the Issuance of an Injunction

In order to succeed on a motion for a preliminary injunction in a bankruptcy

or SIPA liquidation, a trustee must establish either that the injunction “plays an

important part in the debtor’s reorganization plan,”6 SEC v. Drexel Burnham

Lambert Grp. (In re Drexel Burnham Lambert Grp.), 960 F.2d 285, 293 (2d Cir.

6 As this Court has recognized, “[w]hile ‘[t]he jurisdiction of bankruptcy courts may extend more broadly’ in reorganizations than in liquidations, this cautionary note does not preclude a bankruptcy court from issuing a § 105(a) injunction where warranted in a SIPA liquidation.” Lautenberg, 2013 WL 616269, at *1 (internal citations omitted).


37

1992), cert. den. sub nom., Hart Holding Co. v. Drexel Burnham Lambert Grp.,

506 U.S. 1088 (1993), or that the targeted action “will have an immediate adverse

economic consequence for the debtor’s estate.” Queenie, Ltd. v. Nygard Int’l, 321

F.3d 282, 287 (2d Cir. 2003).

In seeking a section 105 injunction, the Trustee does not need to establish all

four elements required for a preliminary injunction under the Federal Rules of

Civil Procedure. See In re Adelphia Commc’ns, 298 B.R. 49, 54 (S.D.N.Y. 2003).

“The proof required to extend the stay is not as rigorous as that normally required

for injunctions.” Id. In the present case, the Trustee has amply demonstrated both

that the requested injunction plays an important role in the liquidation of BLMIS—

in that it ensures that hundreds of millions of dollars of stolen customer property

will be available for recovery and for return to BLMIS customers—and that the

Settlement Agreement will have an immediate adverse impact upon the BLMIS

estate by impeding its recovery of said stolen and fraudulently transferred customer

property.

In evaluating the Trustee’s request for an injunction, however, the District

Court erroneously held that the Trustee had not shown that the Settlement Payment

involved assets fraudulently transferred from BLMIS, or shown that the Merkin

Defendants could not satisfy any potential judgment in favor of the Trustee after

making the Settlement Payment. In so doing, the District Court required a greater


38

showing from the Trustee than is appropriate, and ignored the Trustee’s legal

arguments and factual submissions to the contrary. The Trustee met his burden for

a preliminary injunction, sufficiently establishing that the funds to be used for the

Settlement Payment consisted of money paid to the Merkin Defendants stolen from

BLMIS customers and that the Merkin Defendants would be unable to satisfy both

the Settlement Payment and a judgment in favor of the Trustee.

1. The Settlement Payment Involves Assets Fraudulently Transferred from BLMIS

In a trustee’s attempt to recover fraudulent transfers disbursed as part of a

massive fraud, “proper tracing does not require dollar-for-dollar accounting.” IBT

Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689, 708 (11th Cir.

2005). The District Court nevertheless held that the Trustee had not established

that the money to be used by the Merkin Defendants and Funds to satisfy the

Settlement Payment involved assets fraudulently transferred from the BLMIS

estate. The showing demanded by the District Court, however, is near unattainable

in all but the simplest cases. Money is a fungible asset, and perfect tracing

between BLMIS and the money to be used by the Merkin Defendants and Funds

would be impossible without a detailed forensic analysis. Cf. In re 650 Fifth Ave.

& Related Props., 777 F. Supp. 2d 529, 571 (S.D.N.Y. 2011) (“The tracing

requirement, however, poses particular problems in the case of money or other


39

fungible property. Once money is deposited into a bank account, the government

cannot trace the physical currency.”).

The courts have thus recognized certain tracing “fictions” in order to aid in

the determination of ownership of fungible property. In a case such as this one,

where a party holds fraudulently-obtained property, that party is presumed to have

made previous disbursements with its own funds rather than the fraudulently-

obtained funds.

Generally, “[a]ll rules for tracing cash through bank accounts start with the fiction that the victim’s dollars are ‘in’ the account.” Funds can be traced into commingled accounts and courts apply an irrebuttable presumption that a wrongdoer spends his own money first. As a result, “as long as the amount in the account exceeds the amount of misappropriated funds that were deposited there, all the plaintiffs’ money is still in the account.”

FTC v. Bronson Partners, LLC, 654 F.3d 359, 373 n. 8 (2d Cir. 2011) (internal

citations omitted) (quoting Douglas Laycock, Modern American Remedies 673–74

(3d ed. 2002)). Accordingly, where the Merkin Defendants and Funds would have

insufficient funds available to satisfy the Recovery Action following the

Settlement Payment, this tracing fiction dictates that the Settlement Payment

necessarily involves the disbursement of fraudulently-transferred stolen customer

property.

Moreover, to the extent that the Trustee’s inability to trace the fraudulent

transfers received by the Merkin Defendants and Funds is due to those parties’


40

actions in commingling and disbursing the transfers, for personal use or otherwise,

the Defendants should not be heard to complain that the Trustee has not done a

perfect trace.

[I]n the sense that money is fungible, and it would be difficult, if not impossible, to trace specific [fraudulent] funds to specific mortgage payments—a freeze order need not be limited only to funds that can be directly traced to defendant’s illegal activity for the reason that the defendant should not benefit from the fact that he commingled his illegal profits with other assets.

SEC v. Byers, 2009 WL 33434, at *3 (S.D.N.Y. Jan. 7, 2009) (internal quotations

omitted). In Byers, the District Court accordingly denied the intervenors’ request

to lift an asset freeze on their home, finding that the property “was inextricably

intertwined with [the defendant’s] allegedly fraudulent business dealings,” even

though the intervenors had not been named as wrongdoers or accused of any

crimes. Id. at *2.

Finally, the Receiver Action seeks a constructive trust over all property held

by the Merkin Defendants. Such an expansive request necessarily implicates

fraudulently-transferred stolen customer property held by the Merkin Defendants,

and, accordingly, any such request must be stayed.

2. The Merkin Defendants Would Be Unable to Satisfy the Settlement and a Judgment in Favor of the Trustee

As a preliminary matter, it is undisputed that Ascot is insolvent and would

be unable to satisfy both the Settlement Payment and the full amount of the


41

Trustee’s claims in the Recovery Action. The Trustee has also submitted a sworn

affidavit explaining that the Merkin Defendants likewise cannot satisfy both the

Settlement Payment and a judgment, and the Defendants have not offered any

evidence in rebuttal. Setting aside Ascot’s and the Merkin Defendant’s limited

funds, the Defendants and the District Court instead argue that the “claims against

Ascot . . . will be offset by net equity distributions either in full or with the Trustee

recovering in the end only slightly more than Ascot will receive back in

distribution.” (SPA-20.)

The District Court, however, erroneously discounted the contingent nature of

Ascot’s claims for net equity. First, the Trustee (like the NYAG and Receiver

Actions) alleges that the Merkin Defendants knew or should have known of fraud

at BLMIS, that Merkin directed the Funds’ investments in BLMIS, and that

Merkin is liable as a general partner of the insolvent Ascot. Furthermore, the

Trustee alleges that the Funds received fraudulent transfers from BLMIS and did

not provide true value in return. Under these circumstances, the Funds are not

innocent investors and thus are not entitled to any payment on their customer

claims. See SEC v. Packer, Wilbur & Co., 498 F.2d 978, 984 (2d Cir. 1974)

(“[O]ne who engages in a fraudulent transaction cannot reap the benefits of

[SIPA’s] intended protection.” (internal quotations omitted)).


42

Second, the contingent nature of the Funds’ customer claims—at best

potentially payable under Bankruptcy Code section 502(h) sometime in the future

and disallowed under section 502(d) of the Code until the Trustee’s Recovery

Action is resolved—makes any calculus which depends upon the payment of these

claims inappropriate when considering whether the Settlement Payment will harm

the BLMIS estate or impede recovery of stolen customer property. Accordingly,

and ignoring the hypothetical payment of the Funds’ customers claims—as the

District Court should have done, particularly without any fact-finding—the Trustee

adequately demonstrated that the Merkin Defendants and Funds would not satisfy

both the Settlement Payment and his claims under the Recovery Action.

III. THE TRUSTEE’S STAY ACTION IS TIMELY AND IS NOT BARRED BY THE DOCTRINE OF LACHES

The District Court incorrectly held that the Trustee’s Stay Action and

Injunction Motion were barred by the Trustee’s purported laches. While the

District Court doubted that the Trustee could even maintain an injunction action

before first avoiding the transfers against the Merkin Defendants, the District Court

concluded that in any event, the Trustee had brought his action too late. The

District Court, however, misapplied the doctrine of laches to the facts of this case.

The doctrine of laches bars a party’s claim where that party has

unreasonably delayed in bringing such claim. “[A]t all times, the defendant bears

the ultimate burden of persuasion of the affirmative defense of laches.” A.C.


43

Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1038 (Fed. Cir. 1992).

“[I]n this Circuit, a defendant must establish three elements to prevail on a laches

defense: (1) that he lacked knowledge that the claim might be asserted against him;

(2) that the plaintiff delayed asserting the claim despite the opportunity to do so;

and (3) that he would be prejudiced if the claim were now allowed to go forward.”

Amalgamated Lithographers of Am. v. Unz & Co., 670 F. Supp. 2d 214, 228

(S.D.N.Y. 2009) (internal quotation marks omitted). The Defendants have failed

to carry their burden on all three elements.

First, the Defendants were not surprised by the Trustee’s action. The

Trustee’s extended history of negotiations with the Defendants, together with his

warnings that he would seek to stay any claim to the Merkin Defendants’ assets

which circumvented the statutorily-defined liquidation process, counsel against a

finding of laches. Second, the Trustee did not delay in bringing his Stay Action,

because the assets he sought were not threatened until the Defendants executed the

Settlement Agreement without involving the Trustee or providing for actual

distribution to the Trustee for the benefit of customer property. Finally, even

assuming, arguendo, that the Trustee had delayed in bringing the Stay Action, the

Defendants have suffered little prejudice where granting the Trustee’s request will

only stay the Settlement pending resolution of the Recovery Action. Once the


44

Trustee’s Recovery Action has concluded, the Settlement may continue without

interfering with customer property.

A. The Trustee Put the Defendants on Notice of the Trustee’s Claims

In order to establish the affirmative defense of laches, the Defendants must

first prove that they did not know that the Trustee might bring an injunction action

against them. See id. As this Court has stated, laches does not bar an action where

the defendant “cannot claim to have been unfairly surprised by, nor can it claim to

have been unable to plan to account for, a dispute of which it was promptly

informed.” Veltri v. Bldg. Serv. 32B-J Pension Fund, 393 F.3d 318, 326–27 (2d

Cir. 2004); see also Hutton Constr. Co. v. Cnty. of Rockland, 52 F.3d 1191, 1193

(2d Cir. 1995) (brushing aside a party’s laches defense where the party had “notice

the [adverse party] might assert their rights”); DeSilvio v. Prudential Lines, Inc.,

701 F.2d 13, 17 (2d Cir. 1983) (rejecting a laches defense where the defendant

“was on notice of the accident and a probable lawsuit” for over two years).

In the case at hand, the Defendants had ample notice of the Trustee’s

intention to enjoin the NYAG and Receiver Actions. As a preliminary matter, the

NYAG and Receiver Actions each allege that Merkin knew or should have known

about Madoff’s fraud and that the Merkin Defendants profited greatly from their

relationship with Madoff. (A-247–48; 357–59.) The NYAG and Receivers cannot

conceivably claim to be ignorant of the BLMIS liquidation and the Trustee’s


45

claims to the Merkin assets. Nevertheless, to avoid all doubt, as early as June

2009, the Trustee clearly informed the NYAG that the Trustee had a claim to assets

held by Merkin which had been fraudulently transferred by BLMIS. (A-1922–25.)

The Trustee repeatedly warned the NYAG and the Receivers that the NYAG and

Receiver Actions violated the Protective Order and the automatic stay and that the

Trustee would move to enjoin any attempt to collect these assets before the Trustee

had resolved the Recovery Action. Despite these clear warnings, the NYAG and

the Ariel & Gabriel Receiver continued to prosecute their actions, knowing full

well the potential consequences. The doctrine of laches has no application where

the Defendants were well aware that their actions potentially violated the

Protective Order and the automatic stay and could be subject to an injunction.

B. The Trustee Commenced the Stay Action in a Timely Manner Once He Learned that the Merkin Assets Were Threatened

Throughout the course of the NYAG and Receiver Actions, the Trustee

engaged in good faith negotiations with the Defendants in order to resolve all

claims against the Merkin Defendants. The Trustee learned that Merkin himself

desired the same result: “global peace” in any settlement agreement, including a

release from the Trustee. (A-1924–25.) The Trustee justifiably relied upon these

settlement negotiations and the Defendants’ representations that any settlement

would involve the Trustee, choosing to preserve estate resources rather than

moving for what the Trustee believed would be an unnecessary injunction. To the


46

Trustee’s surprise, however, on June 25, 2012, the Defendants announced the

Settlement Agreement which circumvented the SIPA liquidation and the Trustee’s

claims brought in the Recovery Action. (A-61.) At that time, and at no earlier

point, were the assets sought by the Trustee in the Recovery Action truly

threatened by the NYAG and Receiver Actions.

The Trustee’s ongoing pursuit of a settlement with the Defendants in order

to resolve the parties’ claims to the Merkin assets obviated any delay in filing the

Stay Action and Injunction Motion. “[W]here plaintiff has not slept on her rights,

but has been prevented from asserting them . . . because of ongoing settlement

negotiations, the delay is reasonable and the equitable defense of laches will not

bar an action.” Stone v. Williams, 873 F.2d 620, 625 (2d Cir.), vacated on

rehearing, 891 F.2d 401 (2d Cir. 1989) (holding that laches did not bar the

plaintiff’s action due to the defendants’ unclean hands). As courts have

recognized, parties should be encouraged to settle disputes rather than pursuing

litigation at the first indication of a dispute. See, e.g., Mogavero v. McLucas, 543

F.2d 1081, 1083 (4th Cir. 1976) (“In the interest of encouraging disputants to settle

claims prior to the institution of litigation, we conclude that such a period [of

settlement negotiations] should not be counted for purposes of laches.”).

Moreover, prior to the execution of the Settlement Agreement, there was no

imminent threat of interference with the assets sought by the Trustee, especially


47

given the Trustee’s understanding that any settlement would require his consent or

the resolution of his avoidance and recovery claims. Cf. Lautenberg, 2013 WL

616269, at *2 (stating that an injunction is available to prevent “immediate”

adverse consequences). “Although a plaintiff cannot simply sleep on his rights, he

has no obligation to sue until . . . his right to protection [has] clearly ripened.”

ProFitness Physical Therapy Ctr. v. Pro-Fit Orthopedic, 314 F.3d 62, 68 (2d Cir.

2002) (internal quotations omitted). Thus, the Trustee did not delay when he could

not have filed the Stay Action earlier.

The Defendants contended that the NYAG’s motion for summary judgment,

which could have resulted in a judgment in favor of the NYAG at any time after it

was fully briefed and argued in February 2011, threatened the BLMIS estate’s

claimed assets and thus started the clock for the Trustee’s Stay Action. This

argument, however, ignores a crucial point: the motion for summary judgment

itself did not threaten to interfere immediately with the disputed assets; only a

judgment in favor of the NYAG could do so. Thus, the Trustee would have moved

for an injunction if the state court had granted the motion for summary judgment.

Furthermore, the Defendants themselves requested that the state court

withhold a decision on the motion for summary judgment pending settlement

negotiations between the parties—settlement negotiations in which the Trustee

took part. (A-1926.) Thus, as described above, the Trustee’s involvement in the


48

settlement negotiations, which delayed a decision on the motion for summary

judgment, likewise delayed any cause for bringing an injunction motion.

C. Enjoining the Settlement Pending Resolution of the Trustee’s Recovery Action Will Not Prejudice the Defendants

The injunction sought by the Trustee would cause little or no prejudice to the

Defendants inasmuch as it would merely stay the operation of the Settlement

Agreement rather than void it entirely. The District Court, however, only

considered the prejudicial effect of ruling the NYAG and Receiver Actions as void

ab initio, accepting the Defendants’ arguments that, having engaged in months of

litigation, any action to void their actions would prejudice them severely.

Yet the Trustee’s claim for a section 105 injunction would only stay the

NYAG and Receiver Actions—and the resulting Settlement Agreement—until the

Trustee’s Recovery Action is resolved. Thus, the efforts expended by the NYAG

and Ariel & Gabriel Receiver would not have been wasted; indeed, they would

have been required whether or not the Trustee had moved for a stay in June 2009

or August 2012.

While the District Court did not determine that a stay pending resolution of

the Recovery Action would prejudice the Defendants—a necessary element of the

doctrine of laches—the District Court nevertheless applied the doctrine of laches to

bar the entirety of the Trustee’s Stay Action. This failure to require the Defendants

to demonstrate the prejudice caused by the Trustee’s purported delay in filing for a


49

section 105 injunction was plain error. When put to the test, the Defendants are

unable to show any prejudice beyond having to wait until the Recovery Action is

resolved. Any “prejudice” caused to the Defendants in that case will be due to the

priorities created by SIPA for the benefit of BLMIS customers, not due to the

Trustee’s actions.

CONCLUSION

For the reasons stated, the judgment of the District Court should be reversed

and this case remanded with instructions that the Preliminary Injunction be issued.

Dated: Washington, D.C. June 6, 2013 Respectfully submitted, SECURITIES INVESTOR PROTECTION CORPORATION _/s/Josephine Wang____________________ JOSEPHINE WANG General Counsel KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution NATHANAEL S. KELLEY Staff Attorney 805 15th Street, N.W., Suite 800 Washington, D.C. 20005 Telephone: (202) 371-8300


CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

This brief complies with Fed. R. App. P. 32(a)(7)(B) because the brief

contains 11,964 words, excluding the parts exempted by Fed. R. App. P.

32(a)(7)(B)(iii).

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

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

brief has been prepared in a proportionately spaced typeface using Microsoft Word

in 14-point Times New Roman font.

Dated: Washington, D.C. June 6, 2013 Respectfully submitted, SECURITIES INVESTOR PROTECTION CORPORATION _/s/Nathanael S. Kelley_________________ NATHANAEL S. KELLEY Staff Attorney 805 15th Street, N.W., Suite 800 Washington, D.C. 20005 Telephone: (202) 371-8300


ADDENDUM


ADDENDUM TABLE OF CONTENTS

PAGE

Schott v. Ivy Asset Management Corp., No. 10 Civ. 8077 (CM) (S.D.N.Y. May 15, 2013) [ECF No. 78] ................................................ Add-1


Case 1:10-cv-08077-LBS -AJP Document 78 Filed 05/15/13 Page 1 of 43

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

IN RE BEACON ASSOCIATES LITIGATION

This Document Relates to: ALL ACTIONS

IN RE J.P. JEANNERET ASSOCIATES, INC. et al,

This Document Relates to: ALL ACTIONS

BEACON ASSOCIATES MANAGEMENT CORP.,

Plaintiff,

-against-

BEACON ASSOCIATES LLC I,

Defendants.

ERNEST A. HARTMENT et al.,

Plaintiffs,

-against-

IVY ASSET MANAGMEENT L.L.C. et al.,

Defendants.

1

09 Civ. 777 (CM)

09 Civ. 3907 (CM)

09 Civ. 6910 (CM)

09 Civ. 8278 (CM)

Add-001



BOARD OF TRUSTEES OF THE BUFFALO LABORERS SECURITY FUND, WELFARE FUND

AND WELFARE STAFF FUNDS, in their capacity

as fiduciaries of the respective funds, individually and on behalf of all others similarly situated,

Plaintiffs,

-against-

J.P. JEANNERET ASSOCIATES, INC., JOHN P.

JEANNERET, PAULL. PERRY, and IVY ASSET

MANAGEMENT CORPORATION,

Defendants.

HILDA L. SOLIS, Secretary of the United States

Department of Labor,

Plaintiff,

-against-

BEACON ASSOCIATES MANAGEMENT CORP.,

et al.,

Defendants.

----------------------------------~X STEPHEN C. SCHOTT, as Trustee for the STEPHEN C. SCHOTT A 1984 TRUST,

Plaintiff,

-against-

IVY ASSET MANAGEMENT CORP. et al.,

Defendants.

2

09 Civ. 8362 (CM)

I 0 Civ. 8000 (CM)

10 Civ. 8077 (CM)

Add-002



SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

-----------------------------------X THE PEOPLE OF THE STATE OF NEW YORK

BY ERIC SCHNEIDERMAN, Attorney General ofthe State ofNew York,

Plaintiff,

-against-

IVY ASSET MANAGEMENT LLC, LAWRENCE SIMON and HOWARD WOHL,

Defendants. ___________________________________x DONNA M. McBRIDE, individually and derivatively on behalf of Beacon Associates LLC II,

Plaintiff,

-against-

KPMG INTERNATIONAL et al.,

Defendants, -and-

BEACON ASSSOCIATES LLC II,

Nominal Defendant.

ALISON ALTMAN et al.,

Plaintiffs, -against-

BEACON ASSOCIATES MANAGEMENT CORP., et al.,

--------------------------c ________ X

3

Index No. 450489/2010

Index No. 650632/2009E

Index No. 652239/2010

Add-003



SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NASSAU ___________________________________ x

JOEL SACHER and SUSAN SACHER, derivatively on behalf of BEACON ASSOCIATES LLC II,

Plaintiffs,

-against-

BEACON ASSOCIATES MANAGEMENT CORP. et al.,

Defendants,

-and-

BEACON ASSOCIATES LLC II,

Nominal Defendant.

CHARLES J. HECHT, derivatively on behalf of

ANDOVER ASSOCIATES LLC I,

Plaintiff,

-against-

ANDOVER ASSOCIATES MANAGEMENT CORP. et al.,

Defendants. -and-

ANDOVER ASSOCIATES LLC I,

Nominal Defendant.

------------------------------------X

4

Index No. 5424/2009

Index No. 6110/2009

Add-004



THE JORDAN GROUP LLC, derivatively on behalf of


Plaintiff,

-against-

BEACON ASSOCAITES MANAGEMENT CORP. et al.,

Defendants,

-and-


Nominal Defendant.

CIRCUIT COURT OF THE STATE OF FLORIDA FIFTEENTH JUDICIAL CIRCUIT, PALM BEACH COUNTY

-----------------------------------X HARVEY GLICKER, et al.,

Plaintiffs,

-against-

IVY ASSET MANAGEMENT CORP., et al.,

Defendants.

5

Index. No. 3757/2011

Court File No.

50201 OCA029643

XXXXMBAB

Add-005



AMENDED DECISION AND ORDER APPROVING SETTLEMENT AND GRANTING PLAINTIFFS' COUNSELS' JOINT MOTION FOR AWARD OF ATTORNEYS' FEES

McMahon, J.:

The above-captioned actions, brought in this court and in the New York State Supreme

Court in New York and Nassau Counties, are among the plethora of lawsuits arising out ofthe

Bernard Madoff disaster. These actions are among the so-called "feeder fund" lawsuits; in this

case, they focus on the activity of defendant Ivy Asset Management ("Ivy"), through whom the

other defendants- Beacon Associates, Andover Associates, and J.P. Jeanneret Associates

("Jeanneret"), together with various affiliates- invested client funds in the Madoff Ponzi

Scheme.

This court, which superintended the Jeanneret actions from the beginning, inherited the

Beacon actions in January, upon the retirement of The Hon. Leonard B. Sand.

The various New York and Florida state court actions appearing in the caption are

temporarily before this court in the context of a motion to approve a global settlement of all

actions in which Ivy is named as a defendant. The settlement extends to all defendants in all of

those actions. This court's approval is required for the Rule 23 class actions that were filed and

prosecuted here (SDNY Civil Action Nos. 09 Civ. 0777, 39078 and 8362). The State Court

actions (principally derivative suits) and the other federal actions (notably the Hartman Action,

brought by the Trustees of 17 ERISA benefit funds) were settled simultaneously. Certain aspects

of the settlements in the non-Rule 23 cases (notably a cap on attorneys' fees that would not

ordinarily require court approval) were voluntarily made contingent on this court's approval.

Adopting the parties' nomenclature, I will hereinafter refer to these lawsuits as the "Settling

Actions."

6

Add-006



I do not here intend to recite the history of the Madoff scandal; it is too well known to

bear repeating. Decisions by Judge Sand and me denying the motions to dismiss in In re Beacon

and In re Jeanneret recount the asserted background of the investment decisions that are the

subject of this litigation. The reader is referred to them for background information.

For the reasons set forth below, the settlement, the Plan of Allocation, and the request for

reimbursement of expenses are all granted without modification. The request for attorneys' fees

is granted with one modification, explained below. The objections are disallowed.

BACKGROUND

I. Settlement

After laborious negotiations, including several full-day mediations sessions involving all

parties interested in these actions- a group that included the NYAG and the United States

Department of Labor ("DoL"), as well as the Class, Derivative, and Individual Plaintiffs

(hereinafter, the "Private Plaintiffs")- a settlement in the amount of $219,857,694 was reached.

The Settlement was expressly made subject to the execution of a Settlement Agreement between

the Parties to the Mad off Trustee Proceeding in the United States Bankruptcy Court for the

Southern District ofNew York, pursuant to which the MadoffTrustee has agreed to approve the

claims of the Beacon and Andover Funds in certain stipulated amounts. This means that the

Madoff Bankruptcy Estate will also make payments to the investors whose interests are

represented by the Private Plaintiffs in the Settling Actions.

The Gross Settlement Amount consists of $216,500,000 in cash, plus the waiver of

management fees of$3,357,694 accrued by the Beacon Defendants. Ivy is putting up

$210,000,000 ofthe Settlement Amount; Jeanneret $3,000,000; and Beacon cash and waived

fees totaling $6,857,694.

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From this Gross Settlement Amount, $7 million is to be paid to the DoL and $5 million to

the NYAG. Court-approved attorneys' fees and expenses, notice and administration expenses

and taxes and tax expenses will then be deducted. If the court approves the fee and expense

request in its entirety, this settlement would represent approximately 70% of the net dollars

invested by the plaintiffs with Madoff (using the formulation endorsed in the Madoff Bankruptcy

proceedings). In re Bernard L, Madoff Inv. Sec. LLC, 654 F. 3d 229, 235-42 (2d Cir. 2011). The

settlement, coupled with the recoveries these investors can anticipate from the bankruptcy estate,

is expected to return to the Private Plaintiffs collectively all or nearly all of the money they

invested with Madoff.

Not a single voice has been raised in opposition to this remarkable settlement, or to the

Plan of Allocation that was negotiated by and between the Private Plaintiffs, the NY AG and the

DoL. 1 I approved the settlement orally at the Fairness Hearing, held on March 15, 2013, and I

endorse that approval in writing today.

The settlement, taken as a whole, is fair, reasonable, and adequate. In fact, the Private

Plaintiffs and regulators have collectively achieved a remarkable result. Counsel and the

regulatory agencies who participated in its negotiation are to be congratulated.

A. The Settlement is Procedurally Fair.

The settlement was reached after protracted arms-length negotiations conducted over the

span of nine months by experienced counsel after meaningful discovery. It was reached despite

the high bar imposed by defendants' insistence that any settlement resolve the full scope of their

exposure in all lawsuits anywhere, and that the settlement of investors' claims be completed in

conjunction with the resolution of the MadoffTrustee Proceeding. All formal negotiations were

1 The court did receive one letter from a Christine Duttweiller, objecting to the payments to the DoL and NY AG, but I find no merit in the objection.

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conducted with the assistance of two independent mediators - one to mediate disputes between

defendants and the investors and another to mediate claims involving the Bankruptcy Estate.

Class Representatives and other plaintiffs were present, in person or by telephone, during the

negotiations. The US Department of Labor and the New York State Attorney General

participated in the settlement negotiations. Rarely has there been a more transparent settlement

negotiation. It could serve as a prototype for the resolution of securities-related class actions,

especially those that are adjunctive to bankruptcies.

B. The Settlement is Substantively Fair.

The settlement ticks off all the important "Grinnell factors":

1. The actions involved difficult and complex factual issues, especially because the

defendants were not themselves the alleged perpetrators of the underlying securities

fraud (Madoff), but were themselves Madoff customers, who cast themselves as

among his victims, and whose "sin" was variously described as (i) their failure to

recognize Madoffs duplicity, or (ii) their failure to share with their clients their

suspicions about Madoffs bona .fides. The theories ofliability were novel and

untested.

2. Both Private Plaintiffs' Counsel and the regulators had access to considerable

discovery, and so were in an excellent position to evaluate what the settlement really

offered to the investors.

3. There were a number of open legal questions concerning the liability of third parties

like Ivy and Jeanneret, which made settlement an attractive alternative to litigation

especially since many of Madoff s investors were older people who do not need to

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wait years and years to get back the money that was stolen from them in his

extraordinary Ponzi scheme.

4. There was no risk at the District Court level that the action could not be maintained as

a class action through trial/ but Judge Sand's class certification orders were before

the Second Circuit and there was no guarantee that they would not be overturned if

the Circuit chose to entertain Ivy's Rule 23(f) petitions (though this court believes

that was a highly unlikely proposition).

5. Ivy could easily have withstood a greater judgment.

6. The recovery in this case is unlike anything this court has ever seen, affording well

over 50% recovery to the Madoff investors involved in these lawsuits. It is, in a word,

unprecedented.

Factors 1, 2, 3, and 6 strongly favored settlement; Factor 4 was neutral. Only Factor 5

might have counseled against settlement; but given the Settlement Amount, the prospect of years

of litigation before investors would see any money, and the cost of obtaining full recovery rather

than a 70% recovery, the game was simply not worth the candle. The fact that the investors are

all but certain to recover additional sums through the efforts of the Madoff Trustee also counsels

in favor of approving the settlement.

7. Above all, the members of the class overwhelmingly approve of the settlement.

The Court-approved Notices that were sent to Class Members to apprise them of the

settlement and the procedures devised by the parties for disseminating same to the Class

Members proved to be remarkably effective. The notices were in fact reasonably calculated to

2 Judge Sand had already certified classes in the Beacon and Buffalo Laborers cases (while excluding from those classes the plaintiffs in Hartman v. Ivy Asset Management, 09 Civ. 8278). This court was asked to stay its hand on the class certification motions in Jeanneret pending the outcome of the settlement negotiations, and I did so, but the likelihood that I was going to certify a class was overwhelming.

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apprise interested parties of the pendency of the action and afford them an opportunity to present

their objections. The proof of the pudding is that an astonishing 98.72% of the Rule 23(b )(3)

Class Members who were eligible to file a proof of claim did so (464 out of 470), and only one

Class Member opted out (that Class Member was not entitled to recover anything under the Plan

of Allocation). I have never seen this level of response to a class action Notice of Settlement, and

I do not expect to see anything like it again.

Additionally, of the 83,022 Rule 23(b)(l) Class Members who received notice, only one

filed an objection to the terms of the settlement.

The strong support for the settlement demonstrated by the Class Members and the

absence of any serious objection indicates that the real parties in interest- the investors who

were ensnared in the Madoff Ponzi scheme - are satisfied with the results achieved by the

settlement. The only objection recorded to the settlement is, in effect, to the contents of the

Notice, since the objector (Duttweiler) principally protests that she has insufficient information

about the resources of the defendants. But the court has previously concluded that the Notice

provided all the information that a Class Member needed in order to decide whether to

participate in the settlement. The fact that this Class Member's objection was not echoed by

anyone else reinforces my inclination to reject the Duttweiler Objection, and I do so.

The court also approves the Plan of Allocation. In this case, there were multiple classes

and groups of investors. Recovery had to be allocated among four separate investment vehicles

(Beacon, Income Plus, Andover, and the Direct, or DIMA, Investors). The parties balanced many

factors, including the net amount invested with Madoff through each vehicle, the timing of

investments and lost opportunity costs (particularly important to those investors who received

more in distributions from Madoff than they actually invested), fees paid to defendants, SIPC

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advances, and money paid to resolve the Mad off Trustee litigation. The negotiations over the

Plan of Allocation included a separate, one day mediation. The regulators were actively involved

in the process of setting up the Plan of Allocation. No one has objected to it or suggested any

reason why it is inadequate, except for Objector Duttweiler, who thinks it inappropriate for the

regulators to receive any payment out of the Settlement Fund. I disagree; the taxpayers have

borne considerable costs as a result of the investigations into Madoff and those who, like

defendants, dealt with him. Reimbursement for at least part of those costs is entirely appropriate.

I thus approve the entire Plan of Allocation, including allocation of $5 million to the NY AG and

$7 million to the DoL.

In short, there is no reason to reject the settlement and every reason to approve it. And I

do.

II. Attorneys' Fees and Expenses

Approving the settlement was the easy part.

The real issue before the court is whether the requested fee award should be approved.

The NY AG and several other parties have objected to that award, arguing that it should be

substantially reduced.

After considerable thought, I am prepared to accept the negotiated fee award, with one

minor but, in my view, necessary adjustment to the fees to be paid to the attorneys in the Class

Actions. I also grant the unopposed motion for an award of expenses in the amount of

$1,213,292.58, plus additional expenses that may have accrued in the Class Actions. I note that

the expenses of Hartman Counsel and Ross & Orenstein are being paid by their clients, and are

not subject to court approval, even as part ofthe overall settlement.

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A. Principles Governing Approval of Fee Applications

We start by recognizing several propositions.

The first is that counsel for a class is entitled to be paid a fee out of the common fund

created for the benefit of the class. Guippone v. BH S&B Holdings, LLC, No. 09 Civ. 1029, 2011

WL 5148650, at *8 (S.D.N.Y. Oct. 28, 2011). In this case, we are in the unusual posture that the

fee request is being made on behalf of all Private Plaintiffs' Counsel, even those who are not

litigating in this court (principally the plaintiffs in various derivative actions) or who were

retained to litigate direct actions and are not representing Rule 23 classes (the Hartman

Plaintiffs). This is an artifact of the global nature of the settlement; counsel have agreed to

participate in a carefully negotiated "common fund" settlement, rather than billing their

respective clients separately.

The second is that a court overseeing a class action can only approve a fee request that is

fair and reasonable.

The third is that the trend in this Circuit has been toward the use of a percentage of

recovery as the preferred method of calculating the award for class counsel in common fund

cases, reserving the traditional "lodestar" calculation as a method of testing the fairness of a

proposed percentage award. See, e.g., In re Bisys Sec. Litig., No. 04 Civ. 3840, 2007 WL

2049726, at *2 (S.D.N.Y. July 16, 2007). In this Circuit, courts routinely award attorneys' fees

that run to 30% and even a little more of the amount of the common fund. See, e.g., Velez v.

Novartis Pharmaceuticals Corp., No. 04 Civ. 9194,2010 WL 4877852, at *21 (S.D.N.Y. Nov.

30, 201 0) (collecting cases).

B. Relevant Facts: What Private Plaintiffs' Counsel Did

Herewith the factual background leading to the application for fees in these cases.

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Both the Beacon and the Jeanneret actions were client-driven from the beginning, unlike

all too many class actions, which are lawyer-driven. The Lead Plaintiffs in In re Beacon and In

re Jeanneret held a multi-law firm "beauty contest," in which a number of firms competed for

the position of Lead Counsel. The beauty contest was won by Lowey Dannenberg, which offered

to serve as Lead Securities Counsel for fees the lesser of (i) four times the hourly rate as

calculated under the lodestar method, or (ii) 22% of any amount recovered. The 22% number

represented a significant reduction from the size of fee awards that are routinely approved in this

Circuit- although I hasten to add that it does not automatically make the fee a reasonable one.

Both Judge Sand and I approved the retention of Lowey Dannenberg as Lead Counsel-

specifically, as Lead Counsel in In re Beacon, Lead Securities and Derivative Counsel in In re

Jeanneret, and Liaison Counsel in all the coordinated actions. Kessler Topaz Meltzer & Check,

LLP were appointed Lead Counsel in the Buffalo Laborers Action, which was the ERISA case in

Jeanneret. Cohen Milstein Sellers & Toll PLLC were appointed ERISA Class Counsel in In re

Beacon. Other subclasses were identified in In re Beacon and counsel were appointed to

represent those subclasses Bernstein Liebhard LLP to represent the "Investor Class" and Wolf

Haldenstein Adler Freeman & Herz (which was already prosecuting three separate derivative

actions in the Supreme Court: Nassau County3) to represent a different "Investor Class."

Neither Judge Sand nor I placed any special conditions on these appointments in terms of

cost containment. In retrospect, I wish that I had imposed conditions to keep down the cost of

document review, and I undoubtedly will in the future when approving the appointment of Lead

Counsel (this will be discussed further below).

3 The Nassau county derivative actions were brought by the firm of Hecht & Associates, P.C., which was "absorbed" (to use counsel's term) by WolfHaldenstein during the pendency of this litigation. This left Wolf Haldenstein wearing two hats at the end of the day.

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Private Plaintiffs' Counsel in the Beacon and Jeanneret cases (including the Hartman

Plaintiffs, who were not part of any class action and who, while consolidated with the rest of the

Beacon cases for discovery purposes, were proceeding on their own track and were litigating

ERISA~related issues) responded to two motions to dismiss in each case- one filed prior to May

2010 (when the NYAG filed his complaint in the New York State Supreme Court) and one filed

shortly thereafter. They attended at least seventeen conferences with Magistrate Judge Peck, who

was appointed by Judge Sand and myself to superintend discovery. (I have the transcripts of all

conferences in my chambers.) Counsel in the class actions coordinated the review of documents

already produced to the regulators that will be discussed below; the Hartman Plaintiffs' Counsel

conducted their own parallel review of those documents. All Private Plaintiffs' Counsel

responded to discovery requests from defendants - Class Counsel to requests for class-related

discovery; the Hartman Plaintiffs to requests for discovery about the seventeen ERISA employee

benefit plans that were plaintiffs in their direct action. All counsel participated in the arduous

settlement negotiations, with Lowey Dannenberg taking the lead - not just in dealing with the

defendants, but in coordinating the negotiating strategies of the various Private Plaintiffs, who

were not allied in interest much of the time.

Needless to say, no one was planning to work pro bono. The cases were taken on

contingency.

During the settlement negotiations, the plaintiffs themselves engaged in a separate

mediation session over attorneys' fees, during which all Private Plaintiffs' Counsel (including

counsel in actions that are (1) not subject to Rule 23 approval, and even (2) not pending in this

court!) agreed to accept a stipulated amount in fees, subject to the approval of this court. The

proposed payments to the DoL and NY AG that were to be made as part of the settlement were

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deducted from the sum against which fees for Private Plaintiffs' Counsel would be calculated, as

was a payment of $4 million to Named Plaintiffs in the Class Actions. Put otherwise, the Gross

Settlement Fund was reduced by $16 million (yielding an Adjusted Settlement Fund) before any

percentage was applied in order to calculate a fee. Then, at the insistence of the DoL which

participated actively in the negotiations, and which supports approval of the request- Private

Plaintiffs' Counsel agreed as a group to cap the sum of all fee awards at 20% of that Acijusted

Settlement Fund. This represents a significant reduction in the total amount of fees to be paid by

the Madoff investors since, absent these negotiations, Lowey Dannenberg alone would have

ordinarily been entitled to seek approval of a fee of22% of the Gross Settlement Fund (almost

$5 million in additional fees)- with everyone else's attorneys being paid on top of that amount!

The parties agree that the Secretary of Labor played a critical role in reducing the Fee

A ward Cap from 22% to 20%.

At the end of the day, the proposed total fee award amounts to $40,771,538, plus

expenses of $1 ,213,292.58. The breakdown, together with a lodestar calculation from each firm,

is attached to this opinion as Appendix A.

C. Objections to the Fee Request

Objections to the request for fees have been filed by the NY AG, an attorney purporting to

represent four of the Beacon and Andover investment funds in which some of the plaintiffs

invested, and two individual investors (Siegel and Medrick). For the most part the objections are

mere copycat objections ofthe one filed by the NYAG, on which I will focus most ofthe

discussion.

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The NY AG mounts two separate objections to the fee award. One, predictably, is to the

number of hours expended and the amount being charged for those hours- so-called Goldberger

objections. Those will be dealt with in due course.

The other, however, is unique to this situation and to the involvement of the NYAG in the

Madoff investigations. It needs to be separately discussed.

(i) The NYAG Investigation and Settlement Negotiations

The so-called "Madofffeeder fund" cases, including In re Beacon and In re Jeanneret,

were filed within months of the December 2008 revelation that Madoffhad been engaged in a

Ponzi scheme for virtually the entire life of Bernard Madoff Investment Services (BMIS). BMIS

was in bankruptcy; Madoffwas under indictment; and investors were casting about for deep

pockets to reimburse them for the loss of the profits (real and imaginary) that they had accrued

(or thought they had accrued) because they had been permitted to invest with the wizard who

seemingly never lost any money in the market. The securities fraud complaints, filed under the

Private Securities Litigation Reform Act (PSLRA), proceeded on the slow and deliberative track

dictated by Congress back in 1995. In other words, for long stretches oftime, nothing happened

because nothing was allowed to happen; the statute effectively prohibits a court from fast

tracking or managing the progress of a securities fraud case. ERISA class actions were also filed,

but as has become customary in this court, they were consolidated with and put on the same slow

track as the securities fraud cases. The Hartman Plaintiffs (trustees of 17 ERISA benefit funds)

declined to rely on the class action track and retained separate counsel to pursue a private, direct

action, although that, too, was consolidated with In re Beacon for purposes of discovery.

In April2009, during the long period when the PSLRA effectively imprisoned the actions

pending in this court in a state of suspended animation, then-Attorney General Andrew Cuomo

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opened an investigation into the Madoff-related activities of feeder fund defendant Ivy Asset

Corporation, a subsidiary of The Bank ofNew York. Proceeding with (relative) dispatch, since

he was subject to no congressionally-mandated stay and possessed of subpoena power, which

Private Plaintiffs lacked -the NY AG conducted a year-long investigation into Ivy and several

other entities. The investigation involved the production of over 11 million documents and 37

depositions. The discovery convinced the NY AG that Ivy had fraudulently misled clients about

Mad off for more than a decade, while knowing or strongly suspecting that his was not a

legitimate operation. Among those who were misled, according to the NY AG, were the

managers of Beacon, Andover, and Income Plus Funds, who had collectively invested over $227

of client assets with Madoff.

In May 2010, the NYAG filed a 55 page complaint against Ivy and two of its former

principals, Lawrence Simon and Howard Wohl, detailing the facts uncovered during its

investigation. The complaint identified numerous letters and oral statements sent or made by Ivy

to Beacon, Andover, and/or Income Plus that affirmatively misrepresented Ivy's views about

Madoff, supporting each allegation of non-disclosure with quotations from internal Ivy emails

and documents, and from deposition testimony.

In the months prior to filing the complaint, the NY AG and Ivy engaged in settlement

negotiations. According to the NY AG, Ivy indicated that it would pay an aggregate of $140

million to settle the NYAG's claims- but only as part of a settlement that, among other things,

contemplated the global resolution of all claims by investors in the Beacon, Andover, and

Income Plus Funds; Beacon, Andover, and Income Plus themselves; and all Direct (DIMA)

Investors, including those who had invested with Jeanneret. In short, Ivy told the NYAG that it

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would pay $140 million to obtain the settlement it ultimately obtained here for the payment of

$210 million.

Had the NY AG been able to effect a settlement, the entire $140 million would have been

paid to the investors who are represented in the Private Plaintiffs' Actions i.e., the Madoff

victims who will be receiving payment from the Settlement Fund just approved by this court.

There would have been no attorneys' fees, because there would have been no need to pay any

attorneys- the NYAG, acting in parens patriae, would have created the common fund.

Unfortunately, there was no settlement. Ivy's offer was plainly a conditional offer and the

condition global peace- was not fulfilled. So negotiations broke off and the NY AG complaint

was filed.

The existence of the negotiations between Ivy and the NYAG was not disclosed to any of

the Private Plaintiffs, whose various lawsuits (see the caption at the head of this opinion) were

starting to come to life in this court, the New York State Supreme Court (in two counties), and

the state court in Palm Beach County, Florida. No effort was made during the winter and spring

of2010 to bring anyone else into the NYAG/Ivy discussions, or to figure out a way to make the

global settlement happen. Apparently no effort was made to involve the Madoff Trustee in

Bankruptcy, either, even though his prodigious efforts on behalf of the Madoff "investors" make

him the elephant in the room whenever private actions involving Mad off investors are under

discussion. Because Beacon and Andover were involved in the NY AG investigation, it appears

that they or their attorneys were aware oflvy's settlement offer, but they never told anyone about

it, either- although the law firm that purports to represent four of the Beacon and Andover

Funds (Herrick Feinstein) insists that it was pushing for mediation rather than litigation all along

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because it knew that Ivy had already suggested a serious figure to resolve the cases against it.

(Memorandum of Law at Docket #344, pages 10-11.)

(ii) Proceedings in this Court Following the Filing of the NYAG Complaint

The filing of the NY AG's complaint led to a round of frenzied activity in the Beacon and

Jeanneret actions that were pending in this court. As originally filed, the complaints in these

actions alleged that Ivy had failed to uncover Madoffs fraud; they did not allege that Ivy had

uncovered the fraud early on but kept that knowledge to itself. The pleadings in both federal

class actions were bereft ofthe detailed and damning allegations contained in the NYAG

complaint; they were of the "missed red flags" genre of pleading. This was entirely

understandable, since the PSLRA's congressionally-mandated waiting periods and automatic

stay of discovery pending the expiration of a notice/waiting period, the appointment of lead

counsel, and the resolution of motions to dismiss the original complaints had robbed the Private

Plaintiffs of any opportunity to learn via discovery what Ivy had been forced to disclose to the

NYAG.

But as soon as the NY AG filed its complaint, both the Beacon and the Jeanneret

complaints were amended to reflect the results of the year-long, subpoena-aided, public

regulator-led investigation. Eventually, Judge Sand and I denied a second round of motions to

dismiss that were directed to those amended complaints which, as both of us recognized, relied

heavily for their well-pleaded allegations on the discoveries made by the NY AG.

Denial of the motions to dismiss finally unleashed Lead Counsel and ERISA Class

Counsel (who had also successfully fended off motions to dismiss) to begin discovery in the

federal actions, superintended by Magistrate Judge Andrew J. Peck of this court. Of principal

relevance to the dispute over counsel fees, Judge Peck directed class counsel to review the

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documents that had been produced to regulators before making any document requests of their

own. He also ordered that this be done on an expedited schedule.

Securities and ERISA Lead Counsel, obedient to the court's directive, devised a plan for

reviewing the millions of documents that had already been reviewed by the NYAG. This plan

included protocols for dividing the documents among the various law firms involved and for

eliminating duplication in the documents themselves. Private Plaintiffs' Counsel did not assume

that the NYAG had found all the important documents among the 11 million that had been

produced to it; they conducted a de novo review. Private counsel also examined some 3 million

documents that had been produced to other regulators; it is highly likely that this lot included

many duplicates of documents that had been produced to the NYAG, though no one can confirm

this fact.

The NYAG insists that private counsel uncovered not a single significant document that

it had not already located in the production made during its Ivy investigation; Private Plaintiffs'

Counsel insist that they found numerous additional documents of evidentiary value. I am sure

that the Private Plaintiffs found some documents that the NY AG overlooked and since the

NY AG did not conduct any investigation into Jeanneret, that alone was a source of some new

evidence. I am equally sure that the NYAG managed to find much ofthe significant

documentary evidence in the case during its investigation.

In addition to document discovery, Private Plaintiffs' Counsel had to familiarize

themselves with the 37 depositions taken by the NYAG. This of course cut down substantially on

the merits-based litigation that would have been required had these lawsuits continued.

Lead Counsel in the securities and ERISA class actions also moved for class certification

in both In re Beacon and In re Jeanneret. Defendants were entitled to, and took, considerable

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class discovery in order to fashion opposition to those motions. The Beacon motion as granted by

Judge Sand~ I stayed the Jeanerette motion after full briefing because settlement negotiations had

gotten serious.

Private Plaintiffs' Counsel also responded to substantive discovery requests. The lion's

share of that work appears to have been borne by counsel for the Hartman Plaintiffs, who were

required to, and did, produce detailed information about their 17 clients from a variety of

sources. Indeed, counsel for the Hartman Plaintiffs spent twice as much time responding to

discovery requests from defendants as they did reviewing document produced by plaintiffs to the

regulators in this case.

In Nassau County, motions to dismiss three derivative actions were filed and denied, as

were motions for reargument. As is customary in the state court, interlocutory appeals were taken

from all three denials (the appeals have been briefed and remain pending. There was

considerable additional motion practice, including motions for stays of proceedings and for a

change of venue in at least one of the cases to Westchester County- as well as a motion made in

this court to lift a litigation stay imposed by (I believe) Judge Sand.

In all, counsel for the Private Plaintiffs briefed a total of 26 motions. Three interlocutory

appeals were taken in the Nassau County cases. The parties had prepared to take some 20

depositions in the ERISA cases when the settlement mediation process began. Private Plaintiffs'

Counsel, not the NY AG, demonstrated the will to litigate. And that is what ultimately led to the

commencement of serious settlement negotiations. The potential cost of dealing with the

multipronged attack from the Private Plaintiffs has to have been a significant factor motivating

Ivy to return to settlement mode- a mode from which it had walked away prior to the filing of

the NY AG complaint- and in inducing the other defendants to enter into settlement negotiations.

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Contrary to the NYAG's assertion, the pendency of its action in the New York State

Supreme Court does not appear to have played any role in inducing the defendants to commence

serious settlement negotiations. That is undoubtedly because the NY AG displayed no interest in

actually litigating the charges it had filed against Ivy. Once the action was filed, the NYAG

effectively stopped doing anything at all. I have obtained a copy of the docket sheet from the

NYAG's civil action, filed in the Supreme Court, New York County. It contains a total of eight

docket entries. Nothing whatsoever happened after the complaint and the answer were filed. No

motions were filed; there was no further discovery. No one served a Request for Judicial

Intervention, which is the usual mechanism for moving a case along in the State Supreme Court.

The lawsuit served as nothing more than a placeholder.

It is undisputed- indeed, it is conceded by the NY AG that the Private Plaintiffs carried

the laboring oar in the settlement negotiations, which began late in 2011 and took approximately

9 months to be concluded. Those efforts are described in more detail above. The NYAG and the

DoL participated in those negotiations- both in negotiations to settle the lawsuits, and in what

the NY AG disparagingly refers to as "time consuming ancillary negotiations" that resulted in the

overall settlement and fee award request. The DoL participated more actively in the "time

consuming ancillary negotiations" than did the NY AG, and was identified by the Private

Plaintiffs as being exceedingly helpful in bringing matters (especially the amount of an agreed

fee request) to a successful conclusion. Private Plaintiffs' Counsel have a lower opinion of the

helpfulness of the NYAG in connection with these ancillary matters, but I will proceed on the

assumption that he participated in the negotiations and did not hinder the resolution of the

matters.

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FINDINGS OF FACT AND CONCLUSIONS OF LAW

I. Objections

Objections to the request for attorneys' fees have been filed by the NYAG; by the law

firm of Herrick Feinstein, which apparently represents four funds (Beacon Associates LLC I,

Beacon Associates LLC II, Andover Associates LLC I, and Andover Associates QP LLC); by

Beacon 23(b)(3) class members Howard M. Siegel and Charles T. Medrick; and by Max

Folkenflik, an attorney who is himself a party to the fee request.

The objections break down into two categories.

The NYAG (echoed by other objectors) argues that the requested fee award is excessive

because the efforts of Private Plaintiffs' Counsel added at most $76 million to a pot of$140

million that had already been obtained by the NY AG from Ivy- the principal target of the

NYAG's 2009-2010 investigation.

Herrick Feinstein also argues that the award is unreasonable because counsel spent an

excessive number of hours "duplicating" work already done by the NYAG and other regulators

before agreeing to mediate claims that Beacon and Andover (if no one else) were willing to

mediate rather than litigate from the outset. The NY AG echoes the contention that the number of

hours expended by Private Plaintiffs' Counsel were excessive and cannot reasonably be

compensated, even on the basis of a settled fee request that was mediated and is endorsed by the

United States Secretary of Labor.

Mr. Folkenflik objects to the fact that some of the attorneys who are participating in the

fee request are getting too much money. He does not object to the three quarters of a million

dollars that is his share of the joint fee request, although I cannot see that he did much of

anything to earn his proposed fee.

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The principal objector is the NYAG. I will deal with his objections first; I will then add a

section addressing the Herrick Feinstein, Siegel/Medrick, and Folkenflik objections.

The objections originally filed by the so-called "Banfield" group of investors (Docket

#339) have been resolved consensually. The objection of Christine Duttweiler (Docket #354-3)

have already been rejected.

II. The Objection That The Fee Award Should Be Calculated Off the Difference Between Ivy's Original Settlement Offer to the NY AG and The Ultimate Settlement Amount is Denied

I reject the NYAG's contention that the fee award for Private Plaintiffs' counsel should

be reduced because their work contributed at most $76 million to the settlement pot that had

already been funded to the tune of$140 million in it as a result of the efforts of the NYAG.

When the Private Lawsuits revved up for litigation, and when settlement negotiations

commenced, the settlement pot did not contain $140 million. The settlement pot was empty. It is,

therefore, not correct for the NY AG to assert that it had obtained a $140 million settlement

before the private lawsuits effectively got off the ground.

Ivy may well have offered $140 million to settle with the NY AG sometime prior to the

filing of the NYAG's complaint, but it did so on a condition the NYAG was either unwilling or

unable to fulfill- namely, that all the lawsuits filed against Ivy be resolved at the same time. As

a result, Ivy took its offer off the table and began litigating- not with the NY AG, which has not

demonstrated the slightest interest in actually preparing its case for trial, but with the Private

Plaintiffs. Their counsel all of them blissfully unaware oflvy's pre-suit offer to the NYAG-

worked assiduously to assimilate the knowledge that the NY AG had compiled during the year

when Class Counsel were statutorily barred from taking any substantive steps toward pursuing

the merits, and to produce discovery from and make and oppose motions on behalf of their

25

Add-025



clients. It is noteworthy that Ivy's conditional settlement offer was not put "on suspense;" it was

withdrawn, while Ivy (and the other defendants) litigated the viability of the Amended Class

Action Complaints, the Derivative Actions, and the Hartman Complaint with Private Plaintiffs'

Counsel.

The cases on which the NYAG relies for the proposition that counsel's "piggybacking"

onto its work should result in any fee award's being calculated as a percentage of the amount by

which the ultimate settlement exceeded Ivy's original offer are neither binding on this court nor

factually apposite.

For example, in Swedish Hospital Corp v. Shalala, 1 F. 3d 94 (D.C. Cir. 1993), the class

action complaints were not even filed until after the underlying issue whether HHS was

obliged to pay the copying expenses of the hospital plaintiffs had already been decided and

"represented binding precedent in this Circuit." /d. at 105. Here, there has been no final

adjudication of defendants' liability on the merits, as was the case in Swedish Hospitals; there

was no law of the case to apply to latterly-filed class actions. No matter how strong the NYAG

believes its fraud claims against Ivy to be, I have already noted that these cases raised novel

issues relating to the liability, not of Bernard Mad off Investment Services ("BMIS"), but of so

called third party "feeder funds," whose clients invested with BMIS, and which were arguably

themselves victims ofMadoff's fraud. It is true that the Private Plaintiffs would have had to

prove elements that the NY AG did not notably reliance and scienter- in order to prevail, but

all plaintiffs, including the regulators, had numerous litigation hurdles to surmount. And the

NY AG was not helping them surmount those hurdles, since the NY AG was not litigating its

claims at all.

26

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Similarly, in In re First Databank Antitrust Litigation, 209 F. Supp. 2d 96 (D.D.C. 2002),

the private class actions were litigated in tandem with a proceeding brought by the FTC. The

court approved a settlement in the form of a consent judgment in the FTC case. That judgment

implemented a complex plan of divestiture of the defendant's assets, disgorgement of profits,

and payment of civil penalties. The FTC represented to the court that it and the defendant had the

disgorgement of profits was intended to be "for the purpose of settling the [private] class action

lawsuits," and that of the total amount, $16 million had been agreed to (or, as the court put it,

$16 million was the amount "to which defendants had already committed themselves") before

the class plaintiffs filed their lawsuit. There is no indication in the record that this money was

ever withdrawn; plaintiffs' counsel were required only to negotiate the supplemental recovery

over and above what was already "on the table." The opinion also suggests that class counsel did

not engage in any meaningful motion practice or discovery; it appears that the FTC did the lion's

share of litigating, which is exactly the opposite of what happened here.

Here, by contrast, (1) no separate settlement with the NY AG preceded the negotiation of

the global settlement- and, indeed, the NY AG was unable to consummate any sort of settlement

on its own; (2) the feeder fund class actions were filed months before the NY AG filed its lawsuit,

although because of the constraints imposed by the PSLRA and consolidation, they had not been

allowed to proceed on the merits; (3) the $140 million for which the NY AG wants to take sole

credit was taken off the table precisely because the NY AG was unwilling or unable to

consummate the kind of global deal that was negotiated principally by the Private Plaintiffs; and

(4) Private Plaintiffs' Counsel were negotiating from scratch, since they had no idea (because the

NYAG did not disclose) that Ivy had once offered $140 million to settle the case.

27

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I do not in any way minimize the important the work done by the lawyers at the NY AG

office. Their investigation unquestionably jump-started the process that resulted in the extremely

favorable settlement I have here approved. But I will not allow the NY AG to take credit for a

settlement that, for whatever reason, it did not obtain. And once that prospect of settlement

disappeared, so, for all intents and purposes, did the Attorney General.4

I am especially disinclined to punish private counsel by subtracting the portion of the

ultimate settlement fund represented by Ivy's undisclosed and ultimately withdrawn settlement

offer because I consider what was presented to this court for approval to be nothing short of

extraordinary. Private Plaintiffs obtained a generous, global settlement, one that covers a

significant portion of their clients' losses with no penalty to those plaintiffs in the Madoff

Bankruptcy (in which they remain eligible to recover from the bankruptcy estate). It is a

settlement that has proved acceptable not only to the members of the classes and to every private

plaintiff, but also to the Department of Labor and the Madoff Trustee.

The NY AG cannot take credit for bringing about this happy result, because he did not

herd all the cats that needed to be rounded up in order to bring it to fruition. I am not aware of

any other Madoff-related case in which counsel have found a way to resolve all private and

regulatory claims simultaneously and with the concurrence of the SIPC/Bankruptcy Trustee.

Indeed, I am advised by Private Plaintiffs' Counsel that the MadoffTrustee is challenging

4 There is a serious question whether the NY AG even had standing to pursue the lawsuit he filed. The action was brought in parens patriae, but the NY AG cannot bring claims for damages on behalf of private citizens; a state that sues in parens patriae must seek to redress an injury to an interest that is separate from that of individuals. Connecticut v. Physicians Health Services, 287 F. 3d 110 (2d Cir. 2002); People of the State of New York by Abrams v. II Cornwell Co., 695 F. 2d 34, 38 (2d. Cir. 1982). So having failed to obtain a pre-suit settlement that could have been used to satisfy at least some of the claims of the Private Plaintiffs. the NY AG had no real ability to recover through litigation the money that plaintiffs had lost even on behalf of citizens of the State of New York (and not all the class members and Private Plaintiffs are citizens of the State of New York). The NYAG could have attempted to obtain injunctive relief to forestall future violations oflaw in the public interest, but since Ivy was in the process of winding down its operations in May 2010, when the NY AG filed its lawsuit, the request for injunctive relief may very well have been moot. This issue need not be decided, but the weakness of the NYAG's position as a party to litigation might well explain its failure to take even a single step to move its lawsuit forward.

28

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settlements reached by the NYAG in other feeder fund cases (Merkin, Fairfield Greenwich)

which makes the achievement here all the more impressive.

So I deny the NYAG's motion (and the copycat objections) asking that I calculate the

reasonable fee award off a base of $76 million instead of $219 million (or $207 million). If the

fee request is to be reduced, it will be because counsel is asking for too much in light of the

Goldberger factors. I turn to them now.

III. Except in One Respect, the Goldberger Factors Support the Requested Fee Award

The factors to be considered in deciding what constitutes a reasonable fee include the

followings: (1) time and labor expended by counsel; (2) risks of litigation; (3) magnitude and

complexity of litigation; (4) requested fee in relation to the size of the settlement; (5) quality of

representation; and (6) public policy considerations. Goldberger v. Integrated Resources, Inc.,

209 F. 3d 43 (2d Cir. 2000).

The only factor that warrants extended discussion is the first, so I will leave it for last.

A. Risks of Litigation/Magnitude and Complexity of Litigation

The risks of litigation and the magnitude and complexity of the litigation conflate. The

issues relating to the liability of third parties (the Madoff"feeder funds") for losses suffered by

Madoffinvestors as a result of the fraud committed by Bernard Madoff are, as I have said earlier,

novel and uncertain. The defendants here are not accused of being accessories to the Mad off

fraud; rather, the theory of the various amended complaints was that the fund managers knew or

should have known that Madoff was engaged in a Ponzi scheme. There is some evidence,

discussed in the pleadings, that managers at various funds suspected as much, but whether that

would have sufficed to impose liability on third parties for imprudent investments is not a matter

that has been definitively litigated. The subsidiary issues, particularly in the ERISA context, are

29

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entirely novel. And all of these matters were taken on contingency, so in view of the novelty of

the issues there was some possibility that counsel would recover nothing at all.

The pendency of the NYAG's entirely dormant lawsuit does not seem to have put any

additional pressure on the Ivy Defendants to settle (especially given what appear to be very real

impediments to jurisdiction, see below and n. 3, supra), but it probably reduced somewhat the

risk ofproving some elements of fraud. But the NYAG's lawsuit could not have eliminated the

litigation risk. As Private Plaintiffs point out, the NYAG cannot sue for damages owed to private

plaintiffs. See Connecticut v. Physicians Health Services, 287 F. 3d 110 (2d Cir. 2002); People of

the State ofNew York by Abrams v. 11 Cornwell Co., 695 F. 2d 34, 38 (2d. Cir. 1982). The

Private Plaintiffs in these cases thus could not have simply "piggybacked" their way to victory

by allowing the NY AG to litigate his case (assuming he had shown any inclination to do so) and

abiding the result. Even if he had standing to pursue an action for injunctive relief, the NY AG

would not have had to prove either reliance or scienter in order to prevail - both necessary to

plaintiffs recovery in the securities fraud cases so the Private Plaintiffs had absolutely no

choice but to litigate their matters actively if they wanted their money back. Which they did.

Because the NY AG did not actively litigate its case once the complaint was filed,

according to publicly available records, there is little reason to compare this case to In re

Renaissance Holdings ltd Sec. Litig., No. 05 Civ. 6764, 2008 WL 236684 (S.D.N.Y. Jan. 18,

2008), where my colleague, Judge Pauley, concluded that the risk of non-recovery was small

because the SEC had commenced its own parallel investigation. The one thing the NY AG could

have done to advance the interests of the Private Plaintiffs - get a settlement without having to

file a lawsuit- it conspicuously failed to do. From the moment Ivy withdrew its offer, the Private

Plaintiffs' hope of recovery rested squarely on the shoulders of private counsel.

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B. Quality of Representation

The quality of representation is not questioned here, especially for those attorneys

(principally from Lowey Dannenberg) who worked so hard to achieve this creative and, in my

experience, unprecedented global settlement.

C. Size of Fee in Relation to Size of Settlement

This being an unusual case, the size of the fee in relation to the size of the settlement can

be measured in several different ways.

The fee request is for $40,771,538. That represents either 18.5% or 20% of the settlement

amount, depending on whether one includes or deducts the payments that are to be made to the

DoL and the NYAG as part of the settlement. Either way, the negotiated amount to pay all the

plaintiffs' lawyers in all of these cases is a lower percentage of the recovery than was negotiated

by Lowey Dannenberg during the Lead Counsel "beauty contest." Because I reject the NYAG's

contention that it obtained the first $140 million in settlement funds, I necessarily reject its

argument that the fee request is a patently unreasonable 53% of the settlement achieved by

Private Plaintiffs' Counsel.

20% of the settlement amount is not only within the range of amounts awarded in similar

actions where court approval of fees is required, it is actually below the range of25%-33% that

is often allowed in this court. See, e.g., Velez, 2010 WL 4877852, at *21. The requested fee

award, when viewed in its totality, is lower as a percentage ofthe settlement fund than is

customarily seen in this court. It is lower than the amount to which Lead Counsel Lowey

Dannenberg would have been entitled under its agreement with Lead Plaintiffs (which was, of

course, subject to court approval), yet it also includes fees for counsel in the ERISA class actions

31

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and for the attorneys who are representing the plaintiffs in the various direct and derivative

actions pending in all the various courts, including principally the Hartman Plaintiffs.

As a purely technical matter, the only fees that must be approved by this court are the

fees for work performed in the In re Beacon and In re Jeanneret class actions (whether securities

or ERISA). The proposed fees for counsel in those actions that are statutorily subject to this

court's approval pursuant to Rule 23 total $28,625,000 which is about 70% of the requested fee

award, and about 13.8%, or a little over one-eighth, of the Settlement Amount (including the

Beacon fee waiver) after deduction of the sums to be paid to the DoL and the NYAG. When only

the Rule 23 fee applications are viewed separately, the amount is far below the percentage of

settlement that is customarily asked for and approved in this Circuit.

The rest of the $40.7 million fee request comes from counsel who are under no obligation

to submit their fees to this court for approval- except insofar as they have voluntarily agreed to

do so in order to effectuate a settlement that will obtain an expeditious (relatively speaking) and

highly favorable recovery for their clients. Of that $12.1 million, 60% is to go to counsel in the

Hartman Individual Actions. This amount represents about 53.5% of their lodestar, and is below

what their clients agreed to pay them in order to induce them to undertake the representation (and

get out from participation in the class actions). The amounts to be paid to the other attorneys

reflect the paucity of proceedings in any of the other actions, except for the three derivative

actions before Justice Bucaria in Nassau County Supreme Court, where the WolfHaldenstein

firm engaged in a substantial amount of procedural litigation, including interlocutory appeals of

denials of motions to dismiss.

As can be seen in the chart annexed as Appendix A to this opinion, the proposed fee

award compares favorably with lodestar recovery. The Second Circuit encourages a crosscheck

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against counsel's lodestar. See In re Bisys Sec. Litig., 2007 WL 2049726, at *2 (citing

Goldberger, 209 F.3d at 50). In this case, Private Plaintiffs' Counsel and their paralegals have

spent, in the aggregate, 118,475.74 hours in the prosecution of this case. The lodestar amount,

using the hourly rates proposed by counsel, is $48,967,217.35- a negative collective multiplier

of0.8325.5

D. Public Policy Considerations

Settlement is to be encouraged and that includes settlement of fee applications. This

particular settlement was mediated and overseen by a representative from the United States

Department of Labor. It results in an award of less in fees than the Lead Plaintiffs had been

prepared to submit for approval to this court, and less in fees than Private Plaintiffs had been

prepared to pay. Lead Plaintiffs support the fee request. The private Hartman plaintiffs support

the request. A number of individuals who invested with the "objecting" Beacon and Andover

Funds support the request (and object to the objection, which comes from they know not whom).

Almost no class members have objected to the fee award.

Finally, it is highly significant to the court that the Department of Labor endorses the fee

request and was instrumental in negotiating the percentage down from 22% to the 20% here

requested.

In short, Goldberger factors 2 through 6 strongly favor allowing the fee request. The only

remaining issue is whether the number of hours expended and the hourly rates charged for those

hours are reasonable.

s Under the plan of distribution agreed to among all participating counsel, Co-Lead Counsel Lowey Dannenberg (in the securities cases) and Kessler Topaz (in the ERISA cases) would recover a tiny fraction more than their lodestar amount if the fee award were approved, with other counsel recovering proportionally less. With the adjustment I am making to the fees attributable to the review of documents produced to regulators, Lead Counsel's fees should come in at just about lodestar.

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E. Reasonableness of Hours Worked and Rates Charged

As noted, the total number of hours expended by all counsel in all matters comes to

something close to 118,000. That is, admittedly, a lot of attorney and paralegal hours.

Ofthat total, just under 30,000 hours were spent reviewing documents produced by the

defendants, including principally documents that were also reviewed by the NY AG during the

course of its investigation. Approximately two thirds ofthose 30,000 hours were expended by

attorneys from the firms that were appointed to represent various classes and subclasses, working

under the lead of the Lowey Dannenberg firm. As Lead and Liaison Counsel, it developed a

protocol and divided the responsibility for reviewing documents previously produced by

defendants to all regulators (not just the NY AG). This document review was conducted

principally by Lowey Dannenberg, WolfHaldenstein, Kessler Topaz, and Cohen Milstein.

Counsel from Keller Rohrback and Lewis Feinberg, representing the Hartman Plaintiffs,

did not participate in the coordinated document review with the attorneys representing the class

plaintiffs (as indeed they had no obligation to do), but proceeded to do their own discovery on

behalf of their clients- although Judge Sand and I consolidated the Hartman Actions with In re

Beacon and In re Jeanneret for discovery purposes. The Hartman Plaintiffs proceeded on the

assumption that their case would either settle or be tried separately from the class actions and

that their counsel (who were also working on contingency) would be paid from the fund created

by that separate settlement or verdict. Their work accounts for approximately one third of the

hours spent on reviewing documents produced by defendants.

The rest of the time for which all of these attorneys seek reimbursement was spent doing

all of the other things that were discussed exhaustively above: reviewing and producing

documents that were requested from the various plaintiffs; responding to interrogatories;

34

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preparing for and participating in depositions (which did not duplicate the NYAG depositions);

reviewing and responding to motions or making motions; and participating in the arduous

settlement negotiations. While I am certain that not every hour billed was absolutely necessary,

the NY AG and other objectors have offered no good reason why the fee request should be cut as

a result of time spent on any of those activities, which were not in any way duplicative of work

performed by the NYAG. The NYAG simply states, in wholly conclusory fashion, that it could

not possibly have taken so many hours to perform these myriad tasks, especially given the fact

that it handed Private Plaintiffs their case on a silver platter.

But the fact that the NYAG's work was instrumental in allowing the Private Actions to

proceed does not reflect badly on plaintiffs' counsel, as my colleague Judge Kaplan observed in

In re Lehman Bros. Securities and ERISA Litigation, 09 MD 2017, a case in which private

counsel were similarly able to take advantage of someone else's investigation and detailed report

(in that case, a bankruptcy examiner) in crafting a viable pleading. Judge Kaplan concluded that

class counsel's heavy reliance on the examiner's lengthy report in fashioning their case

warranted a reduction in the multiplier to be applied to the lodestar in that case - from 2.18, as

proposed by counsel, to 1.5. But he refused to penalize private counsel by denying them

compensation simply because they were able to "piggyback" (if I may use a loaded term) on the

work of the Lehman Bankruptcy Trustee. I am no more inclined to punish Private Plaintiffs for

taking advantage of the work done by the NY AG than Judge Kaplan was.

Given the number of lawsuits, the number of motions that had to be litigated, the number

of in-court conferences, and the number of perfectly legitimate tasks involved in responding to

discovery requests that were addressed to plaintiffs by the defendants (this is especially true for

the Hartman Plaintiffs), I cannot say that the fee request attributable to these activities is

35

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unreasonable- particularly since all counsel except for Lowey Dannenberg and Kessler Topaz

will be taking a haircut on lodestar in order to obtain immediate recovery for their clients.

Could the cases have been litigated more efficiently? Without a doubt.

Does the result justify the fee? Absolutely.

So I tum to the one item that sticks in the craw of the Objectors- the 30,000 hours spent

by two groups of attorneys (Class Counsel and Counsel for the Hartman Plaintiffs) reviewing

documents that the defendants had originally produced to the NYAG and/or other regulators. The

NYAG and Objectors contend that this work was purely duplicative of the NYAG's infinitely

more efficient efforts, such that it is presumptively unreasonable to compensate Private

Plaintiffs' Counsel for undertaking it. Furthermore, the NYAG insists that it found all the really

useful evidence in the case; as proof, the NY AG notes that its complaint served as a template for

the amended complaints that were served in the various Private Plaintiffs' Actions (including the

class actions).

But I cannot fairly conclude, as Objectors wish me to, that the "duplicative" review of

documents by Private Plaintiffs' Counsel is objectionable and non-compensable, because counsel

were required by the court to review the documents that had already been reviewed by the

NYAG! Magistrate Judge Peck quite sensibly refused to permit Private Counsel to make new

document requests until they had first familiarized themselves with the documents previously

produced to, inter alia, the NYAG.

Furthermore, as pointed out by the Hartman Plaintiffs' counsel, the NYAG may have

reviewed the same documents as Private Plaintiffs' Counsel, and done so first, but there is no

evidence in the record before me that he offered plaintiffs' counsel any information that would

have assisted them in circumscribing their work- other than its selection of quotable quotes for

36

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its complaint. And because the NYAG (assuming it ever had any intention of actually litigating

its lawsuit) did not have to prove many of the issues confronting the Private Plaintiffs (reliance,

scienter, anything having to do with ERISA fiduciary status), it was not necessarily looking for

the same things that Private Plaintiffs hoped to find when reviewing the same documents. Private

Plaintiffs' Counsel would have been remiss to rely on the NYAG's review given the different

litigation burdens they bore.

So we must put to one side any suggestion that Private Plaintiffs' Counsel did something

wrong by not "relying" on the NYAG's document review and foregoing familiarizing themselves

with the documents that had been produced to regulators.

I am left to opine on the reasonableness of the time expended in this aspect of counsel's

work. The 30,000 hours put in by dozens of lawyers and paralegals employed by private counsel

on the review of defendants' documents vastly exceeds the number of hours put in by the much

smaller number ofNYAG staff members who reviewed documents during his year-long

investigation into Ivy. The difference is striking even when you divide this number between the

Class Plaintiffs and the Hartman Plaintiffs (who conducted their own document review, since

they were litigating independently of any class) - 10,500 hours expended by counsel in Hartman,

and nearly twice that by Class Counsel- although the most striking disparity by far is the

difference between the time expended by counsel for the Hartman Plaintiffs reviewing

previously-produced documents and the time expended by Class Counsel reviewing the same

documents!

Like my colleague Judge Kaplan in Lehman, I wonder whether all of the hours for which

recovery is sought were efficiently and usefully devoted to this matter. Unlike him, I cannot rely

on the fact that the regulator on whose efforts the Private Plaintiffs built their case had devoted a

37

Add-037



like number of hours to his investigation in order to corroborate the order of magnitude of

plaintiffs' efforts in furtherance of this case.

There are, of course, reasons that would account for at least some of the difference

between the number of hours spent by the NY AG team on its document review and the number

of hours spent by Hartman Counsel and by Class Counsel. I can attribute part of the disparity to

the fact that these hours include hours that Private Counsel spent reviewing documents that were

produced to regulators other than the NY AG. I can attribute part of it to the fact that it includes

documents produced by defendants who were not investigated by the NYAG at all (principally

the Jeanneret Defendants). And I can attribute part of the disparity to the fact, noted above, that

Private Plaintiffs' Counsel were looking for different and additional types of evidence when they

reviewed the documents produced to the regulators.

I can also attribute some of the disparity to the fact that Magistrate Judge Peck put the

Private Plaintiffs on a "rocket docket" schedule for reviewing the regulatory document

productions and directed them to devote as many personnel as necessary to that endeavor in

order to meet his (short) deadline for its completion. It has been my experience, both in private

practice and on the bench, that haste often makes waste, and that expedited discovery, while

sometimes necessary, can often end up taking more hours, and costing more money, than does a

more leisurely pursuit of evidence.

The sum of these differences probably wipes out most, if not all, of the disparity between

the amount of time the NYAG spent reviewing Ivy's documents and the amount of time that

Keller Rohrbach and Lewis Feinberg spent reviewing defendants' documents.

It does not, however, account for the fact that Class Counsel spent significantly more

time on this task as the Hartman Plaintiffs' Counsel did. Not only did the attorneys working in

38

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the Class Action regulatory document review rack up twice as many hours as did the attorneys

working on behalf of the Hartman Plaintiffs, they did so at significantly higher blended rates -

ranging from $300 to $456 per hour, as against the blended rate of$275 per hour for document

review by counsel for the Hartman Plaintiffs.

I have struggled for several weeks with this whole issue of compensation for document

review. Had I thought ahead to the end of the case at the beginning, I would have included in my

order appointing Lead Counsel specific directives about how much this court was prepared to

authorize in terms of an hourly rate for document reviewers - and it would likely have been

significantly below even the $275 blended rate achieved by Keller Rohrback and Lewis

Feinberg. There is little excuse in this day and age for delegating document review (particularly

primary review or first pass review) to anyone other than extremely low-cost, low-overhead

temporary employees (read, contract attorneys) and there is absolutely no excuse for paying

those temporary, low-overhead employees $40 or $50 an hour and then marking up their pay ten

times for billing purposes.

But I did not think ahead, and I did not include any such limitation in my order

appointing Lead Counsel, and neither did Judge Sand. I believe it unfair to impose such a rule ex

post facto. So I will not.

But since I am left with the finn conviction that Class Plaintiffs expended unnecessary

hours reviewing the regulatory documents (and have the example of Keller Rohrback/Lewis

Feinberg against which to compare their work), I am going to reduce by 25% the fee requested

by the five Class Action Finns for the work they did reviewing documents that had been

produced to the regulators. That is, each finn must reduce the number of hours billed for this one

activity by 25%:

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Add-039



• Lowey Dannenberg from 4559 to 3419.25

• Kessler Topaz from 6139 to 4626.75

• Bernstein Liebhard from 1473 to 1104.75

• Cohen Milstein from 5320 to 3990

• WolfHaldenstein from 3381 to 2,535.75 (this covers hours charged to both the Federal

securities and state derivative actions)

Each firm must reduce the dollar amount of its share of the fee request accordingly

which will reduce the overall amount of fees awarded (I will let counsel do the math for me).

I would likely have imposed a harsher remedy, but I believe that the concession extracted

during settlement negotiations by the DoL- which convinced Private Plaintiffs' Counsel to

reduce their request to less than the 22% of recovery originally negotiated between Lead Counsel

and Lead Plaintiffs in the securities class actions - takes care of the matter to the satisfaction of

the court.

With this adjustment, I conclude that the fee request is reasonable and appropriate and I

grant the motion for an award of attorneys' fees.

There has been no objection to the request for expenses. That motion is granted in its

entirety.

F. Other Objections

I have already disallowed the Duttweiler and NY AG objections.

At oral argument on March 15, 2013, I denied the Folkenflik objection as untimely and

granted the motion to strike it, for substantially the reasons set forth in the Memorandum of Law

in support of the motion to strike, which was filed by all counsel in all actions. I adhere to that

40

Add-040



oral decision today and disallow the objection. It really does not lie in Mr. Folkenflik's mouth to

object to what anyone else is getting paid, since he is being compensated generously for doing

very little.

The objection to the fee award filed by Herrick Feinstein on behalf of four Beacon and

Andover Funds is denied. I have already dealt with the merits of Herrick's objection; I have

rejected the notion that the amount of the undisclosed, unconsummated, highly conditional

settlement offer made by Ivy to the NYAG should be excluded from the base on which the

Private Plaintiffs' fee award is calculated, and I have blessed as reasonable (for the most part) the

hours expended by counsel (in the circumstances of the case). I decline to resolve objections to

its status to file objections.

Finally, the Siegel and Medrick objections are simply copycat objections echoing the

NYAG's objection to the fee request. Those objections are also disallowed.

CONCLUSION

I ask Lead and Liaison Counsel to submit a Final Order, adjusting the attorneys' fee

award in accordance with my decision and otherwise granting all motions and disallowing all

objections that were not resolved prior to the hearing.

I thank everyone for the amazing work that you did in resolving these matters. Your

clients all of them have been well served.

I also express my appreciation to my colleagues in the New York State Supreme Court

and in the state courts in Palm Beach County, Florida, whose support and cooperation permitted

this matter to be resolved. The actions pending in those courts in which special appearances have

41

Add-041



been made by counsel for settlement purposes are now remitted to those courts for whatever final

proceedings need to occur in light oftoday's decision and order.

This constitutes the decision and order of the court. The Clerk of the Court is directed to

remove all outstanding motions in any of the cases listed in the caption from the Court's list of

pending motions, as they have all been disposed of, in one way or another, by this opinion.

Dated: May 15, 2013

U.S.D.J.

BY ECF TO ALL COUNSEL

BY FIRST CLASS MAIL TO ALL JUDGES IN ALL ACTIONS

42

Add-042


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PAYMENT UNDER LEAD -1 WDESTAR FEE AGREEMENT CURRENT COUNSEL

PLAINTIFFS' FIRM THROUGH (ASSUMING MULTIPLIER MULTIPLIER

APPROVAL OF 20% IF20% AT FEE i 1131/13 OF NET AWARDED AGREEMENT I

SETTLEMENT) (5/30/ll) ' -

Lowey Dannenberg Cohen & Hart, P.C. $14.201,725.10 $14,300,000.00 1.0069 1.16 (est.) Lead Counsel in In re Beacon, Lead Securities and Derivative Counsel in In re Jeanneret, Co-Liaison Counsel for All Actions with DOL

Keller Rohrback L.L.P. and Lewis, Feinberg, Lee, --- -I $13,730,226.85 $7,350,000.00 0.5353

Renaker & Jackson, P .C. I

ERISA Counsel to Hartman Individual Action Plaintiffs Cohen Milstein Sellers & Toll PLLC $7,359,505.75 $6,140,000.00 0.8343 ERISA Sub-Class Counsel in In re Beacon

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Kessler Topaz Meltzer & Cheek LLP (including local $4,709.238.00 $5,200,000.00 1.1042 1.16 (est.) counsel Dealy & Silberstein, LLP) Lead ERISA Class Counsel to Buffalo Laborers' Class, Income Plus Participant and Beneficiary Class, Andover Participant and Beneficiary Class, and Direct Participant and Beneficiary Class

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Wolf Haldenstein Adler Freeman & Hen LLP* (including $3,609,066.00 $2,600,000.00 0.7204 Jordan co-counsel Deutsch & Lipner) Three State Derivative Actions Before Justice Bucaria

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WolfHaldenstein Adler Freeman & Hen LLP $2,353.261.50 $1,930,000.00 0.8201 Investor Plaintiffs· Sub-Class Counsel in In re Beacon

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Bernstein Liebhard LLP $1 '734,688. 75 $1,595,000.00 0.9195 Investor Plaintiffs' Sub-Class Counsel in In re Beacon -----

FolkenRik & MeGerity** $773,605.00 $750,000.00 0.9695 Fastenberg Intervenors

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Cotcbett, Pitre & McCarthy, LLP $594,122.00 $425,000.00 0.7153 State Derivative Action Before Justice Lowe --

Ross & Orenstein LLC** $414,612.50 $400,000.00 0.9648 Gluck. Altman and Glid:er Individual and Arbitration Actions

--- ---- ---- ·-

Gordon & Gordon $91,157.00 $81,538.00 0.8945 Schou Individual Action

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Total: $49,571,208.45 $40,771,538.00 0.8225 N/A -- ---

*Litigated as Hecht & Associates P.C. pre-merger with WolfHaldenstein. **Under the fee agreement, the payments for Folkenflik & McGerity and Ross & Orenstein LLC are fixed even if the Court awards a different percentage.

(2283/CHT I 001 166llDOCXv2)

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