picard vs annette bongiorno

Baker & Hostetler LLP45 Rockefeller PlazaNew York, NY 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201 David J. SheehanKeith R. MurphyGeraldine E. Ponto

Attorneys for Irving H. Picard, Esq., Trusteefor the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLCand Bernard L. Madoff

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORKSECURITIES INVESTOR PROTECTIONCORPORATION,

Plaintiff-Applicant,

v.

BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Defendant.

Adv. Pro. No. 08-01789 (BRL)

SIPA LIQUIDATION

(Substantively Consolidated)

In re:

BERNARD L. MADOFF,

Debtor.

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

Plaintiff,

v.

ANNETTE BONGIORNO and RUDY BONGIORNO,

Defendants.

Adv. Pro. No. 10-_______ (BRL)

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COMPLAINT

Irving H. Picard (the “Trustee”), as trustee for the liquidation of the business of Bernard

L. Madoff Investment Securities LLC (“BLMIS”), under the Securities Investor Protection Act,

15 U.S.C. §§ 78aaa, et seq. (“SIPA”),1 and the substantively consolidated estate of Bernard L.

Madoff individually (“Madoff”), by and through his undersigned counsel, for his Complaint,

states as follows:

INTRODUCTION

1. This adversary proceeding arises from the massive Ponzi scheme perpetrated by

Bernard L. Madoff (“Madoff”). Over the course of the scheme, there were more than 8,000

client accounts at BLMIS. In early December 2008, BLMIS generated client account statements

for its approximately 4,900 open client accounts. When added together, these statements

purportedly show that clients of BLMIS had approximately $65 billion invested with BLMIS. In

reality, BLMIS had assets on hand worth a small fraction of that amount. On March 12, 2009,

Madoff admitted to the fraudulent scheme and pled guilty to 11 felony counts, and was sentenced

on June 29, 2009 to 150 years in prison. The within Defendants, Annette Bongiorno (“Annette”)

and Rudy Bongiorno (“Rudy,” and together with Annette, “Defendants”), received avoidable

transfers from BLMIS.

2. Defendant Annette Bongiorno was fully aware of the fraudulent Ponzi scheme

and played a key role in both defrauding customers and disguising the fraud. Annette helped

Madoff perpetrate the massive Ponzi scheme for nearly forty years. Annette was an employee of

BLMIS from July, 1968 until December 11, 2008.2 Over the forty years she served as one of

Madoff’s most trusted Investment Advisory business (“IA Business”) employees, Annette

1 For convenience, future reference to SIPA will not include “15 U.S.C.”2 Annette was employed elsewhere for the short period of time between August 1970 and April 1971.

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worked as a typist, secretary and account manager for certain BLMIS Investment Advisory

accounts (“IA Accounts”). The IA Business was nothing more than an illusion created to

support Madoff’s fraudulent Ponzi scheme. As of December 11, 2008 and as she had for many

years prior, Annette managed over 300 IA Accounts. Many of the owners of the IA

Accounts Annette managed benefited substantially from the Ponzi scheme by withdrawing funds

that were not the result of the purported securities trading in their accounts but were simply funds

invested by other customers. Annette and her husband Rudy themselves obtained millions of

dollars in funds stolen from other customers through their IA Accounts.

3. Annette actively monitored the IA Accounts of her customers for performance

against expectations, and directed the creation of fictitious trades with the benefit of hindsight in

order to keep these accounts in line with expectations. Specifically, Annette managed the

accounts of select clients (mostly close friends and family of Madoff, the Defendants, and other

BLMIS employees) for whom she manufactured financial gains or losses by fabricating various

backdated and fictitious trades and recording them in customer account records. Annette

processed billions of dollars in deposits into these accounts and manipulated the purported

balances of these accounts, often in response to specific requests from clients. Select clients

contacted Annette with specific long-term or short-term goals for returns in their accounts.

These requests often stated a specific amount of gain or loss desired by the client. In response to

these requests, Annette researched the recent pricing history of certain securities to determine

which of these could have historically produced the desired result had they been bought and/or

sold on a given historical date. Annette generated pricing reports showing the historical prices of

securities to be used by herself and other BLMIS employees in manufacturing fraudulent returns.

Based on these reports, Annette provided key punch operators with the relevant pricing and share

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information to be entered into the BLMIS computer system. The system then produced records

indicating that the hypothetical trade was actually executed at the price on that historical date.

4. Annette oversaw the recording of fabricated trades in customer statements using

historical price data, and closely monitored the purported account returns. Annette supervised

the key punch operators and other BLMIS employees who assisted with the administrative

aspects of maintaining the illusion that securities trades were occurring. On a regular basis,

Annette manufactured false trading records and prepared or caused to be prepared fraudulent

customer statements that were mailed to BLMIS clients, which reflected transactions and returns

that were entirely fictitious, despite knowing that no such transactions were taking place.

5. In addition to managing the fraudulent trading and account records, Annette was

responsible for communicating with clients of the IA Business. Annette knowingly perpetuated

the fraud by serving as the primary point of contact for clients whose IA Accounts she managed,

including a number of significant insiders to the Ponzi scheme.

6. Upon information and belief, Annette and her husband, Defendant Rudy

Bongiorno, recruited investors into the IA Business. A group of 62 accounts named “RU-ANN”

included many of the Defendants’ relatives, friends and neighbors. Many of the RU-ANN

accounts benefited substantially from the Ponzi scheme.

7. Annette and Rudy Bongiorno have benefitted from the scheme through the

withdrawal of millions of dollars in fictitious profits from the Ponzi scheme in the form of IA

Account withdrawals, improper use of the BLMIS corporate American Express credit card

(“American Express”), and the payment of millions of dollars to Annette in the form of salary

and bonuses. Annette knew that she was benefitting from the fraud she was committing, and her

husband Rudy knew or should have known that they were profiting from fraud because of

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substantial IA Account withdrawals made on behalf of Defendants, substantial purchases made

by Defendants with funds transferred directly from BLMIS, and/or substantial purchases made

by Annette using the BLMIS American Express. Because Annette managed the family’s IA

Accounts as an insider within BLMIS, her knowledge of the fraud is imputed to Rudy and their

family accounts, and the funds Annette and Rudy each received from BLMIS were for each

other’s benefit as well as their own.

8. Upon information and belief, certain transfers were dispensed from Defendants'

IA Accounts at the direction of, and for the benefit of, Defendants Annette and/or Rudy, to third

parties.

9. Defendants were substantial beneficiaries of this Ponzi scheme. Since April

1983, Defendants received the amount of $22,909,868 from BLMIS. Through this action, the

Trustee seeks a judgment in the aggregate amount of at least $22,909,868 against Defendants

Annette Bongiorno and Rudy Bongiorno, resulting from the fraudulent transfers that they

received over the years from BLMIS and for Annette’s tortious conduct that facilitated Madoff’s

crimes.

NATURE OF PROCEEDING

10. This adversary proceeding is brought pursuant to sections 78fff(b), 78fff-1(a) and

78fff-2(c)(3) of SIPA, sections 105(a), 544, 548(a), 550(a) and 551 of title 11 of the United

States Code (the “Bankruptcy Code”), the New York Fraudulent Conveyance Act (New York

Debtor and Creditor Law § 270 et seq. (McKinney 2001) (“DCL”)) and other applicable law, for

avoidance of fraudulent conveyances in connection with certain transfers of property by BLMIS

to or for the benefit of Defendants. The Trustee seeks to set aside such transfers and preserve

and recover the property for the benefit of BLMIS’ defrauded customers.

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JURISDICTION AND VENUE

11. This is an adversary proceeding commenced before the same Court before which

the main underlying SIPA proceeding, No. 08-01789 (BRL) (the “SIPA Proceeding”), is

pending. The SIPA Proceeding was originally brought in the United States District Court for the

Southern District of New York as Securities Exchange Commission v. Bernard L. Madoff

Investment Securities LLC et al., No. 08 CV 10791 (the “District Court Proceeding”) and has

been referred to this Court. This Court has jurisdiction over this adversary proceeding under 28

U.S.C. § 1334(b) and 15 U.S.C. §§ 78eee(b)(2)(A), (b)(4).

12. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (H) and (O).

13. Venue in this district is proper under 28 U.S.C. § 1409.

DEFENDANTS

14. Upon information and belief, Defendant Annette Bongiorno maintains her

residence at Manhasset, NY 11030. Annette has been associated with Madoff as a trusted

employee within Madoff’s inner circle at BLMIS for approximately forty years. Annette holds

IA Accounts in the names “Annette Bongiorno,” “Rudy Bongiorno and Annette Bongiorno J/T

WROS,” “Ru Ann Family Plan,” and “Estate of John Argese” with the account addresses

reported as Manhasset, NY 11030. Upon information and belief, Annette is the executrix of the

estate of her late father, John Argese.

15. Upon information and belief, Defendant Rudy Bongiorno is the spouse of

Defendant Annette Bongiorno. Rudy maintains his residence at Manhasset, NY 11030 with

Annette. Rudy has been associated with Madoff on a business and/or social level through his

wife. Rudy holds IA Accounts in the names “Rudy Bongiorno,” “Rudy Bongiorno and Annette

Bongiorno J/T WROS,” “Ru Ann Family Plan,” and “Letterio Bongiorno or Rudy Bongiorno”

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with the account addresses reported as Manhasset, NY 11030 and N. Babylon, NY 11703. On

information and belief, Letterio Bongiorno is Rudy’s father, who is deceased.

BACKGROUND, THE TRUSTEE AND STANDING

16. On December 11, 2008 (the “Filing Date”),3 Madoff was arrested by federal

agents for violation of the criminal securities laws, including, inter alia, securities fraud,

investment adviser fraud, and mail and wire fraud. Contemporaneously, the Securities and

Exchange Commission (“SEC”) filed a complaint in the District Court which commenced the

District Court Proceeding against Madoff and BLMIS. The District Court Proceeding remains

pending in the District Court. The SEC complaint alleged that Madoff and BLMIS engaged in

fraud through the investment advisor activities of BLMIS.

17. On December 12, 2008, The Honorable Louis L. Stanton of the District Court

entered an order appointing Lee S. Richards, Esq. as receiver for the assets of BLMIS.

18. On December 15, 2008, pursuant to 15 U.S.C. § 78eee(a)(4)(A) of SIPA, the SEC

consented to a combination of its own action with an application of the Securities Investor

Protection Corporation (“SIPC”). Thereafter, pursuant to 15 U.S.C. § 78eee(a)(4)(B) of SIPA,

SIPC filed an application in the District Court alleging, inter alia, that BLMIS was not able to

meet its obligations to securities customers as they came due and, accordingly, its customers

needed the protections afforded by SIPA.

19. Also on December 15, 2008, Judge Stanton granted the SIPC application and

entered an order pursuant to SIPA (the “Protective Decree”), which, in pertinent part:

3 Section 78lll(7)(B) of SIPA states that the filing date is “the date on which an application for a protective decree is filed under 78eee(a)(3),” except where the debtor is the subject of a proceeding pending before a United States court “in which a receiver, trustee, or liquidator for such debtor has been appointed and such proceeding was commenced before the date on which such application was filed, the term ‘filing date’ means the date on which such proceeding was commenced.” 15 U.S.C. § 78lll(7)(B). Thus, even though the application for a protective decree was filed on December 15, 2008, the Filing Date in this action is December 11, 2008.

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a. appointed the Trustee for the liquidation of the business of BLMIS pursuant

to 15 U.S.C.§78eee(b)(3) of SIPA;

b. appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to 15

U.S.C. § 78eee(b)(3) of SIPA; and

c. removed the case to this Bankruptcy Court pursuant to 15 U.S.C.

§78eee(b)(4) of SIPA.

By this Protective Decree, the Receiver was removed as Receiver for BLMIS.

20. By orders dated December 23, 2008 and February 4, 2009, respectively, the

Bankruptcy Court approved the Trustee’s bond and found that the Trustee was a disinterested

person. Accordingly, the Trustee is duly qualified to serve and act on behalf of the estate of

BLMIS.

21. At a Plea Hearing on March 12, 2009 in the case captioned United States v.

Madoff, Case No. 09-CR-213(DC), Madoff pled guilty to an eleven-count criminal information

filed against him by the United States Attorneys’ Office for the Southern District of New York.

At the Plea Hearing, Madoff admitted that he “operated a Ponzi scheme through the investment

advisory side of [BLMIS].” See Plea Allocution of Bernard L. Madoff at 23, United States v.

Madoff, No. 09-CR-213 (DC) (S.D.N.Y. March 12, 2009) (Docket No. 50). Additionally,

Madoff asserted “[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed

criminal.” Id. Madoff was sentenced on June 29, 2009 to 150 years in prison.

22. On August 11, 2009, a former BLMIS employee, Frank DiPascali (“DiPascali”),

pled guilty to participating and conspiring to perpetuate the Ponzi scheme. At a Plea Hearing on

August 11, 2009 in the case entitled United States v. DiPascali, Case No. 09-CR-764 (RJS),

DiPascali pled guilty to a ten-count criminal information. Among other things, DiPascali

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admitted that the fictitious scheme had begun at BLMIS since at least the 1980s. See Plea

Allocution of Frank DiPascali at 46, United States v. DiPascali, No. 09-CR-764 (RJS) (S.D.N.Y.

August 11, 2009) (Docket No. 11).

23. The Trustee has the job of recovering and paying out customer property to

BLMIS’ customers, assessing claims, and liquidating any other assets of the firm for the benefit

of the estate and its creditors. The Trustee is in the process of marshalling BLMIS’ assets, and

the liquidation of BLMIS’ assets is well underway. Such assets, however, will be insufficient to

reimburse the customers of BLMIS for the billions of dollars that they invested with BLMIS

over the years. The Trustee must use his authority under SIPA and the Bankruptcy Code to

pursue recovery from, among others: (i) those persons who helped Madoff perpetrate his Ponzi

scheme; (ii) those persons who were paid to knowingly help Madoff perpetrate his Ponzi

scheme; and (iii) BLMIS “customers” who received preferences and/or payouts of fictitious

profits to the detriment of other defrauded customers whose money was consumed by the Ponzi

scheme. Absent this or other recovery actions, the Trustee will be unable to satisfy the claims

described in subparagraphs (A) through (D) of 15 U.S.C. § 78fff-2(c)(1).

24. Pursuant to section 78fff-1(a), the Trustee has the general powers of a bankruptcy

trustee in a case under the Bankruptcy Code in addition to the powers granted by SIPA pursuant

to section 78fff-1(b). Pursuant to section 78fff(b), chapters 1, 3, 5 and subchapters I and II of

chapter 7 of the Bankruptcy Code are applicable to this case.

25. Pursuant to section 78fff(b) and 78lll(7)(B) of SIPA, the Filing Date is deemed to

be the date of the filing of the petition within the meanings of section 548 of the Bankruptcy

Code and the date of the commencement of the case within the meaning of section 544 of the

Bankruptcy Code.

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26. The Trustee has standing to bring these claims pursuant to section 78fff-1 of SIPA

and the Bankruptcy Code, including sections 323(b) and 704(a)(1), because, among other

reasons:

a. Defendants received “customer property” as defined in 15 U.S.C. §

78lll(4);

b. BLMIS incurred losses as a result of the claims set forth herein;

c. BLMIS’ customers were injured as a result of the conduct detailed herein;

d. SIPC cannot by statute advance funds to the Trustee to fully reimburse all

customers for all of their losses;

e. the Trustee will not be able to fully satisfy all claims;

f. the Trustee, as bailee of customer property, can sue on behalf of customer

bailors;

g. the Trustee is the assignee of claims paid, and to be paid, to customers of

BLMIS who have filed claims in the liquidation proceeding (such claim-filing customers,

collectively, “Accountholders”). As of the date hereof, the Trustee has received multiple

express unconditional assignments of the applicable Accountholders’ causes of action,

which actions could have been asserted against Defendants. As assignee, the Trustee

stands in the shoes of persons who have suffered injury in fact and a distinct and palpable

loss for which the Trustee is entitled to reimbursement in the form of monetary damages.

The Trustee brings this action on behalf of, among others, those defrauded customers of

BLMIS who invested more money in BLMIS than they withdrew; and

h. SIPC is the subrogee of claims paid, and to be paid, to customers of

BLMIS who have filed claims in the liquidation proceeding. SIPC has expressly

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conferred upon the Trustee enforcement of its rights of subrogation with respect to

payments it has made and is making to customers of BLMIS from SIPC funds.

THE FRAUDULENT PONZI SCHEME

27. Founded in 1959, BLMIS began operations as a sole proprietorship of Madoff and

later, effective January 2001, formed a New York limited liability company wholly owned by

Madoff. From 1987 to 2008, BLMIS operated from its principal place of business at 885 Third

Avenue, New York, New York. Madoff, as founder, chairman, and chief executive officer, ran

BLMIS together with several family members and a number of additional employees. BLMIS

was registered with the SEC as a securities broker-dealer under Section 15(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78o(b). By that registration, BLMIS is a member of SIPC.

BLMIS had three business units: the IA Business, market making and proprietary trading.

28. For certain accounts in the IA Business, BLMIS purported to participate in a

capital appreciation/depreciation strategy, depending on whether the customer sought to generate

gains or losses. For example, the strategy was executed by either purporting to purchase small

groups of securities near lows and then purporting to sell those same securities near highs, or by

purporting to short-sell securities near highs and then purporting to repurchase those securities

near lows. Annette manufactured customer account statements that utilized this capital

appreciation/depreciation strategy for many years.

29. From at least 1979 through 1997, BLMIS engaged in an “arbitrage” investment

strategy in many IA Accounts. This strategy was entirely fictitious and involved the purported

purchase of convertible instruments, such as convertible preferred stocks, that could be converted

to shares of the corporation’s common stock, coupled with the short sale of the same amount of a

corporation’s common stock, thereby locking in the gains between the purchase of the

convertible instrument and the sale of the common stock. After a prearranged number of weeks,

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BLMIS purportedly converted the convertible instruments into shares of common stock and used

those shares to cover the short sale positions. However, these paired transactions were

fraudulent and entirely created with hindsight to achieve a predetermined rate of return and, as a

result, customers who were purportedly invested in this strategy often received identical rates of

return in nearly every purported paired “arbitrage” transaction. Each paired arbitrage transaction

would then be used across numerous accounts, without regard to the actual trading volume of the

convertible instruments or common shares in the market. As far back as the early 1980s, Annette

was the supervisor within this arbitrage strategy.

30. Although clients of the IA Business received monthly or quarterly statements

purportedly showing the securities that were held in – or had been traded through – their

accounts, as well as the growth of and profit from those accounts over time, the trades reported

on these statements were a complete fabrication. The security purchases and sales depicted in

the account statements virtually never occurred and the profits reported were entirely fictitious.

At his Plea Hearing, Madoff admitted that he never in fact purchased any of the securities he

claimed to have purchased for customer accounts. See Madoff Plea Allocution, at 25. Indeed,

based on the Trustee’s investigation to date and with the exception of isolated individual trades

for certain clients other than the Defendants, there is no record of BLMIS having cleared any

purchase or sale of securities on behalf of the IA Business at the Depository Trust & Clearing

Corporation, the clearing house for such transactions, or any other trading platform on which

BLMIS could have reasonably traded securities.

31. Prior to his arrest, Madoff assured clients and regulators that he conducted all

trades on the over-the-counter market after hours. To bolster that lie, Madoff periodically wired

hundreds of millions of dollars to BLMIS’ affiliate, Madoff Securities International Ltd.

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(“MSIL”), a London based entity substantially owned by Madoff and his family. There are no

records that MSIL ever used the wired funds to purchase securities for the accounts of the IA

Business clients. In fact, MSIL wired hundreds of millions of dollars back into the bank

accounts of BLMIS to allegedly record revenue related to the purported trades in Europe.

32. Additionally, based on the Trustee’s investigation to date, there is no evidence

that BLMIS ever purchased or sold any of the options that Madoff claimed on customer

statements to have purchased.

33. For all periods relevant hereto, the IA Business was operated as a Ponzi scheme

and Madoff and his co-conspirators concealed the ongoing fraud in an effort to hinder and delay

other current and prospective customers of BLMIS from discovering the fraud. The money

received from investors was not set aside to buy securities as purported, but instead was

primarily used to make the distributions to – or payments on behalf of – other investors. The

money sent to BLMIS for investment, in short, was simply used to keep the operation going and

to enrich Madoff, his associates and others, including Defendants, until such time as the requests

for redemptions in December 2008 overwhelmed the flow of new investments and caused the

inevitable collapse of the Ponzi scheme.

34. During the scheme, certain investors requested and received distributions of the

“profits” listed for their accounts, which were nothing more than fictitious profits. Other

investors, from time to time, redeemed or closed their accounts, or removed portions of the

purportedly available funds, and were paid consistently with the statements they had been

receiving. Some of those investors later re-invested part or all of those withdrawn payments with

BLMIS.

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35. When payments were made to or on behalf of these investors, including

Defendants, the falsified monthly statements of accounts reported that the accounts of such

investors included substantial gains. In reality, BLMIS had not invested the investors’ principal

as reflected in customer statements. In an attempt to conceal the ongoing fraud and thereby

hinder, delay or defraud other current and prospective investors, BLMIS paid to or on behalf of

certain investors the inflated amounts reflected in the falsified financial statements, including

principal and/or fictitious profits.

36. BLMIS used the funds deposited from new investments to continue operations

and pay redemption proceeds to or on behalf of other investors and to make other transfers. Due

to the siphoning and diversion of new investments to fund redemptions requested by other

investors, BLMIS did not have the funds to pay investors on account of their new investments.

BLMIS was able to stay afloat only by using the principal invested by some clients to pay other

investors or their designees.

37. In an effort to hinder, delay or defraud authorities from detecting the fraud,

BLMIS did not register as an Investment Advisor until August 2006.

38. In or about January 2008, BLMIS filed with the SEC an amended Uniform

Application for Investment Adviser Registration. The application represented, inter alia, that

BLMIS had 23 customer accounts and assets under management of approximately $17.1 billion.

In fact, in January 2008, BLMIS had approximately 4,900 active client accounts with a purported

value of approximately $68 billion under management.

39. Not only did Madoff seek to evade regulators, Madoff also had false audit reports

“prepared” by Friehling & Horowitz, a three-person accounting firm in Rockland County, New

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York. Of the two accountants at the firm, one was retired and living in Florida for many years

prior to the Filing Date.

40. At all times relevant hereto, the liabilities of BLMIS were billions of dollars

greater than the assets of BLMIS. At all relevant times, BLMIS was insolvent in that (i) the fair

value of its assets were worth less than its liabilities; (ii) it could not meet its obligations as they

came due; and (iii) at the time of the transfers, BLMIS was left with insufficient capital.

Annette’s Knowledge of and Participation in the Fraudulent Scheme

41. Annette was a core employee in the IA Business for many years responsible for

manufacturing fictitious trading activity that was reported on the customer account statements.

Based on her integral role in the Ponzi scheme, Annette and her husband Rudy knew or should

have known that Madoff's IA Business was predicated on fraud, that Defendants were benefitting

from fraudulent transactions in Defendants’ accounts, and that Defendants’ purported account

activity was not the result of legitimate trading activity.

42. Annette worked in the IA Business at BLMIS for approximately forty years. As

the Account Manager of select IA Accounts, Annette had intimate knowledge of and high-level

involvement in the fraudulent scheme.

43. Most of the accounts managed by Annette supposedly participated in a capital

appreciation/depreciation strategy, depending on whether the customer sought to generate gains

or losses. Annette generated these gains and/or losses through a number of methods, including

backdating security transactions to prior periods, selecting beneficial share prices with hindsight

within a given month, directing the recording of fictitious options gains, and reversing

transactions that had previously been recorded to meet the customers’ investment needs, among

others. Some of these fictitious trades were purported to have occurred in a prior month but

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reported on a subsequent month’s customer statement (e.g. January 2002 trades recorded on a

March 2002 customer statement). In some cases, these trades required the wholesale creation of

replacement IA Account statements in order to conceal the backdating. Annette oversaw the

creation of these fraudulent customer statements reflecting fictitious trading activity to generate

implausibly high rates of return, and at times, specific profit and/or loss amounts. The investors

who participated in this customized strategy were generally individuals who had long affiliations

with Madoff.

44. One of the tools Annette relied upon to manage the IA Accounts was the A Group

Buying Power Report (“Buying Power report”). The Buying Power report calculated expected

equity balances based on a formula that incorporated net working capital and a benchmark or

expected rate of return. Annette reviewed the Buying Power report at the end of each month to

evaluate whether the IA Accounts were over or under their expected rate of return. After

determining which IA Accounts needed gains or losses to reach their expected rate of return,

Annette directed her staff to enter trades on a backdated basis to obtain the desired result.

45. Annette took steps to minimize red flags resulting from the unusual trading

methods she and other BLMIS employees engaged in for managing the IA Accounts. Using a

program called Statement Pro on the IA Business computer system, Annette created “corrected”

customer statements that attempted to conceal the backdated trading. The Statement Pro

program was designed to correct prior end-of-month (“EOM”) customer statements based on

revised trading volumes, prices and trade dates. It allowed a user to load EOM data files from

back-up tapes, view and modify existing trade details or enter new trades beyond those in the

original EOM statement. This program was used by Annette and other BLMIS employees from

1993 through the collapse of the Ponzi scheme in 2008 to create replacements for customer

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statements that contained backdated trades to give the appearance that the backdating never

occurred. To conceal the fictitious backdated trades, customer statements for previous months

would be “corrected” in Statement Pro to show backdated transactions occurring in the period to

which they were backdated, altering end-of-month stock holdings and cash balances to give the

appearance that the trades were recorded contemporaneous to the monthly statement. The House

17 (17th floor IA Business) Manual dated August 1995, which contains detailed instructions on

“Fixing Statements” using Statement Pro, indicates that all paperwork should be given to

Annette. Given her central role in manufacturing backdated statements through Statement Pro,

Annette was fully aware that BLMIS was reporting fictitious trading activity to its IA Business

customers when in fact no securities were purchased on their behalf.

46. Examples of the fictitious trading executed by Annette with hindsight for IA

Business customers, often evidenced by notes in her own handwriting, demonstrate that she

directed the fictitious backdated trades and applied hindsight to create returns consistent with

accountholder requests. In fact, there were virtually no securities trades executed on behalf of

IA Business customers during these time periods.

a. Customer A. Annette’s handwritten notes document a series of

communications between Annette and Customer A’s bookkeeper (“Bookkeeper”) about

specific gains desired in one of Customer A’s IA accounts. Around May 14, 2007,

Annette noted that Customer A “needs some gains during Jan. & Feb. ’06 [2007] – She

[Bookkeeper] will call back later this week with numbers [gains needed].” On May 18,

2007, Bookkeeper called back and indicated that she needed “$20 mil in gains during Jan

& Feb [2007] & will want 18% [rate of return] for years 07 appreciation.” While

awaiting Customer A’s final approval, on May 21, 2007 Annette wrote “No call! – I did

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some preliminary work to see how account looks & pulled sheets on securities that are

down – waiting for call.” Annette had started pulling and reviewing historical pricing

information to identify possible securities that she could use to falsely generate the

desired gains. Two days later, on May 23, 2007, Annette wrote: “Wed 5/23 –

[Bookkeeper] said all numbers she gave me were wrong! - She will call back with new

amount for gains! – Called, needs only $12.3 million for Jan/Feb. – March – Anything!”

The May 2007 customer statement for the Customer A account shows multiple sales of

AMR Corporation backdated to January 2007, generating approximately $6.7 million of

long-term gains, and multiple sales of Circuit City backdated to February 2007,

generating approximately $5.6 million of long-term gains. These transactions combined

generated approximately $12.3 million of gains, which corresponds to the amount

requested by Bookkeeper as written in Annette’s notes. Procedure logs recovered from

BLMIS indicate that corrected versions of the January through May 2007 customer

statements for the Customer A account were created on June 4, 2007 and June 5, 2007

using Statement Pro, although the replacement statements falsely reported that the

backdated transactions occurred in the earlier periods before they were even created in

the program.

b. Customer B. In Customer B’s account, Annette generated outrageous

returns by backdating trades prior to the account even being opened. Customer B’s IA

Account was opened on or about April 24, 2006, according to account opening

documents, with a deposit of $125 million which was reflected on April 18, six days

before the account purportedly opened. Once again, Annette’s handwritten notes provide

a roadmap to fraudulent and fictitious trades that were made for the benefit of Customer

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B. Her notes specify to “Use 125 mil[lion] to set up trading with 51 mil[lion] in gains.”

The notes further state to, “Go back to Jan 06 [2006] [and] increase $50 mil[lion] net in

equity.” Consistent with her notes, Annette promptly began backdating purchases in this

account to January 2006. By the end of April 2006, a scant 12 days after the account

was purportedly opened, the fraudulent backdated trades had generated gains of $39

million, or a return of more than 30% in less than the two weeks that the account had

been opened. These massive gains were the result of 57 fraudulent purchases of

securities purportedly made between January 10 and January 24, 2006, almost three

months before the account was opened or funded. Annette was clearly aware that in a

legitimate trading environment, an account cannot trade before it is opened. The majority

of the purported purchases of securities in January were transacted near the lowest share

prices for the period from January to April 2006, and were intentionally selected by

Annette in order to create an unusually high unrealized gain by the end of April.

c. Customer C. In another instance, Annette reversed eight months worth of

trading gains from Customer C’s IA Account to “pay back” a loan Madoff had provided

to him. Specifically, handwritten notes by Annette indicate, “[Customer C] owes BLM

[Madoff] $1.6 mil[lion], We reduced Eq[uity] by that amount in Aug[ust] [20]08.” She

goes on to state: “Cxl [Cancel] all this years trading & redo statements” and “Also put

port[folio] on 1/1/08 to whenever the 8/08 new equity fig[ure] is.” In September 2008,

Annette reversed a number of transactions between February and August 2008, which

had the effect of eliminating approximately $1.7 million of value - slightly more than the

$1.6 million loan - that was owed to Madoff. The reversal effectively eliminated seven

months of trading gains in Customer C’s IA account statements. As indicated in her

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notes, on or about October 14, 2008 Annette began the process to ‘redo’ certain Customer

C’s IA account statements, including his September 2008 account statement—reflecting

the “new” balance of the account in light of the fraudulent backdated trade cancellations.

In addition to her ‘redo’ of Customer C’s IA accounts statements, her handwritten notes

indicate that she had to obtain the original customer statements from Customer C before

providing the modified statement. This was necessary in an attempt to conceal the fraud,

so that multiple versions of the customer statement were not in circulation. Her notes

specifically, state “Corrected statements: keep in hanging folder. Do not mail out! We

never received [Customer C’s] original statement back...[Customer C] told Bernie he

sends everything to [Customer C’s Accountant] and [Customer C’s Accountant] told

Bernie he shreds whatever he doesn’t need! All copies Jan 08 to Aug 08 sent to

[Customer C’s Accountant] on 9/23/08.” Annette knew that the reversal of the 2008

trading activity in Customer C’s account was fraudulent and then attempted to further

conceal the fraudulent nature of the transactions by creating new account statements.

d. Customer D. Annette’s handwritten notes indicate that during April and

May 2003, Annette used hindsight and fictitious backdated trades to create $8 million in

losses in 2002 for Customer D for tax purposes. Specifically, Annette’s notes state

“[Customer D] Jan losses were 2002 Tax + were put on in May 2003.” Annette worked

with Customer D’s accountant to provide the desired losses. Her notes read “[Customer

D] 4/29/03 [Customer D’s Accountant] will call to give me a loss # to put thru last day in

Dec. Trade to settle beg[inning] of Jan 03”. By choosing trade dates which would settle

in January 2003, Annette made sure that she would not have to generate replacement

customer statements for 2002, as the dates on the customer statements represent

-21-

settlement dates. Annette’s notes include a page worth of backdated trade instructions

which indicate that short positions would be covered in order to generate $8.27 million of

losses during tax year 2002. Historical Bloomberg printouts for each of the fraudulently

backdated transactions listed in Annette’s instructions contained Annette’s hash marks

next to the corresponding December 2002 trade date. Each of the Bloomberg printouts

have print dates of May 5, 2003, further evidencing the backdated nature of the

transactions. These transactions had not appeared on the January 2003 statement for

Customer D’s IA Account, nor on any prior monthly customer statements that had been

generated before May 2003, nor were the corresponding equity positions or values

reflected in any earlier statements. Annette used Statement Pro to create replacement

customer statements for Customer D for January through April 2003.

e. Customers E and F. Annette generated millions of dollars of fraudulent

gains as a result of fictitious and backdated transactions in Customer E’s and Customer

F’s IA Accounts. Notes written by Annette indicate that, “Bernie said make $6

mil[lion][in gains] +[20]% for taxes + whatever mrgn [margin] int [interest] it should

be.” An adding machine tape containing Annette’s handwriting appears below her notes

and calculates that Customer E and Customer F are each due $7.38 million. Additional

handwritten notes by Annette list the fraudulent terms of the fictitious trades, including

trade dates, share volumes, and sale and purchase prices, to be done in Lucent that would

obtain the specific $7.38 million in fraudulent gains. Other documents containing

Annette’s handwritten notes further evidence these transactions were recorded using

hindsight. In April 2004, despite having no capital in Customer E or Customer F’s IA

accounts, Annette directed that more than 2.9 million shares of Lucent Technologies be

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“purchased” in each account, backdated more than a year to March 2003. She further

instructed that these fraudulent backdated “purchases” to be “sold” in April 2004 for a

gain of over $7.5 million in both Customer E and Customer F’s IA accounts. The trade

dates, number of shares, and purchase and sale prices recorded on the customer

statements correspond to Annette’s handwritten instructions, confirming that the

backdated trades she specified were recorded on the customer statements of both

Customer E and Customer F. Additionally, in April 2004, Annette oversaw the

fraudulent creation of “corrected” customer statements for Customer E and Customer F’s

IA accounts, including the recreation of the March 2003 through April 2004 IA customer

statements.

f. Customer G. Annette created trading gains for Customer G, a BLMIS

employee who was also central to the execution and concealment of the Ponzi scheme.

The July 2004 customer statement for Customer G contains a fraudulent purchase of

157,000 shares of Lucent Technologies, backdated to March 2003, and the subsequent

fraudulent sale of these same shares backdated to April 2004, generating an immediate

gain of $399,810. This gain was the only trading activity in the account during 2004 and

represented a 1,179% rate of return for that year. Annette’s handwritten documents state

“[Customer G] had me put thru a profit trade for 399810…” The gains realized on the

Lucent transaction agree exactly to the amount noted in Annette’s notes and display that

Annette knowingly recorded the backdated transactions to realize the gain requested by

Customer G.

g. Customer H. In late 2002 and/or early 2003, Annette was involved in

backdating a large number of purported short-against-the-box sales, which generated

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massive amounts of capital gains for Customer H’s IA account. During 2002, the S&P

100 Index declined by approximately 23% and thus the value of many of the securities

purportedly held by Customer H in his IA account also declined significantly in value.

As of September 2002, the reported equity value of Customer H’s IA account had

declined by approximately 43% for the year to date. Rather than allow Customer H to

experience purported losses in his account, Annette engineered backdated and fraudulent

transactions resulting in massive fictitious gains in the account. Specifically, Annette

backdated a number of short sales to early in 2002 before the market began its decline. In

or about January 2003, Annette requested Customer H and Customer H’s Accountant to

return the customer statements for Customer H’s IA account for the months of January

through November 2002. Specifically, Annette’s handwritten notes monitoring the return

of customer statements, “From [Customer H] – Jan – Nov 02” indicate her knowledge of

the attempt to get these statements back from Customer H. By early March 2003,

Customer H and Customer H’s Accountant had complied with Annette’s request and

returned the specified statements, and Annette then provided them with new fictitious

statements, in a further attempt to conceal the fraudulent backdated trading activity.

47. Annette was also aware that fictitious and backdated trading activity was being

reported in her own accounts, and that she and her husband Rudy’s IA Accounts reflected

fictitious holdings, as she managed the IA Accounts for Rudy and herself. Defendants knew that

the activity in their accounts was not the result of legitimate trading activity, and the funds

withdrawn from those accounts were not profits of real trading. For example:

a. The May 2002 and June 2002 customer statements for Annette’s account

1B0048 contain backdated trades of 85,000 WorldCom Group shares, for a $635,500

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gain. The backdating is evident from the face of the customer statements which show

transaction dates of January and April 2002 on the May and June 2002 customer

statements, respectively. Consistent with the instances for other IA Business customers

outlined above, these fraudulently backdated securities transactions were not included on

the original customer statements issued for the months ended January 31 and April 30,

2002.

b. The December 2001 customer statement for Rudy and Annette’s joint

account 1B0050 contains purchases recorded with hindsight of 170,000 shares of Circuit

City, generating unrealized gains through December 31, 2001 of approximately $1.6

million. The Buying Power report for December 31, 2001 contains Annette’s

handwritten notes acknowledging that her account 1B0050 was under its expected

balance by approximately $1.6 million. The purchases of shares of Circuit City were

recorded with the benefit of hindsight to offset the account’s $1.6 million underage. The

purchase, dated November 28, 2001 (December 4 settlement date), was recorded on or

after December 31, 2001, and before the December 2001 customer statement was run, so

it was not necessary to create a corrected statement using Statement Pro.

c. The July 2006 customer statement for Rudy and Annette’s joint account

1B0050 contains purchases recorded with hindsight of 175,000 shares of Apple,

generating unrealized gains through December 31, 2006 of approximately $3.7 million.

Annette’s handwritten notes on the Buying Power report dated July 31, 2006 indicate that

she knew that as of that date, her account did not own shares of Apple. The purchases of

Apple shares, dated July 13, 2006 (July 18 settlement date), were recorded on or after

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July 31, 2006 and before the July 2006 customer statement was run, so it was not

necessary to create a corrected statement using Statement Pro.

Belated Attempted Transfers to Defendants

48. After the Filing Date, the FBI found a stack of checks in Madoff’s desk that he

had been unable to deliver prior to his arrest. Among these were a check to Rudy and Annette

for $706,157.23—an amount very close to the purported value of their joint account, 1B0216, as

reported on their November 2008 customer statement.

49. In addition, a BLMIS ledger indicates that on December 11, 2008, Annette and

Rudy were scheduled to receive checks totaling $57,826,084 in aggregate. This amount roughly

approximates the total purported balance of three of the Defendants’ BLMIS accounts: 1B0048,

1B0049, and 1B0050. No payments were made to the extent the requested checks were actually

generated.

Exorbitant Salary and Extravagant Use of American Express Card

50. While employed at BLMIS, Annette was paid $3,931,878 between 1993 and 2008

for her active participation in and administration of the fraudulent scheme. Annette worked for the

IA Business for decades, and upon information and belief, every duty or task performed by

Annette was in furtherance of the fraud. On information and belief, her work was exclusively in

the IA Business, which was predicated on fraud. Accordingly, Annette provided no value to

BLMIS in return for her compensation. Further, Annette knew that the source of the funds paying

her salary was the defrauded customers of the IA Business.

51. In addition to her salary, Annette enjoyed seemingly unfettered access to a BLMIS

corporate American Express charge card, the balance of which was paid from a BLMIS-controlled

bank account containing funds deposited by defrauded customers of the IA Business. Between

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2002 and 2008, Annette made purchases totaling $46,565. These purchases were personal in

nature, for the benefit of Defendants, and conveyed no benefit or value to BLMIS. They include,

but are not limited to, expenditures at Walt Disney World, The Venetian in Las Vegas, The Four

Seasons Resort in Scottsdale, Arizona, and the Borgata in Atlantic City. Annette knew or should

have known that she was not entitled to use BLMIS monies to pay for personal luxuries and

expenses for herself and her husband, as these expenditures provided no corresponding benefit or

value to BLMIS in return. Further, Annette knew that the source of the funds paying her corporate

American Express bill was the defrauded customers of the IA Business.

THE TRANSFERS

52. According to BLMIS’ records, Defendants maintained multiple accounts with

BLMIS set forth on Exhibit A (collectively, the “Accounts”). Actions on the Accounts were to

be performed in New York, New York through securities trading activities that would take place

in New York, New York. The Accounts were held in New York, New York, and Defendants

sent funds to BLMIS and/or to BLMIS’ account at JPMorgan Chase & Co., Account

#xxxxxxxxxxx1703 (the “BLMIS Bank Account”) in New York, New York for application to

the Accounts and the purported conducting of trading activities. Between the dates the Accounts

were opened and the Filing Date, Defendants made deposits to BLMIS through checks and/or

wire transfers into bank accounts controlled by BLMIS including the BLMIS Bank Account,

and/or received inter-account transfers from other BLMIS accounts.

53. Prior to the Filing Date, BLMIS made payments or other transfers (collectively,

the “Transfers”) directly or indirectly to Defendants totaling the amount of $22,909,868. Under

the circumstances set forth above, the Defendants knew of the fraud at BLMIS, that BLMIS was

insolvent, and/or that the Transfers were made for a fraudulent purpose, or at the very least,

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Defendants were on inquiry notice of the same. Of the Transfers: (a) $18,931,425 was in the

form of withdrawals from BLMIS accounts in the name of, or for the benefit of, Annette and/or

Rudy (see Exhibit B); (b) $3,931,878 was in the form of salary and/or bonus payments made by

BLMIS to Annette in return for her active participation in and administration of the fraudulent

scheme; and (c) $46,565 resulted from personal use of a BLMIS credit cards by or for the benefit

of Annette and/or Rudy.

54. Upon information and belief, certain Transfers were dispensed from Defendants'

IA Accounts at the direction of, and for the benefit of, Defendants Annette and/or Rudy to third

parties.

55. The Transfers are avoidable and recoverable under sections 544, 548, 550(a) and

551 of the Bankruptcy Code, applicable provisions of SIPA, particularly SIPA section 78fff-

2(c)(3), and applicable provisions of N.Y. CPLR 203(g) and 213(8) (McKinney 2001) and DCL

sections 273-279 (McKinney 2001).

56. Of the Transfers, BLMIS made payments to Defendants of at least $11,196,826

during the six years prior to the Filing Date (the “Six Year Transfers”) and are avoidable and

recoverable under sections 544, 550(a) and 551 of the Bankruptcy Code, applicable provisions of

SIPA, particularly § 78fff-2(c)(3), and applicable provisions of DCL sections 273 – 279. Of

these Six Year Transfers, (a) $9,337,682 was in the form of withdrawals from BLMIS accounts

in the name of or for the benefit of Defendants Rudy and Annette by or for the benefit of

Defendant Rudy and/or Defendant Annette; (b) $1,823,228 was in the form of salary and/or

bonus payments made by BLMIS to Annette in return for her active participation in and

administration of the fraudulent scheme; and (c) $35,916 resulted from personal use of a BLMIS

credit card by or for the benefit of Defendants.

-28-

57. Of the Six Year Transfers, BLMIS made payments to Defendants of at least

$4,941,521 (the “Two Year Transfers”) during the two years prior to the Filing Date, which are

avoidable and recoverable under sections 544(b), 548, 550(a) and 551 of the Bankruptcy Code

and applicable provisions of SIPA, particularly SIPA section 78fff-2(c)(3). Of these Two Year

Transfers, (a) $3,939,764 was in the form of withdrawals from BLMIS accounts in the name of

or for the benefit of Defendants Rudy and Annette by or for the benefit of Defendant Rudy

and/or Defendant Annette; (b) $990,088 was in the form of salary and/or bonus payments made

by BLMIS to Annette in return for her active participation in and administration of the fraudulent

scheme; and (c) $11,669 resulted from personal use of a BLMIS credit card by or for the benefit

of Defendants.

58. Upon information and belief, the estate of John Argese, which held Account No.

1A0040 (the “Argese Account”) received transfers from BLMIS as an initial transferee. Upon

further information and belief, Defendant Annette, who is the executrix of the estate of her late

father, was also an initial transferee of transfers from the Argese Account. Upon information

and belief, some the foregoing transfers were subsequently transferred to, or for the benefit, of

Defendants (the “Subsequent Transfers”). The Subsequent Transfers, or the value thereof, are

recoverable from Defendants pursuant to section 550(a) of the Bankruptcy Code.

59. To the extent that any of the recovery counts may be inconsistent with each other,

they are to be treated as being pled in the alternative.

60. The Trustee’s investigation is ongoing and the Trustee reserves the right to (i)

supplement the information regarding the Transfers, and any additional transfers, and (ii) seek

recovery of such additional transfers.

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COUNT ONE- ACTUAL FRAUD UNDER FEDERAL LAWFRAUDULENT TRANSFER – 11 U.S.C. §§ 548(a)(1)(A), 550(a) AND 551

61. To the extent applicable, the Trustee incorporates by reference the allegations

contained in the previous paragraphs of this Complaint as if fully rewritten herein.

62. Each of the Two Year Transfers was made on or within two years before the

filing date of BLMIS’ case.

63. Each of the Two Year Transfers constitutes a transfer of an interest of BLMIS in

property within the meaning of sections 101(54) and 548(a) of the Bankruptcy Code and

pursuant to section 78fff-2(c)(3) of SIPA.

64. Each of the Two Year Transfers was made by BLMIS with the actual intent to

hinder, delay, or defraud some or all of BLMIS’ then existing or future creditors.

65. Each of the Two Year Transfers constitutes a fraudulent transfer avoidable by the

Trustee pursuant to section 548(a)(1)(A) of the Bankruptcy Code and recoverable from the

Defendants pursuant to section 550(a) of the Bankruptcy Code and section 78fff-(2)(c)(3) of

SIPA.

66. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a), and 551 of

the Bankruptcy Code, the Trustee is entitled to a judgment against Defendants: (a) avoiding and

preserving the Two Year Transfers, (b) directing that the Two Year Transfers be set aside, and

(c) recovering the Two Year Transfers, or the value thereof, from the Defendants for the benefit

of the estate of BLMIS.

COUNT TWO - CONSTRUCTIVE FRAUD UNDER FEDERAL LAW FRAUDULENT TRANSFER – 11 U.S.C. §§ 548(a)(1)(B), 550(a) AND 551



-30-

68. Each of the Two Year Transfers was made on or within two years before the

Filing Date.

69. Each of the Two Year Transfers constitutes a transfer of an interest of BLMIS in

property within the meaning of sections 101(54) and 548(a) of the Bankruptcy Code and

pursuant to section 78fff-2(c)(3) of SIPA.

70. BLMIS received less than a reasonably equivalent value in exchange for each of

the Two Year Transfers.

71. At the time of each of the Two Year Transfers, BLMIS was insolvent, or became

insolvent as a result of the Two Year Transfer in question.

72. At the time of each of the Two Year Transfers, BLMIS was engaged in a business

or a transaction, or was about to engage in a business or a transaction, for which any property

remaining with BLMIS was an unreasonably small capital.

73. At the time of each of the Two Year Transfers, BLMIS intended to incur, or

believed that it would incur, debts that would be beyond BLMIS’ ability to pay as such debts

matured.

74. Each of the Two Year Transfers constitutes fraudulent transfers avoidable by the

Trustee pursuant to section 548(a)(1)(B) of the Bankruptcy Code and recoverable from the

Defendants pursuant to section 550(a) and section 78fff-(2)(c)(3) of SIPA.

75. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a), and 551 of

the Bankruptcy Code, the Trustee is entitled to a judgment against Defendants: (a) avoiding and

preserving the Two Year Transfers, (b) directing that the Two Year Transfers be set aside, and

(c) recovering the Two Year Transfers, or the value thereof, from the Defendants for the benefit

of the estate of BLMIS.

-31-

COUNT THREE - ACTUAL FRAUD UNDER NEW YORK LAW FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW

§§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551



77. At all times relevant to the Six Year Transfers, there have been one or more

creditors who have held and still hold matured or unmatured unsecured claims against BLMIS

that are allowable under section 502 of the Bankruptcy Code or that are not allowable only under

section 502(e) of the Bankruptcy Code.

78. Each of the Six Year Transfers constitutes a conveyance by BLMIS as defined

under DCL section 270.

79. Each of the Six Year Transfers was made by BLMIS with the actual intent to

hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Six Year Transfers to or for

the benefit of the Defendants in furtherance of a fraudulent investment scheme.

80. Each of the Six Year Transfers was received by the Defendants with actual intent

to hinder, delay or defraud creditors of BLMIS at the time of each of the Transfers, and/or future

creditors of BLMIS.

81. As a result of the foregoing, pursuant to DCL sections 276, 276-a, 278 and/or 279,

sections 544(b), 550(a), and 551 of the Bankruptcy Code, and section 78fff-2(c)(3) of SIPA, the

Trustee is entitled to a judgment against Defendants: (a) avoiding and preserving the Six Year

Transfers, (b) directing that the Six Year Transfers be set aside; and (c) recovering the Six Year

Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS, and

(d) recovering attorneys’ fees from the Defendants.

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COUNT FOUR - CONSTRUCTIVE FRAUD UNDER NEW YORK LAW FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW

§§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551


contained in the previous paragraphs of the Complaint as if fully rewritten herein.

83. At all relevant times there was and is at least one or more creditors who held and

hold matured or unmatured unsecured claims against BLMIS that were and are allowable under

section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e)

of the Bankruptcy Code.



85. BLMIS did not receive fair consideration for the Six Year Transfers.

86. BLMIS was insolvent at the time it made each of the Six Year Transfers or, in the

alternative, BLMIS became insolvent as a result of each of the Six Year Transfers.

87. As a result of the foregoing, pursuant to DCL sections 273, 278 and/or 279,




Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS.

COUNT FIVE - CONSTRUCTIVE FRAUD UNDER NEW YORK LAWFRAUDULENT TRANSFER—NEW YORK DEBTOR AND CREDITOR LAW

§§274, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551




hold matured or unmatured unsecured claims against BLMIS that were and are allowable under

-33-

section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e)

of the Bankruptcy Code.




92. At the time BLMIS made each of the Six Year Transfers, BLMIS was engaged or

was about to engage in a business or transaction for which the property remaining in its hands

after each of the Six Year Transfers was an unreasonably small capital.






COUNT SIX - CONSTRUCTIVE FRAUD UNDER NEW YORK LAWFRAUDULENT TRANSFER-NEW YORK DEBTOR AND CREDITOR LAW

§§ 275, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551




hold matured or unmatured unsecured claims against BLMIS that are allowable under section

502 of the Bankruptcy Code or that are not allowable only under section 502(e) of the

Bankruptcy Code.




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98. At the time BLMIS made each of the Six Year Transfers, BLMIS had incurred,

was intending to incur, or believed that it would incur debts beyond its ability to pay them as the

debts matured.






COUNT SEVEN – RECOVERY OF ALL FRAUDULENT TRANSFERS – NEW YORK CIVIL PRACTICE LAW AND RULES 203(g), 213(8) AND NEW YORK DEBTOR AND

CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279,AND 11 U.S.C. §§ 544, 550(a) AND 551

100. The Trustee incorporates by reference the allegations contained in the previous

paragraphs of this Complaint as if fully rewritten herein.

101. At all times relevant to the Transfers, the fraudulent scheme perpetrated by

BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS.

102. At all times relevant to the Transfers, there have been one or more creditors who

have held and still hold matured or unmatured unsecured claims against BLMIS that are

allowable under section 502 of the Bankruptcy Code or that are not allowable only under section

502(e) of the Bankruptcy Code.

103. Each of the Transfers prior to the six years before the Filing Date constitutes a

conveyance by BLMIS as defined under DCL section 270.

104. Each of the Transfers was made by BLMIS with the actual intent to hinder, delay,

or defraud the creditors of BLMIS. BLMIS made the Transfers to or for the benefit of the

Defendants in furtherance of a fraudulent investment scheme.

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105. Each of the Transfers was received by the Defendants with actual intent to hinder,

delay or defraud creditors of BLMIS at the time of each of the Transfers, and/or future creditors

of BLMIS.

106. As a result of the foregoing, pursuant to NY CPLR 203(g), 213(8), DCL sections

276, 276-a, 278 and/or 279, sections 544(b), 550(a), and 551 of the Bankruptcy Code, and SIPA

section 78fff-2(c)(3), the Trustee is entitled to a judgment against Defendants: (a) avoiding and

preserving the Transfers, (b) directing that the Transfers be set aside; and (c) recovering the

Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS, and

(d) recovering attorneys’ fees from the Defendants.

COUNT EIGHT – RECOVERY OF SUBSEQUENT TRANSFERS -- NEW YORK DEBTOR AND CREDITOR LAW §§ 273 – 279 AND 11 U.S.C. §§ 544, 548 AND 550(a)



108. Each of the Transfers is avoidable under sections 544 and 548 of the Bankruptcy

Code, DCL sections 273, 274, 275 and/or 276 and section 78fff-2(c)(3) of SIPA.

109. Upon information and belief, some or all of the Transfers were subsequently

transferred to the Defendants.

110. Each of the Subsequent Transfers was made directly or indirectly to, or for the

benefit of, the Defendants.

111. Defendants were immediate or mediate transferees of the Subsequent Transfers.

112. As a result of the foregoing, pursuant to DCL sections 278 and/or 279, sections

550(a) of the Bankruptcy Code, and section 78fff-2(c)(3) of SIPA, the Trustee is entitled to a

judgment against the Defendants recovering the Subsequent Transfers, or the value thereof, for

the benefit of the estate of BLMIS.

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COUNT NINE – CONVERSION



114. BLMIS had a possessory right and interest to its assets, including its customers’

investment funds.

115. Defendants converted the investment funds of BLMIS customers when they

received money originating from BLMIS and its customers, to which Defendants knew they had

no right and were not authorized to take. These actions deprived BLMIS and its creditors of the

use of this money.

116. As a direct and proximate result of this conduct, BLMIS and its creditors have not

had the use of the money converted by Defendants.

117. By reason of the above, the Trustee, on behalf of BLMIS and its creditors, is

entitled to an award of compensatory damages, in an amount to be determined at trial.

COUNT TEN – UNJUST ENRICHMENT



119. Defendants benefited from the receipt of money from BLMIS in the form of

payments and other transfers which were the property of BLMIS and its customers, and for

which Defendants did not adequately compensate BLMIS or provide value or fair consideration.

120. This enrichment was at the expense of BLMIS and, ultimately, at the expense of

BLMIS’ other customers.

121. Equity and good conscience require full restitution of the monies received by

Defendants from BLMIS.

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122. By reason of the above, the Trustee, on behalf of BLMIS and its creditors, is

entitled to restitution for the benefits Defendants improperly received, in an amount to be

determined at trial.

COUNT ELEVENTURNOVER AND ACCOUNTING – 11 U.S.C. § 542



124. The Trustee has commenced this and other adversary proceedings to avoid and

preserve for the benefit of the estate the Transfers, and to recover such Transfers for the benefit

of the estate pursuant to applicable provisions of the Bankruptcy Code, New York Debtor and

Creditor Law, and SIPA.

125. All of the Transfers are deemed to be customer property pursuant to SIPA §§

78fff-2(c)(3) and 78lll(4), and constitute property of the estate to be recovered and administered

by the Trustee pursuant to sections 541 and 542 of the Bankruptcy Code and SIPA §78fff-2(c)(3)

and § 78lll(4).

126. The Defendants are not lawful custodians of the Transfers.

127. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code and

SIPA § 78fff-2(c)(3), the Trustee is entitled to the immediate payment and turnover from the

Defendants of all such customer property and an accounting of all of the customer property, or

its value, transferred at any time, directly or indirectly, to the Defendants.

WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favor

of the Trustee and against the Defendants as follows:

i. On the First Claim for Relief, pursuant to sections 548(a)(1)(A), 550(a) and 551

of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a) avoiding and preserving the Two

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Year Transfers, (b) directing that the Two Year Transfers be set aside, and (c) recovering the

Two Year Transfers, or the value thereof, from the Defendants for the benefit of the estate of

BLMIS;

ii. On the Second Claim for Relief, pursuant to sections 548(a)(1)(B), 550(a) and

551 of the Bankruptcy Code: (a) avoiding and preserving the Two Year Transfers, (b) directing

that the Two Year Transfers be set aside, and (c) recovering the Two Year Transfers, or the value

thereof, from the Defendants for the benefit of the estate of BLMIS;

iii. On the Third Claim for Relief, pursuant to DCL sections 276, 276-a, 278 and/or

279, sections 544(b), 550(a) and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA:

(a) avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be

set aside, (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for the

benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from the Defendants;

iv. On the Fourth Claim for Relief, pursuant to DCL sections 273, 278 and/or 279,

sections 544(b), 550 and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be set

aside, and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for

the benefit of the estate of BLMIS;

v. On the Fifth Claim for Relief, pursuant to DCL sections 274, 278 and/or 279,

sections 544(b), 550, and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

avoiding and preserving the Six Year Fraudulent Transfers, (b) directing the Six Year Transfers

be set aside, and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants

for the benefit of the estate of BLMIS;

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vi. On the Sixth Claim for Relief, pursuant to DCL sections 275, 278 and/or 279,

sections 544(b), 550, and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be set

aside, and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for

the benefit of the estate of BLMIS;

vii. On the Seventh Claim for Relief, pursuant to NY CPLR 203(g) and 213(8), DCL

sections 276, 276-a, 278 and/or 279, sections 544(b), 550(a), and 551 of the Bankruptcy Code

and section 78fff-2(c)(3) of SIPA: (a) avoiding and preserving the Transfers, (b) directing that

the Transfers be set aside, (c) recovering the Transfers, or the value thereof, from the Defendants

for the benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from the Defendants.

viii. On the Eighth Claim for Relief pursuant to DCL section 278 and/or 279, sections

544(b), 548 and 550(a) of the Bankruptcy Code, and section 78fff-2(c)(3) of SIPA recovering the

Subsequent Transfers, or the value thereof, from Defendants for the benefit of the estate of

BLMIS;

ix. On the Ninth Claim for Relief for the conversion of BLMIS assets, for

compensatory damages in amounts to be determined at trial;

x. On the Tenth Claim for Relief for unjust enrichment, for restitution in an amount

to be determined at trial;

xi. On the Eleventh Claim for Relief, pursuant to sections 542, 550(a) and 551 of the

Bankruptcy Code and section 78fff-2(c)(3) of SIPA a judgment: (a) that the property that was the

subject of the Transfers be immediately delivered and turned over to the Trustee, and (b) for an

accounting by the Defendants of the property that was the subject of the Transfers or the value of

such property;

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xii. On all Claims for Relief, pursuant to federal common law and N.Y. CPLR 5001

and 5004, awarding the Trustee prejudgment interest from the date on which the Transfers were

received;

xiii. On all Claims for Relief, establishment of a constructive trust over the proceeds of

the transfers in favor of the Trustee for the benefit of BLMIS’ estate;

xiv. On all Claims for Relief, assignment of Defendants’ income tax refunds from the

United States, state and local governments paid on fictitious profits during the course of the

scheme;

xv. Awarding the Trustee all applicable interest, costs, and disbursements of this

action; and

xvi. Granting Plaintiff such other, further, and different relief as the Court deems just,

proper, and equitable.

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Date: New York, New YorkNovember 11, 2010

Of Counsel:

BAKER & HOSTETLER LLPPNC Center, Suite 32001900 East 9th StreetCleveland, Ohio 44114Telephone: (216) 621-0200Facsimile: (216) 696-0740Terry M. BrennanEmail: [email protected] E. ThorpeEmail: [email protected]

s/David J. Sheehan s/Keith R. Murphy s/Geraldine E. PontoBAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, New York 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201David J. Sheehan Email: [email protected] R. MurphyEmail: [email protected] E. PontoEmail: [email protected]

Attorneys for Irving H. Picard, Esq., Trusteefor the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff

picard vs annette bongiorno

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