Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC. et a

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES INVESTOR PROTECTION 	:
CORPORATION, 	:
Plaintiff, 	:
:
‒ against ‒ 	:
: 	Adv. Pro. No. 08-01789 (SMB)
BERNARD L. MADOFF INVESTMENT 	: 	SIPA LIQUIDATION
SECURITIES LLC, 	: 	(Substantively Consolidated)
Defendant. 	:
---------------------------------------------------------------X
In re: 	:
:
BERNARD L. MADOFF, 	:
:
Debtor. 	:
---------------------------------------------------------------X
MEMORANDUM DECISION AFFIRMING APPLICATION
OF THE TRUSTEE’S INTER-ACCOUNT METHOD TO THE
DETERMINATION OF TRANSFERS BETWEEN BLMIS ACCOUNTS
A P P E A R A N C E S:
(See Appendix A)
STUART M. BERNSTEIN
United States Bankruptcy Judge:
The motion before the Court (the “Motion”) concerns the appropriate methodology for
computing the “net equity” in a customer account maintained at Bernard L. Madoff Investment
Securities LLC (“BLMIS”) where the balance in the account depends, to some extent, on
amounts previously “transferred” into that account from another BLMIS account.1 Applying the
Net Investment Method approved by the Second Circuit Court of Appeals, see In re BLMIS, 654
1 	The terms “transfer,” “transferor” and “transferee” in this decision are used for convenience and are not
intended to imply that a transfer took place between the transferor and transferee within the meaning of 11 U.S.C. §
101(54).
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F.3d 229 (2d Cir. 2011) (“Net Equity Decision”), cert. denied, 133 S.Ct. 24 (2012), Irving H.
Picard, as trustee (“Trustee”) for the substantively consolidated liquidation of BLMIS under the
Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”), and Bernard L. Madoff,
went back to the transferor account, disregarded the fictitious profits (including values ascribed
to imaginary securities positions), recomputed the balance at the time of the transfer based on
actual cash deposits and withdrawals, and credited the transfer up to the amount of the
recomputed balance (the “Inter-Account Method”). The Trustee’s Motion seeks an order
affirming his methodology, and the Securities Investor Protection Corporation (“SIPC”) supports
the Motion.
Numerous BLMIS account holders that were parties to inter-account transfers oppose the
methodology for a variety of reasons detailed below. These objecting customers may themselves
be victims of Madoff’s fraud and hold substantial net equity claims without regard to the inter-
account transfers at issue. Nevertheless, increasing their net equity claims by giving them credit
for the fictitious profits “transferred” into their accounts contravenes the Net Equity Decision.
Accordingly, the Motion is granted.
BACKGROUND
The facts surrounding Madoff’s Ponzi scheme have been the subject of numerous
decisions in this Court, the District Court and the Second Circuit Court of Appeals. See, e.g.,
Picard v. JPMorgan Chase & Co. (In re BLMIS), 721 F.3d 54, 58-59 (2d Cir. 2013); Net Equity
Decision, 654 F.3d at 231-33; Picard v. Greiff (In re BLMIS), 476 B.R. 715, 718 (S.D.N.Y.
2012); SIPC v. BLMIS (In re BLMIS), 424 B.R. 122, 125-32 (Bankr. S.D.N.Y. 2010). I assume
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familiarity with those decisions and limit the discussion, principally derived from the Net Equity
Decision, to the facts required for the disposition of the Motion.
Madoff induced investors to open discretionary trading accounts with BLMIS and entrust
their funds to him. He claimed to invest the funds pursuant to his “split-strike conversion
strategy” which supposedly produced consistently high rates of return. The “strategy” involved
buying a basket of stocks listed on the Standard and Poor’s 100 Index and hedging through the
use of options.
Madoff never invested any of the funds, and instead, used funds taken from later
investors to pay earlier investors. To keep the scheme going, he generated fictitious paper
account statements and trading records that purported to list securities transactions that never
actually took place. The fictional customer statements were based on after-the-fact stock
“trades” using already-published trading data to pick advantageous historical prices. The final
monthly statements sent in November 2008 just before Madoff was arrested falsely recorded an
aggregate of $64.8 billion in mostly non-existent securities and cash holdings. In fact, the only
accurate entries in the BLMIS records reflected the actual cash deposits and withdrawals in each
account.
The conflict between the last monthly statements and the actual value of the customers’
accounts computed on a cash in/cash out basis was resolved by the Net Equity Decision. The
dispute in the Net Equity Decision, discussed more fully below, centered on the correct method
for calculating a BLMIS customer’s “net equity” under SIPA § 78lll(11). The Trustee calculated
each customer’s net equity solely with reference to the customer’s cash deposits and withdrawals
ignoring the fictitious profits depicted in the statements (the Net Investment Method). The
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customers argued that their net equity should be calculated based on the net equity portrayed,
albeit fictitiously, in their last statements (the Last Statement Method). In the Net Equity
Decision, the Second Circuit agreed with the Trustee that the Net Investment Method was the
appropriate method to determine a customer’s net equity in the BLMIS SIPA liquidation. Net
Equity Decision, 654 F.3d at 238-239.
The Net Equity Decision did not directly address the treatment of inter-account transfers.
During his review of BLMIS customer claims, however, the Trustee found numerous instances
involving a transfer from one BLMIS customer account to another BLMIS customer account.
The customer claim asserted by the transferee required the Trustee to determine the amount or
value of the transfer in order to fix the amount of the net equity in the transferee account. Using
the Inter-Account Method, the Trustee first recomputed the amount in the transferor account at
the time of the transfer under the Net Investment Method. He then credited the transferee
account in an amount up to the recomputed balance in the transferor account.
The following three examples illustrate how the Inter-Account Method worked:
1. 	Assume customer A’s statement indicated a balance of $5 million,
but the customer’s actual net investment was only $2 million (the remaining $3
million consisting of fictitious profits). If customer A attempted to transfer the
entire $5 million to customer B, customer B received credit for only $2 million ‒
the net investment in customer A’s account ‒ leaving customer A’s account with a
$0 balance.
2. 	Assume, instead, that the same customer A transferred $1 million
to customer B. Since customer A had an account balance of $2 million computed
under the Net Investment Method ‒ enough to cover the entire transfer ‒ customer
B received credit for the full $1 million, and customer A still had an account with
a $1 million balance.
3. 	Lastly, assume that customer A’s account statement indicated a
balance of $5 million, but consisted entirely of fictitious profits. Customer B
would not receive any benefit from an attempted transfer because customer A had
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$0 balance in his account under the Net Investment Method at the time of the
transfer.
The Trustee’s decision to disallow some or all of a customer’s claim based on the Inter-
Account Method elicited objections from over 400 customer claimants. (See Declaration of Bik
Cheema in Support of the Trustee’s Motion Affirming Application of Net Investment Method to
Determination of Customer Transfers Between BLMIS Accounts, dated Mar. 31, 2014 (“Cheema
Declaration”), at ¶¶ 5-7 (ECF Doc. # 6086) 2 .)3 The Trustee moved to streamline the resolution
of these objections by scheduling a hearing to affirm his application of the Inter-Account Method
to the inter-account transfers. (See Motion for Order Scheduling Hearing on Trustee’s Motion
Affirming Application of Net Investment Method to Determination of Customer Transfers
Between BLMIS Accounts, dated Feb. 27, 2014 (ECF Doc. # 5728).) The Court subsequently
entered an order setting a briefing schedule which specified that the “sole purpose” of the motion
“shall be to resolve the legal issue raised by objections to the methodology used to calculate the
amount transferred between BLMIS accounts in connection with customer claims.” (See
Scheduling Order, dated Mar. 27, 2014 (“Scheduling Order”), at 2 (ECF Doc. # 6049).)
The Trustee subsequently filed the Motion. (Motion Affirming Application of Net
Investment Method to Determination of Customer Transfers Between BLMIS Accounts, dated
2 	“ECF Doc. # __” refers to documents filed in the BLMIS SIPA liquidation proceeding, captioned SIPC v.
BLMIS, Adv. Pro. No. 08-01789 (SMB).
3 	Exhibit 1 to the Cheema Declaration lists the objecting claimants who argue that the Trustee improperly
adjusted the amount of the inter-account transfer to reflect the amount in the transferor’s account at the time of the
transfer. (Cheema Declaration at ¶¶ 5-6.) Exhibit 2 to the Cheema Declaration lists the objecting claimants whose
inter-account transfers were not adjusted. (Id. at ¶ 7.)
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Mar. 31, 2014 (ECF Doc. #6084).)4 The Trustee relies on the Second Circuit’s Net Equity
Decision and a decision by the District Court in SIPC v. BLMIS (In re BLMIS), 499 B.R. 416
(S.D.N.Y. 2013) (the “Antecedent Debt Decision”), certification for interlocutory appeal denied,
987 F. Supp. 2d 309 (S.D.N.Y. 2013), described below. According to the Trustee, using the
Inter-Account Method to calculate the amount of the inter-account transfers is the only method
consistent with the Net Equity Decision and Antecedent Debt Decision. (Trustee Memo at 17-
20.) The Trustee further argues that netting cash deposits against cash withdrawn prior to the
two-year statutory reach-back period governing the avoidance of fraudulent transfers is
consistent with the Antecedent Debt Decision. (Id. at 20-22.) Finally, the customer bears the
burden of proving his “customer” status under SIPA. (Id. at 22-23.) SIPC filed a Memorandum
of Law of the Securities Investor Protection Corporation in Support of the Trustee’s
Determinations Regarding Inter-Account Transfers, dated Mar. 31, 2014 (“SIPC Memo”) (ECF
Doc. # 6079), in which it adopted many of the Trustee’s arguments, and added that the use of the
Inter-Account Method furthers SIPA’s objective of deterring securities law violations. (SIPC
Memo at 11-12.)
Many former customers filed objections to the Motion (collectively, the “Objecting
Claimants”)5 raising numerous arguments that are discussed in the body of this opinion under
4 	See also Memorandum of Law in Support of Motion Affirming Application of Net Investment Method to
Determination of Customer Transfers Between BLMIS Accounts, dated Mar. 31, 2014 (“Trustee Memo”) (ECF Doc.
# 6085).
5 	The objections of the Objecting Claimants are as follows: (1) Samdia Family, LP’s Memorandum of Law in
Opposition to the Trustee’s Inter-Account Transfer Motion, dated May 13, 2014 (“Samdia Objection”) (ECF Doc. #
6640); (2) Memorandum of Law in Opposition to Inter-Account Transfer Motion, dated May 15, 2014 (“Most
Objection”) (ECF Doc. # 6670); (3) Objection of Edward A. Zraick, Jr., Nancy Zraick, Patricia Deluca, and Karen
Rich to Trustee’s Motion Affirming Application of Net Investment Method to Determination of Customer Transfers
Between BLMIS Accounts (Claim Nos. 002107 and 002108), dated May 16, 2014 (“Zraick Objection”) (ECF Doc. #
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separate headings. The Trustee and SIPC thereafter filed replies in further support of the Motion.
(See Reply Memorandum of Law in Support of Trustee’s Motion Affirming Application of Net
Investment to Determination of Customer Transfers Between BLMIS Accounts, dated June 6,
2014 (“Trustee Reply”) (ECF Doc. # 6926) and Reply Memorandum of Law of the Securities
Investor Protection Corporation in Support of the Trustee’s Determinations Regarding Inter-
Account Transfers, dated June 6, 2014 (“SIPC Reply”) (ECF Doc. # 6927).)
6687); (4) Joinder of Interested Party, the Mittlemann Family Foundation, in Samdia Family, LP’s Memorandum of
Law in Opposition to the Trustee’s Inter-Account Transfer Motion and All Other Objections to the Trustee’s Inter-
Account Transfer Motion, dated May 16, 2014 (“Mittlemann Objection”) (ECF Doc. # 6706); (5) Objection and
Joinder of Brian Ross to Arguments Presented in connection with the Trustee’s Motion Affirming Application of Net
Investment Method to Determination of Customer Transfers Between BLMIS Accounts, dated May 16, 2014 (“Ross
Objection”) (ECF Doc. # 6702); (6) Objection of Lawrence Elins to Trustee’s Motion Affirming Application of Net
Investment Method to Determination of Customer Transfers Between Accounts, dated May 16, 2014 (“Elins
Objection”) (ECF Doc. # 6707); (7) Customers’ Memorandum of Law in Opposition to the Trustee’s Method for
Valuing Inter-Account Transfers, dated May 16, 2014 (“B&P Objection”) (ECF Doc. # 6708); (8) Marion Apple’s
Memorandum of Law in Opposition to the Trustee’s Motion Affirming Application of Net Investment Method to
Determination of Customer Transfers Between BLMIS Accounts, dated May 16, 2014 (“Apple Objection”) (ECF
Doc. # 6713); (9) Declaration of Jeffrey L. Bernfeld, dated May 16, 2014 (“Bernfeld Objection”) (ECF Doc. #
6714); (10) The Kostin Company’s Opposition to the “Trustee’s Motion Affirming Application of Net Investment
Method to Determination of Customer Transfers Between BLMIS Accounts,” dated May 16, 2014 (“Kostin
Objection”) (ECF Doc. # 6727); (11) Westport National Bank’s Joinder in Claimants’ Omnibus Opposition to the
Trustee’s Motion Affirming Application of Net Investment Method to Determination of Customer Transfers Between
BLMIS Accounts, dated May 16, 2014 (“Westport Objection”) (ECF Doc. # 6731); (12) Claimants’ Omnibus
Opposition to the Trustee’s Motion Affirming Application of Net Investment Method to Determination of Customer
Transfers Between BLMIS Accounts, dated May 16, 2014 (“Milberg Objection”) (ECF Doc. # 6732); (13)
Customers’ Joinder in Claimants’ Omnibus Opposition to the Trustee’s Motion Affirming Application of Net
Investment Method to Determination of Customer Transfers Between BLMIS Accounts, dated May 16, 2014 (“Lax
Objection”) (ECF Doc. # 6732); (14) The Diana Melton Trust, Dated 12/05/05 Opposition to the Trustee’s Motion
Affirming Application of Net Investment Method to Determination of Customer Transfers Between BLMIS Accounts,
dated May 21, 2014 (“Melton Objection”) (ECF Doc. # 6792); and (15) Elliot G. Sagor Memorandum of Law in
Opposition to the Trustee’s One Size Fits All Method for Valuing Inter-Account Transfers Which Inequitably and
Harshly Does Not Always Credit a Customer’s Principal Investment or Cash in, dated June 2, 2014 (“Sagor
Objection”) (ECF Doc. # 6900).
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DISCUSSION
A. 	The Net Equity Decision
SIPA defines “net equity” as:
the dollar amount of the account or accounts of a customer, to be determined by –
(A) 	calculating the sum which would have been owed by the debtor to such
customer if the debtor had liquidated, by sale or purchase on the filing date, all
securities positions of such customer . . .; minus
(B) 	any indebtedness of such customer to the debtor on the filing date. . . .
SIPA § 78lll(11). In the Net Equity Decision, the Court observed that SIPA imposes on the
Trustee the duty to reimburse net equity claims “insofar as such obligations are ascertainable
from the books and records of the debtor or are otherwise established to the satisfaction of the
trustee.” Net Equity Decision, 654 F.3d at 237 (quoting 15 U.S.C. § 78fff–2(b)(2).) To perform
this duty, he must be satisfied that the method he selects will enable him to deduce the amounts
he must pay to the claimants, id. at 238, and the method he chooses is entitled to deference if it is
not “clearly inferior” to other possible methods under consideration. Id. at 238 n. 7. In the case
of BLMIS, the Trustee properly selected the Net Investment Method to calculate net equity
because it effectuates the principal purposes of SIPA to protect investors against financial losses
arising from their broker’s insolvency and protect the securities markets as a whole. Id. at 235,
239; accord Stafford v. Giddens (In re New Times Sec. Servs., Inc.), 463 F.3d 125, 127 (2d
Cir.2006); see Sec. Inv. Prot. Corp. v. Barbour, 421 U.S. 412, 415 (1975).
The alternative, the Last Statement Method, would perpetuate Madoff’s fraud, id. at 235,
and diminish the amount of customer property available to other investors who had not recouped
even their initial investments. Id. at 240. The last statements were “after-the-fact constructs that
were based on stock movements that had already taken place, were rigged to reflect a steady and
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upward trajectory in good times and bad, and were arbitrarily and unequally distributed among
customers.” Id. at 238.6 Permitting customers to collect based on their last statement would
limit the customer fund and lead to the inequitable result “that those who had already withdrawn
cash deriving from imaginary profits in excess of their initial investment would derive additional
benefit at the expense of those customers who had not withdrawn funds before the fraud was
exposed.” Id.
The statutory definition of “net equity” does not require the Trustee to
aggravate the injuries caused by Madoff’s fraud. Use of the Last Statement
Method in this case would have the absurd effect of treating fictitious and
arbitrarily assigned paper profits as real and would give legal effect to Madoff’s
machinations.
Id. at 235.
B. 	The Antecedent Debt Decision
The Net Equity Decision did not expressly address the treatment of inter-account
transfers, but the Antecedent Debt Decision did. There, the Trustee commenced adversary
proceedings against numerous defendants to avoid and recover fraudulent transfers under
Bankruptcy Code § 548(a)(1)(A).7 Following the withdrawal of the reference, the defendants
moved to dismiss the complaints arguing that they had received the transfers in good faith and
provided value within the meaning of 11 U.S.C. § 548(c).
6 	The Court recognized that the that “a customer’s last account statement will likely be the most appropriate
means of calculating ‘net equity’ in more conventional cases.” Net Equity Decision, 654 F.3d at 238.
7 	The District Court assumed that the defendants, all net winners who had withdrawn more than they had
deposited with BLMIS, Antecedent Debt Decision, 499 B.R. at 419, were good faith transferees. See id. at 418 n. 2.
Under prior decisions of the District Court, they were entitled to invoke the safe harbor under 11 U.S.C. § 546(e),
and limit the Trustee’s avoidance claims to intentional fraudulent transfers under 11 U.S.C. § 548(a)(1)(A). See
Antecedent Debt Decision, 499 B.R. at 418 n.1; see also Greiff, 476 B.R. at 722.
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Several of the defendants had received transfers from other BLMIS accounts. The
Trustee proposed to treat inter-account transfers in excess of principal deposited in the transferor
account as fictitious profits. Antecedent Debt Decision, 499 B.R. at 428. The defendant
transferees argued that inter-account transfers occurring prior to the two-year statutory reach-
back period should be treated as principal, and therefore, constituted “value” for purposes of
Code § 548(c) defense. Id. According to the defendants, the inter-account transfers should be
viewed as two separate transactions – a withdrawal by the transferor and a subsequent deposit by
the transferee. Id. “In this hypothetical scenario, the sender’s withdrawal would not be subject
to avoidance because it occurred before the reach-back period, and the recipient’s investment
would be treated as principal in the recipient’s account (and thus would be credited against any
withdrawals).” Id. The defendants further argued that the Trustee’s use of what we now call the
Inter-Account Method would provide different treatment to economically equivalent
transactions, and was unfair. Id.
The District Court rejected the defendants’ position:
Although defendants contend that the Trustee’s method elevates form over
substance, the true substance of transfers of fictitious profits from one account to
another remains the same: The funds at issue are still other people’s money, and
shifting them among accounts, whether those accounts are owned by the same
person or entity or, for example, transfers among family members, does not
morph those funds into actual new principal. . . . . In other words, no new value
was created by moving these funds between different accounts.
Id. at 428-29.
The District Court found support for its conclusion in the Bankruptcy and District Court
decisions pertaining to an analogous issue in the Bayou Group bankruptcy case. Bayou also
involved a Ponzi scheme. The defendants had invested in the Bayou Fund, and subsequently
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rolled over their investments into Bayou hedge funds. Bayou Accredited Fund, LLC v. Redwood
Growth Partners, L.P (In re Bayou Group, LLC), 396 B.R. 810, 884 (Bankr. S.D.N.Y. 2008),
aff’d in part & rev’d in part, 439 B.R. 284 (S.D.N.Y. 2010). Their Bayou Fund account
statements ‒ the transferor accounts ‒ included fictitious profits. Id. They argued that in
calculating their fraudulent transfer liability for redemption payments received from the Bayou
hedge funds ‒ the transferee accounts ‒ their deposits into the Bayou hedge funds should be
deemed to be the amounts reflected in the inflated Bayou Fund statements that included fictitious
profits. Id.
The Bankruptcy Court disagreed. The defendants’ argument ignored the fact that their
actual investments in the Bayou hedge funds were less than the amounts reflected in their Bayou
Fund account statements, and their purported investments in the Bayou hedge funds were
inflated to the same extent. Id. The Court concluded: “in no event is it appropriate to pile fiction
on fiction by deeming these investors’ final Bayou Fund account statements, including fictitious
profits, to be the value of their investments contributed to the Bayou hedge funds.” Id. at 885.
The District Court affirmed quoting the Bankruptcy Court’s conclusion. Christian Bros. High
Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Group, LLC), 439 B.R. 284,
338-39 (S.D.N.Y. 2010).
The Antecedent Debt Decision also rejected the argument that the failure to treat the pre-
reach-back period transfers as principal allowed the Trustee to indirectly avoid transfers that
were beyond the statute of limitations. There is no time limit on what constituted value under 11
U.S.C. § 548(c), and an inter-account transfer of fictitious profits did not become value just
because it occurred long ago and beyond the statute of limitations. Antecedent Debt Decision,
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499 B.R. at 429. Moreover, inter-account transfers of fictitious profits represented transfers of
funds that never belonged to the sender or recipient or a hypothetical withdrawal and investment
that never occurred. Id.
At heart, the substance of these transactions was merely to perpetuate a cycle of
artificial profits and further investments; where there was no investment of new
principal, even those pre-reach-back-period transfers establishing new accounts
failed to provide any new value.
Id. at 430.
C. 	The Inter-Account Method
The Trustee selected the Inter-Account Method because it allows him to perform his
statutory duty of computing net equity to his satisfaction in reliance on the non-fraudulent entries
in BLMIS’ books and records. Like the Net Investment Method on which it is based, it nets all
cash deposits to and withdrawals from the transferor’s account, ignores the imaginary, fictitious
profits that Madoff arbitrarily conferred on the transferors, and conserves the limited customer
pool available to pay net equity claims on an equitable basis. It is not “clearly inferior,” and
indeed, is superior to the alternative championed by the Objecting Claimants. For these reasons,
his chosen method is entitled to deference.
Crediting the Objecting Claimants with the fictitious profits reflected in the transferors’
account statements essentially applies the Last Statement Method to the transferors’ accounts,
and suffers from the same shortcomings noted in the Net Equity Decision. It turns Madoff’s
fiction into a fact. Computing the balance in the transferor’s account bloated by fictitious profits
increases the transferee’s claim to the customer property pool allocable to all Madoff victims by
artificially increasing the transferee’s net equity. This result aggravates the injury to those net
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losers who did not receive transfers of fictitious profits by diminishing the amount available for
distribution from the limited pool of customer property.
D. 	The Objecting Claimants’ Arguments
1. 	The Inter-Account Method Violates the Two-Year Statute of Limitations for
Fraudulent Transfer Actions Under Bankruptcy Code § 548(a)(1)(A)
A pervasive theme in the objections is that the application of the Inter-Account Method to
transfers occurring more than two-years prior to the BLMIS SIPA liquidation proceeding (before
December 11, 2006) violates the statutory two-year reach-back period for fraudulent transfers set
forth in Code § 548(a)(1). (See Samdia Objection at 8-9; Zraick Objection at ¶¶ 31-32; B&P
Objection at 10-12; Bernfeld Objection at ¶¶ 3-4.) The Trustee could not avoid an inter-account
transfer of fictitious profits that occurred prior to the reach-back period. The argument goes that
the Inter-Account Method permits the Trustee to reach the same result simply by disregarding
the fictitious profits and crediting the transferee account in a reduced amount.
A customer can’t transfer what he doesn’t have. The Inter-Account Method does not
disturb or avoid the transfer; it merely determines the value of what was transferred based on the
net investment in the transferor’s account. The Net Investment Method approved by the Second
Circuit is aimed at computing each customer’s net equity by disregarding fictitious profits
cooked up by Madoff and allocated arbitrarily. The Inter-Account Method ascribes the same
zero value to the fictitious profits in the transferor’s account that the Net Investment Method
ascribes to those fictitious profits in the transferee’s accounts. Although the Court of Appeals
did not address any statute of limitations issues, it did not suggest that the Trustee’s disregard of
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fictitious profits in determining net equity under the Net Investment Method resulted in transfer
of BLMIS’ property or was restricted by any statute of limitations. 8
A similar argument was made and rejected in the Antecedent Debt Decision. There, the
defendants contended that the Trustee violated the statutory reach back period by netting fresh
deposits against pre-reach-back withdrawals in determining the amount Trustee can avoid under
Code § 548(a)(1)(A). Antecedent Debt Decision , 499 B.R. at 426-27. The District Court
rejected the defendants’ arguments explaining that “[j]ust as defendants are entitled to net-equity
claims for amounts of principal invested before the reach-back period that they never withdrew,
so too must withdrawals before the reach-back period be considered to determine whether a
given transfer in fact compensated a given defendant for a claim it would otherwise have had.”
Id. at 427. Here, too, the transferees received credit to their net equity claims based on deposits
made into the transferor’s account regardless of when they occurred, and their net equity claims
must be reduced by any withdrawals the transferor took no matter when he took them.
2. 	The Inter-Account Method Leads to Arbitrary Results
Some Objecting Claimants argue that the Inter-Account Method is arbitrary and unfair
because it treats economically identical transactions differently. They point out that under the
Trustee’s methodology, if customer A’s account consisted entirely of $1 million in fictitious
profits and customer A transferred $100,000 to customer B’s account, customer B would receive
no credit for the transfer. But if customer A, instead, withdrew $100,000 (during the pre-reach-
8 	Certain Objecting claimants argue that refusing to credit inter-account transfers of fictitious profits pre-date
the two-year reach back period violates their due process rights under the United States Constitution because it
allows the Trustee to avoid transfers even though this avoidance claims are time-barred. (B&P Objection at 10-12.)
This contention elevates a faulty statutory argument to the level of an equally faulty Constitutional claim for the
reasons discussed in the text.
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back period), paid the $100,000 to customer B, and customer B deposited the $100,000 into his
BLMIS account, customer B would receive credit for a $100,000 deposit. (B&P Objection at 22-
23; Apple Objection at ¶¶ 2-15; 9 Bernfeld Objection at ¶ 5; Milberg Objection at 8-11.) These
Objecting Claimants argue that the Inter-Account Method exalts form over substance and results
in arbitrary and unjust disparities based solely on the means that customers chose to convey their
funds to other customers.
This objection calls to mind the adage “where you stand depends on where you sit.” The
Objecting Claimants think it fair to increase their net equity claims and their share of the
customer property pool based on the transfer of fictitious profits. Notions of fairness, however,
tend to be subjective. Those victims who did not receive fictitious profits or whose investments
actually funded the excess withdrawals from the transferor accounts would, I suspect, view
fairness differently. In any event, the Net Equity Decision concluded that the Net Investment
Method is fairer than the Last Statement Method under the circumstances of this case, and hence,
the use of the Inter-Account Method is fairer than the Last Statement Method in computing the
net investment in the transferor’s account. See Antecedent Debt Decision, 499 B.R. at 428-29
(shifting the transferor’s fictitious profits to the transferee’s account did not morph the fictitious
profits into principal). That the transferor might have selected a different method to transfer
fictitious profits that would have escaped the reach of the Trustee’s avoiding powers is hardly a
compelling argument for giving legal effect to a Madoff fraud that the Trustee has the means to
rectify.
9 	This claimant also alludes to her payment of taxes on account of the “gains” realized in her BLMIS account
(Apple Objection at ¶ 14), but payment of taxes does not factor into the computation of fictitious profits. See Donell
v. Kowell, 533 F.3d 762, 778-79 (9th Cir.), cert. denied, 555 U.S. 1047 (2008).
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Certain Objecting Claimants also argue that the transferors were actually the initial
transferees of BLMIS, and the transferees were, therefore, subsequent transferees. (Milberg
Objection at 17.) 	They contend that when the customer directed BLMIS to transfer funds
between two BLMIS accounts, it exercised dominion and control over the amounts transferred
making it the “initial transferee,” and conclude that the transaction should be treated the same as
where a customer makes a cash withdrawal and conveys that sum directly to a third party. (Id.)
(citing Hooker Atlanta Corp. v. Hocker, 155 B.R. 332 (Bankr. S.D.N.Y. 1993) and Salomon v.
Nedlloyd, Inc.(In re Black & Geddes, Inc.), 59 B.R. 873 (Bankr. S.D.N.Y. 1986).)
The Inter-Account Method is not concerned with avoiding transfers, and hence, the
distinction between initial and subsequent transferees is irrelevant. Instead, it is intended to
compute the claimant’s net equity by stripping the fictitious profits from the calculation of the
balance in the transferor’s account. Furthermore, the Objecting Claimants’ principal authorities
are distinguishable, and do not support the argument that the transferor account was actually an
initial transferee of BLMIS.
In Hooker, the debtor had purchased an option to buy real estate and paid $500,000 into
escrow. The parties agreed that upon consummation of the sale, the escrow agent would pay the
broker from the escrow in satisfaction of the seller’s obligation. The transaction closed, and the
escrow agent paid the broker. After bankruptcy, the debtor sued the broker, among others,
charging that the payment by the escrow agent was a fraudulent transfer of the debtor’s property.
The court granted the broker’s motion for summary judgment. It explained that under
escrow law, the transfer occurred when the debtor deposited the funds into escrow. At that point,
the debtor retained only a contingent interest in the escrowed funds, and surrendered dominion
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and control. 155 B.R. at 339-40. Once the transaction closed, the seller became entitled to the
escrow, and the seller effectively transferred a portion of the escrow to the broker by authorizing
the escrow agent to pay the broker directly. Id. at 340-41. Hence, the broker was, at most, the
subsequent transferee from the seller. Id. at 341.
The Objecting Claimants did not deposit money with BLMIS pursuant to an escrow
arrangement, and did not surrender “dominion and control” over their funds. Although BLMIS
had discretionary trading authority, every investor had the right to withdraw his funds, or, as
these proceedings show, direct BLMIS to transfer the funds to another account. In fact, this
entire case centers on Madoff’s improper exercise of dominion and control over their
investments. Analogies to escrow arrangements are, therefore, inapt; BLMIS did not “transfer”
anything to the transferor account and the transferor did not become an “initial transferee” when
the transferor instructed BLMIS to make an inter-account transfer.
In Black & Geddes, the debtor, a freight forwarder, paid $21,785.13 to the defendant as
agent for a disclosed principal. The defendant transferred the funds to its principal but retained
the portion corresponding to the amount of its commission. The trustee brought a preference
action, and in the footnote cited by the Objecting Claimants, the court stated that there was no
preference because the debtor did not owe an antecedent debt to the defendant; the debt was
owed by the principal, the principal was entitled to receive the entire payment and the set off
exercised by the agent through the deduction and retention of the commission simplified the
transaction by eliminating the need of the principal to pay the agent directly. 59 B.R. at 874 n. 2.
In addition, the defendant was a mere conduit, and hence, could not be an initial transferee. Id.
at 875.
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The relevance of Black & Geddes is not apparent. The Objecting Claimants are not
arguing that any party in the transaction was a conduit. Furthermore, even if a transfer occurred
between the transferor and the transferee, no transfer occurred between BLMIS and the
transferor when the latter instructed BLMIS to make an inter-account transfer.
3. 	The Inter-Account Method Improperly Combines Accounts and Violates the
Federal Securities Laws
Citing SIPA, SIPC Series 100 Rules, and SEC regulations, several Objecting Claimants
argue that the Inter-Account Method improperly combines the transferee and transferor
accounts.10 (See Samdia Objection at 2-7; B&P Objection at 17-20; Milberg Objection at 6-8;
Melton Objection at 4-5.) The objection is wrong. Under the Inter-Account Method, the Trustee
calculates the net equity in the transferor account using the Net Investment Method and credits
the transfer up to that amount in the transferee account. The transferor and transferee accounts
remain separate, and their balances are computed separately. For example, where the transferor
withdrew more than he deposited and his account balance is actually negative, the negative
balance does not transfer to the transferee account. Instead, the value of the transfer is zero.
Certain Objecting Claimants also assert that “opening of a new account constitutes the
purchase of a security,” (B&P Objection at 21-22) (quoting Savino v. E.F. Hutton & Co., Inc.,
10 	Specifically, these claimants cite, among other statutes, (1) SIPA § 78fff-3(a)(2) (“a customer who holds
accounts with the debtor in separate capacities shall be deemed to be a different customer in each capacity . . . .”);
(2) SIPA § 78lll(11) (“. . . In determining net equity under [SIPA § 78lll(11)], accounts held by a customer in
separate capacities shall be deemed to be accounts of separate customers.”); (3) 17 C.F.R. § 300.100(b) (“[a]ccounts
held by a customer in different capacities, as specified by these rules, shall be deemed to be accounts of “separate”
customers.”); and (4) 17 C.F.R. § 300.103 (a “corporation, partnership, or unincorporated association holding an
account with a member shall be deemed to be a separate customer distinct from the person or persons owning such
corporation or comprising such partnership or unincorporated association if on the filing date it existed for a purpose
other than primarily to obtain or increase protection under the Act.”).
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507 F. Supp. 1225, 1239-40 (S.D.N.Y. 1981) (internal quotation marks and citation omitted), and
reason that transferring fictitious profits between BLMIS accounts is equivalent to opening a
new account for the purpose of purchasing securities. (Id. at 22.) It is not clear why the Inter-
Account Method violates the federal securities laws as these Objecting Claimants contend, but
their argument suffers from a more fundamental problem. The Objecting Claimants ignored the
remainder of the Savino quote that limits the rule to instances “where the [opened] account is an
investment contract.” Savino, 507 F. Supp. at 1240. SIPA’s definition of “security” includes
investment contracts, but only “if such investment contract . . . is the subject of a registration
statement with the [SEC] pursuant to the provisions of the Securities Act of 1933.” SIPA §
78lll(14). The Objecting Claimants do not contend that their BLMIS accounts were registered
with the SEC.
4. 	Public Policy Favors Finality in Business Transactions
Relying primarily on Banque Worms v. BankAmerica Int’l, 570 N.E.2d 189 (N.Y. 1991)
and CFTC v. Walsh, 951 N.E.2d 369 (N.Y. 2011), some Objecting Claimants argue that the
Inter-Account Method violates a public policy favoring the finality of business transactions.
(B&P Objection at 12-14; Milberg Objection at 11-16.) Banque Worms involved a mistaken
wire transfer that nonetheless discharged a valid debt. Expressing a concern for the finality of
business transactions, the Court of Appeals adopted the “discharge for value” rule for wire
transfers. The rule provides that if a beneficiary who “receives money to which it is entitled and
has no knowledge that the money was erroneously wired, the beneficiary should not have to
wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the
transfer of funds as a final and complete transaction, not subject to revocation.” Id. at 196.
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In Walsh, the Court applied the finality doctrine to a matrimonial settlement involving the
transfer of fraudulently obtained property to an innocent spouse. The CFTC and the SEC sought
to follow the property into the hands of the innocent spouse and froze her funds. Answering
questions certified by the Second Circuit, the New York Court of Appeals initially concluded
that assets acquired through fraud during the marriage can nonetheless constitute “marital
property” under New York Domestic relations Law. 951 N.E.2d at 375. Turning next to New
York’s “concern for finality in business transactions,” (id. (quoting Banque Worms), the Court
explained:
Ex-spouses have a reasonable expectation that, once their marriage has been
dissolved and their property divided, they will be free to move on with their lives.
To hold that the proceeds of fraud acquired by one spouse unbeknownst to the
other cannot be subject to equitable distribution or conveyed through a settlement
agreement as marital property would undermine one of the fundamental policies
underlying the equitable distribution process, namely finality. The exception
proposed by the Agencies would effectively undo court orders and settlement
agreements for an indeterminate time after the “winding up of the parties'
economic affairs” . . . and “subvert the policy of upholding settled domestic
relations ... in divorce cases.”
Id. at 375-76 (citations omitted.)11
The Inter-Account Method does not implicate New York’s public policy regarding the
finality of transactions, mistaken or otherwise, or domestic relations settlements. Instead, it
concerns the Trustee’s duty under SIPA to compute net equity based on BLMIS’ books and
records. Those records contain fraudulent bookkeeping entries which, if ignored, will inflate a
large number of net equity claims at the expense of an equally large or larger number of victims
whose net equity claims do not include any fictitious profits. Moreover, concerns for finality in
11 	The Court noted that victims of fraud could follow the property where the transferee acted in bad faith or
did not give fair consideration under N.Y. Debtor and Creditor Law § 272. Walsh, 951 N.E.2d at 378.
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general and the discharge for value rule in particular must yield to the supremacy of federal law.
SIPA directs how net equity should be computed. To the extent SIPA upsets the finality of a
bookkeeping entry crediting fictitious profits, federal law trumps any state law or doctrine. See,
e.g., First Fed. Sav. & Loan Ass’n of Lincoln v. Bevill, Bresler & Schulman, Inc. (In re Bevill,
Bresler & Schulman, Inc.), 59 B.R. 353, 378 (D.N.J. 186) (SIPA preempts state law under
Supremacy Clause), appeal dismissed, 802 F.2d 445 (3d Cir. 1986).
The Objecting Claimants’ argument is similar to the argument made to the Second
Circuit that the use of the Last Statement Method to compute net equity was necessary to protect
the “legitimate expectations” of the customers. See Net Equity Decision, 654 F.3d at 236. The
Court rejected the argument “‘because treating the fictitious paper profits as within the ambit of
the customers’ ‘legitimate expectations’ would lead to the absurdity of ‘duped’ investors reaping
windfalls as a result of fraudulent promises made on fake securities.’” Id. at 241 (quoting In re
New Times Sec. Servs., Inc., 463 F.3d at 130 (in turn quoting In re New Times Sec. Servs., Inc.,
371 F.3d 68, 87-88 (2d Cir. 2004))). Similarly, recognizing the transfer of fictitious profits in the
interest of finality would allow the Objecting Claimants to reap a windfall at the expense of the
other victims of Madoff’s fraud.
5. 	The Inter-Account Method Violates ERISA
Some Objecting Claimants contend that the Inter-Account Method violates ERISA as it
pertains to inter-account transfers involving BLMIS IRA accounts. The claimants point to the
provision in ERISA stating that the benefits under pension plans “may not be assigned or
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alienated.” (See Most Objection at 6-7;12 B&P Objection at 14-17 citing 29 U.S.C. §
1056(d)(1).) This argument fails. Initially, except as described in 29 C.F.R. § 2510.3-2(d),13
ERISA does not generally apply to IRA accounts, including those that were rolled-over from
ERISA-regulated plans. See In re Francisco, 204 B.R. 799, 801 (Bankr. M.D. Fla. 1996)
(“There is nothing in the Congressional Record or in the language of the legislation dealing with
ERISA, to indicate that ERISA was designed to include IRAs within the definition of “employee
benefit program or a plan.””).
Furthermore, ERISA contains an express provision subordinating ERISA to other federal
statutes. See 29 U.S.C. § 1144(d) (“Nothing in this subchapter shall be construed to alter,
amend, modify, invalidate, impair, or supersede any law of the United States . . . .”); see also
SIPC v. Jacqueline Green Rollover Account, No. 12 Civ. 1139 (DLC), 2012 WL 3042986, at *8
n.4 (S.D.N.Y. Jul 25, 2012) (noting ERISA’s subordination provision). These claimants have
not explained how ERISA’s anti-alienation provision trumps SIPA’s net equity calculation or
distribution procedures other than to say it does. In short, SIPA’s net equity calculation as
12 	One claimant rolled over his pension plan into his existing BLMIS IRA account, and argues that the
rollover does not constitute an inter-account transfer. Instead, it represents a pension plan distribution that he could
have taken in cash. (Most Objection at 4-6.) This is a variation of the argument made by other Objecting Claimants
that the Inter-Account Method is arbitrary because it treats economically equivalent transactions (rollover versus
withdrawal and deposit) differently. For the reasons stated in the text, supra, the result is not arbitrary or unfair.
13 	29 C.F.R. § 2510.3-2(d) states that “the terms “employee pension benefit plan” and “pension plan” shall
not include an individual retirement account . . . provided that (i) no contributions are made by the employer or
employee association; (ii) participation is completely voluntary for employees or members; (iii) the sole
involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the
program to employees or members, to collect contributions through payroll deductions or dues checkoffs and to
remit them to the sponsor; and (iv) the employer or employee organization receives no consideration in the form of
cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll
deductions or dues checkoffs.” 29 C.F.R. § 2510.3-2(d).
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approved in the Second Circuit’s Net Equity Decision trumps any affect ERISA might have on
the net equity calculation.
The citation to § 5205(d)(1) of New York’s Civil Practice Law and Rules is also
inapposite. (B&P Objection at 17.) Section 5205(d)(1) exempts certain trust income from
judgment execution where the trust property is exempt from execution under CPLR § 5205(c).14
Here, the Trustee is not seeking to enforce a judgment against a trust or trust income. Rather, the
Objecting Claimants are seeking to enforce their claims against the pool of customer property.
The Trustee’s calculation of net equity using the Inter-Account Method does not violate New
York’s exemptions relating to trusts and trust income.
14 	CPLR § 5205(d)(1) provides:
(d) Income exemptions. The following personal property is exempt from application to the
satisfaction of a money judgment, except such part as a court determines to be unnecessary for the
reasonable requirements of the judgment debtor and his dependents:
1. ninety per cent of the income or other payments from a trust the principal of which is exempt
under subdivision (c); provided, however, that with respect to any income or payments made from
trusts, custodial accounts, annuities, insurance contracts, monies, assets or interest established as
part of an individual retirement account plan or as part of a Keogh (HR-10), retirement or other
plan described in paragraph two of subdivision (c) of this section, the exception in this subdivision
for such part as a court determines to be unnecessary for the reasonable requirements of the
judgment debtor and his dependents shall not apply, and the ninety percent exclusion of this
paragraph shall become a one hundred percent exclusion. . . .
With some exceptions, CPLR § 5205(c)(1) provides that “all property while held in trust for a judgment
debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the
judgment debtor, is exempt from application to the satisfaction of a money judgment,” and § 5205(c)(2) states that
certain trusts and plans that qualify under the Internal Revenue Code, including IRAs, shall be considered a trust
created by someone other than the judgment debtor.
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6. 	The Bankruptcy Court Lacks Constitutional Authority to Render Final
Judgments
Citing Stern v. Marshall, 131 S.Ct. 2594 (2011), one Objecting Claimant asserts that the
Court lacks jurisdiction to render a final determination on the merits of any dispute between the
Trustee and a Madoff victim. (Bernfeld Objection at ¶ 8.) The argument is patently wrong. A
creditor who files a proof of claim submits himself to the Court’s jurisdiction over the claims
allowance process. See Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re
Manville Forest Prods. Corp.), 896 F.2d 1384, 1389 (2d Cir. 1990) (creditor’s filed claim
“submitted itself to the equitable power of the bankruptcy court to disallow its claim”). The
filing of a customer claim in a SIPA proceeding has the same jurisdictional effect. Picard v.
Stahl, 443 B.R. 295, 310 (Bankr. S.D.N.Y. 2011) (citing Keller v. Blinder (In re Blinder
Robinson & Co., Inc.), 135 B.R. 892, 896–97 (D.Col.1991)), aff’d, No. 11 Civ. 2392 (AKH),
2011 WL 7975167 (S.D.N.Y. Dec. 15, 2011), aff’d, 512 F. App’x. 18 (2d Cir. 2013). Moreover,
the Court has authority to finally determine all issues required to be decided as part of the claims
allowance process. See Stern, 131 S.Ct. at 2618 (“Congress may not bypass Article III simply
because a proceeding may have some bearing on a bankruptcy case; the question is whether the
action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims
allowance process.”).
Here, the Trustee proposes to use the Inter-Account Method to compute the Objecting
Claimant’s net equity claim, and his computation is directly related to the allowance of that
claim. The Court may enter a final judgment regarding the allowance of the Objecting
Claimant’s claim, and the decision on the Motion is part and parcel of the claims allowance
process.
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7. 	The Trustee Cannot Disallow Transfers that Occurred Prior to 2001
BLMIS changed from a sole proprietorship to a limited liability company on January 1,
2001. (See Declaration of Kevin H. Bell, dated June 6, 2014 (“Bell Declaration”), Ex. B (ECF
Doc. # 6928).) Certain claimants argue that the Inter-Account Method cannot apply to pre-2001
transfers. They reason that BLMIS was not a member of SIPC before then, (B&P Objection at
9), and it would be “patently improper” “to reduce retroactively a recipient’s BLMIS account by
withdrawals and transfers made from a non-BLMIS account and at a time which predated the
very formation of BLMIS.” (Bernfeld Objection at ¶ 6.) They do not make the same argument
for ignoring deposits made before 2001.
Madoff has always been a member of SIPC, and the incorporation of BLMIS as a limited
liability company continued his business without change. As of January 19, 1960, Bernard L.
Madoff, a sole proprietorship, later known as BLMIS, was registered as a broker-dealer with the
SEC. (See Bell Declaration, Ex. A.) On December 30, 1970, when SIPA was enacted, he
automatically became a member of SIPC. See SIPA § 78ccc(a)(2)(A) (stating that all brokers or
dealers registered under 15 U.S.C. §78o(b) are required to be SIPC members). The Form BD-
Amendment filed on January 12, 2001, stated that “[e]ffective January 1, 2001, predecessor will
transfer to successor all of predecessor’s assets and liabilities related to the predecessor’s
business. The transfer will not result in any change in ownership or control.” (Bell Declaration,
Ex. B at 9-10.) In addition, the amendment checked a “yes” box in answer to a question asking
whether the applicant is “succeeding to the business of a currently registered broker-dealer.”
(Bell Declaration, Ex. B at 5.) Thus, nothing has changed since 1960 except for the business
form that Madoff used to conduct his Ponzi scheme.
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Furthermore, ignoring the change of business form is consistent with the Net Equity
Decision. Fictitious profits created by Madoff, the individual, are still fictitious profits in an
account maintained by BLMIS. Madoff’s incorporation did not transmute those fictitious profits
into principal.
8. 	A Transferee’s Net Equity Claim Should not be Affected by Withdrawals Made
by Other Beneficiaries in a Shared Account
Two Objecting Claimants rolled over investments that had been maintained in accounts
that included multiple beneficiaries. (Ross Objection; Sagor Objection.) As a result of the
withdrawals by the other beneficiaries, the accounts were net winners at the time of the rollover,
and hence, the transferee received no credit under the Inter-Account Method. Brian Ross had
invested in his father’s account, and the two maintained separate records of their deposits and
withdrawals. In 2004, Ross opened his own BLMIS account and his account received transfers
from his father’s account. The Trustee discounted the transfers based on his calculation of the
net equity in the father’s account at the time of the transfers ignoring the fact that Ross was a net
loser in the amount of $935,000 vis-à-vis his father’s account. Similarly, Elliot Sagor was a
participant in his law firm’s profit sharing plan account maintained at BLMIS and rolled his
interest over into a personal BLMIS account. Although he was a net loser as a participant in his
law firm’s BLMIS account, the firm was a net winner because withdrawals by other participants
exceeded the total amount deposited into the account. Hence, the Trustee recalculated the
rollover at $0.
Each of these Objecting Claimants essentially contends that their deposits into and
withdrawals from the transferor account should be treated separately for the purpose of
computing their net equity from all other deposits and withdrawals affecting the transferor
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account. This is another way of arguing that they should be treated as separate customers.
Several decisions have addressed the question and denied customer status to investors in a fund
or account that, in turn, invested in BLMIS. See, e.g., Kruse v. SIPC (In re BLMIS), 708 F.3d
422, 426-27 (2d Cir. 2013) (investors in feeder funds that invested with BLMIS were not
customers of BLMIS); SIPC v. Jacqueline Green Rollover Account, 2012 WL 3042986, at *13
(participants in ERISA-regulated plan that invested with BLMIS were not customers of BLMIS);
In re BLMIS, 515 B.R. 161, 169-70 (Bankr. S.D.N.Y. 2014) (same). Nevertheless, as these
decisions highlight, the question of whether someone is a SIPA customer is a factual one peculiar
to the particular Objecting Claimant. This issue is beyond the scope of the Motion which was
limited to the “legal issue raised by objections to the methodology used to calculate the amount
transferred between BLMIS accounts in connection with customer claims.” (Scheduling Order
at 2.)15 But absent proof of separate customer status, the foregoing authorities demonstrate that
the net investment is computed by netting all deposits into and withdrawals from the customer’s
account regardless of the number or the identity of the beneficiaries, or the amount that each
beneficiary deposited or withdrew.
E. 	Issues Outside the Scope of the Motion
Many Objecting Claimants make arguments specific to their claims which are outside the
defined scope of the Motion. (See, e.g., Most Objection at 7-8 (requesting discovery regarding
inter-account transfers); Zraick Objection at ¶¶ 41-43 (arguing that the Motion violates spirit of
15 	Except for their possible status as customers, the Objecting Claimants offer no authority beyond appeals to
equity for their arguments that the Trustee must determine the net equity in a customer’s shared account on a
beneficiary by beneficiary basis.
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Trustee’s mediation of their claims); Elins Objection at ¶¶ 9-20 (asserting that he was not party
to an inter-account transfer, and instead, closed one BLMIS account and subsequently opened
another account one year later); Bernfeld Objection at ¶ 7 (requesting an evidentiary hearing in
connection with claims); Westport Objection at 2 (discussing facts surrounding claim); Melton
Objection at 3-4 (alleging BLMIS failed to open a separate account as instructed by claimant).)
These objections will be addressed in subsequent proceedings relating to the specific claims.
Finally, the Trustee and SIPC argued that the customers bear the burden of proving the
amount of their claims. (Trustee Memo at 22-23; SIPC Memo at 5-7; Trustee Reply at 16-20;
SIPC Reply at 1-4.) A few of the Objecting Claimants responded disagreeing with the Trustee’s
and SIPC’s position. (See Zraick Objection at ¶¶ 33-40; Milberg Objection at 24-25.) The Court
declines to reach this issue at this time for two reasons. First, it is beyond the scope of the
Scheduling Order which was limited to the appropriateness of the Trustee’s methodology.
Second, the burden of proof question is not limited to inter-account transfers. The Court will
deal with this question either pursuant to an omnibus motion that will allow all claimants to
participate or on a case-by-case basis.
In conclusion, the Motion is granted, and the Court approves the Inter-Account Method,
to wit, calculating the net equity in a transferor account at the time of an inter-account transfer
under the Net Investment Method and crediting the inter-account transfer up to the amount of the
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transferor’s recalculated net equity. The Court has considered all of the objections, and to the
extent not expressly addressed, concludes that they lack merit. Settle order on notice.
Dated: New York, New York
December 5, 2014
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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APPENDIX A
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
David J. Sheehan, Esq.
Jorian Rose, Esq.
Amy E. Vanderwal, Esq.
Seanna R. Brown, Esq.
Bik Cheema, Esq.
Nicholas J. Cremona, Esq.
Of Counsel
Attorneys for Irving H. Picard, Trustee for the SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC
SECURITIES INVESTOR PROTECTION CORPORATION
805 Fifteenth Street, N.W., Suite 800
Washington, DC 20005
Josephine Wang, Esq.
Kevin H. Bell, Esq.
Lauren T. Attard, Esq.
Of Counsel
Attorneys for Securities Investor Protection Corporation
LAW OFFICES OF JOEL L. HERZ
3573 E. Sunrise Drive, Suite 215
Tucson, Arizona 85718
Joel L. Herz, Esq.
Of Counsel
Attorneys for Samdia Family, LP
STIM & WARMUTH, P.C.
2 Eighth Street
Farmingville, New York 11738
Paula J. Warmuth, Esq.
Of Counsel
Attorneys for Michael Most
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HUNTON & WILLIAMS LLP
200 Park Avenue, 53 rd Floor
New York, New York 10166
Peter S. Partee, Sr., Esq.
Richard P Norton, Esq.
Robert A. Rich, Esq.
Of Counsel
Attorneys for Edward A. Zraick, Jr., Nancy Zraick, Patricia DeLuca
and Karen Rich
AKERMAN LLP
666 Fifth Avenue, 20th Floor
New York, New York 10103
Susan Balaschak, Esq.
Michael I. Goldberg, Esq.
Of Counsel
Attorneys for the Mittlemann Family Foundation
DUANE MORRIS LLP
1540 Broadway
New York, New York 10036
Gerard S. Catalanello, Esq.
Patricia H. Piskorski, Esq.
Of Counsel
Attorneys for Brian Ross, Esq.
KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.
551 Fifth Avenue, 18th Floor
New York, New York 10176
David Parker, Esq.
Matthew J. Gold, Esq.
Of Counsel
Attorneys for Lawrence Elins
BECKER & POLIAKOFF LLP
45 Broadway, 8th Floor
New York, New York 10006
Helen Davis Chaitman, Esq.
Of Counsel
Attorneys for Aaron Blecker, Adele Shapiro, Angela Tiletnick, Barbara Engel, Barbara Kotlikoff
Harman, Ben Heller, Benjamin T. Heller Irrevocable Trust, Beth P. Feldman as Trustee, Beth P.
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Feldman as Trustee Dtd 11/15/82, Bruce N. Palmer, Carol Fisher, Carol Kamenstein, Chalek
Associates LLC, David Chalek, Frances Reiss, Isabel Chalek, Jessica Decker, John Tzannes
Trust, Mitchel Chalek, Morton Chalek, Peter Tzannes, Richard Mark Chalek, Robin Tzannes,
Laura Hallick, as participant in Daprex Profit Sharing Plan and 401K Plan, David Drucker,
David Shapiro, Hilda Drucker, Marilyn Komarc, Ptr of David Shapiro Nombrec, Myra M.
Levine, Naomi Karp, Elaine Langweiler, Frederick H. Mandel (Partner), Irving M. Sonnenfeld,
Deborah Shapiro, Edwin Michalove, Elaine R. Schaffer, Estate of Gabriel Friedman c/o Richard
Friedman Executor, Boyer H. Palmer, Fern C. Palmer and Boyer H. Palmer, Ttees Fern C.
Palmer Rec Tst, Fern C. Palmer, Frieda Low, Glenn Rechler, Gunther Unflat, Herbert Barbanel
& Alice Barbanel NT Wros, Jonathan Schwartz as Trustee FBO Nancy M. Riehm, Keith
Schaffer, Kenneth M. Kohl & Myrna Kohl, Kurt C. Palmer, Theresa R. Ryan, Marjorie Forrest,
Martin R. Harnick, Steven P. Norton, NTC & Co. FBO Denis Casteli (19988), Manuel O. Jaffe
MD, Richard M. Friedman, NTC & Co. FBO Robert Halio (26849), Robert Yaffe, Mishkin
Family Trust, NTC & Co. FBO Adele Fox (111257), NTC & Co. FBO Jeffrey Shankman
(111752), Marsh Peshkin Ira, NTC & Co. FBO Steven C. Schupak (096898), Blake Palmer, Bret
Palmer, Callie A. Ostenson/Murray, Dana Lefavor, Heidi Holmers, Kelly Bunch, Megan Bunch,
Oscar Palmer, Palmer Family Trust, Ryan Murray, Sophia Palmer, Pamela K. Marxen, Philip E.
Miller, Robert K. Low, Roberta Schwartz, Robin L. Warner & Jon Warner, Rona Mast, Sage
Realty c/o Malcolm Sage, Sandy Sandler, Sloan G. Kamenstein, Steven J. Andelman, Susan R.
Andelman, Benjamin Rechler Trust c/o Mitchell Rechler, The Gaba Partnership, Willi Rechler
Trust c/o Mitchell Rechler, Theresa R. Ryan and Lawrence J. Ryan Trustees, Timothy Shawn
Teufel and Valerie Anne Teufel, Tracy D. Kamenstein, WDG Associates Inc Retirement Trust
GREENE ESPEL PLLP
222 S. Ninth Street, Suite 2200
Minneapolis, Minnesota 55402
Lawrence M. Shapiro, Esq.
Of Counsel
Attorneys for Marion E. Apple
BERNFELD, DEMATTEO, LLP
600 Third Avenue, 15th Floor
New York, New York 10016
Jeffrey Bernfeld, Esq.
Of Counsel
Attorneys for Alan Winters, Edith Schur, Frederick Konigsberg,
Susan Konigsberg, Harvey L. Werner Revocable Trust U/A/D 8/31/82,
Jeffrey R. Werner 11/1/98 Trust, Manfred Franitza, Margrit Franitza,
Marital Trust No. 1 created under the Harvey L. Werner Revocable
Trust U/A/D 8/31/82 and Werner Foundation
MORGAN, LEWIS & BOCKIUS LLP
101 Park Avenue
New York, New York 10178
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Bernard I. Garbutt, III, Esq.
Of Counsel
Attorneys for Kostin Company
WILLKIE FARR & GALLAGHER LLP
787 Seventh Avenue
New York, New York 10019
Joseph T. Baio, Esq.
Todd G. Cosenza, Esq.
Of Counsel
Attorneys for Westport National Bank, a division of Connecticut
Community Bank, N.A.
ELLIOT G. SAGOR, ESQ., Pro Se
470 Park Avenue South, 10 th Floor North
New York, New York 10016
MILBERG LLP
One Pennsylvania Plaza
New York, New York 10119
Matthew Gluck, Esq.
Matthew A. Kupillas, Esq.
Jennifer L. Young, Esq.
Joshua E. Keller, Esq.
Of Counsel
Jointly with Seeger Weiss LLP, attorneys for Jan Marcus Capper, Gary Albert, Jerry Guberman
Trust Dated 12/23/93, Harold A. Thau (IRA), John Denver Concerts Inc. Pension Plan Trust,
Joseph Sloves (IRA), Laurence E. Leif, Onesco International, Ltd., Potamkin Family Foundation
I, Inc., June Pollack T/O/D to Keith L. Pollack and Cary G. Pollack, Linda Berger Howard
Berger J/T WROS, Judith Rock Goldman, Anita Karimian, Gary L. Harnick (IRA), William M.
Wiessner Family Trust, /Sheila A. Woessner Family Trust TIC, Jonathan Michaeli (IRA), The
Adina Michaeli Revocable Trust, Trudy Schlachter, Gerald Blumenthal (IRA), Steven v. Marcus
Separate Property Marcus Family Trust, Richard Roth (IRA), Richard Roth, Lynda Roth,
Michael Roth, Michael Roth (IRA), Florence Roth, Lester Kolodny (IRA), P. Charles Gabriele
(IRA), Delia Gail Rosenberg, Aspen Fine Arts Co., Elizabeth Harris Brown, The Douglas G.
Brown Revocable Trust, Do Stay, Inc., Elbert R. Brown, Trustee, Viola Brown, Trustee U/T/D
12/29/88, Lawrence I Brown and Barbara Brown J/T WROS, Lewis R. Frank, Martin Gelman &
Michael Dancer JT/WROS, Barbara Harris, Deborah Katz, Jack Kaufman and Phyllis Kaufman
J/T WROS, Michael Mathias and Stacey Mathias J/T WROS, Katharine Brown Trust, Barbara
Schlossberg, Bernard Seldon, Jonathan Sobin, Leila F. Sobin
SEEGER WEISS LLP
77 Water Street, 26th Floor
New York, New York 10005
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Stephen A. Weiss, Esq.
Parvin K. Aminolroaya, Esq.
Of Counsel
Attorneys for Melvyn Weiss and Barbara Weiss JTWROS
K&L GATES LLP
1601 K Street NW
Washington, DC 20006
Richard A. Kirby, Esq.
Laura K. Clinton, Esq.
Of Counsel
Attorneys for Joel A. and Kerry E. Blum, Jt. Owners,
Norman J. Blum Living Trust
DENTONS US LLP
1221 Avenue of the Americas
New York, New York 10020
Carol Neville, Esq.
Of Counsel
Attorneys for Davina Greenspan & Lori Friedman, Toby Hobish (IRA),
Alvin Gindel Revocable Trust Agreement, Estate of Helen Shurman,
Lapin Children LLC, Laura Guggenheimer Cole, Norma Shapiro (IRA),
Norma Shapiro Trustee, Norma Shapiro, Barbara Berdon, Epic
Ventures LLC, David R. Markin 2003 Trust, David Markin, Cecile Rudnick
LAX & NEVILLE LLP
1450 Broadway, 35th Floor
New York, New York 10018
Barry R. Lax, Esq.
Brian J. Neville, Esq.
Of Counsel
Attorneys for Mary Albanese IRA, Dominick Albanese Trust Account B, David Belosa & Bari
Belosa J/T WROS, Gordon Bennet 1988 Trust, Watershed Foundation, Harriet Bergman,
Leonard Bergman Credit Shelter Trust FBO Harriet Bergman, Adriane Biondo, Audrey and
Robert Orenbach, Mildred Wang, Shelley Roth, Ira Roth, Alexander Roth, Evan Roth, Jordan
Roth, Brow Family Partnership, Carol Bulman (IRA), William Jay Cohen, Trustee, Elinor P.
Cohen Trustee Dated 11/14/89 FBO Eleanor P. Cohen, Coronado S A, Jacob Davis and Marilyn
Davis, Trustees, Jacob Davis IRA, Marilyn Davis & Jacob Davis ttees UTA by Marilyn Davis,
Karl Drobitsky, Richard Eaton IRA, Fammad LLC, Myron Feuer IRA, Peds Retirement Trust,
PJFN Investors LP, Selma Fox IRA, Jerome Fox IRA, Fox Family Partnership LLC, Accu Plan
Employees’ Profit Shareing Trust, Constance Friedman, Allan Robert Greene, Julia Greene,
Allen Robert Greene as custodian, Bruce Hector MD, Jay M. Izes IRA, Dori Kamp, Howard L.
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Kamp, Abe Kleinman IRA, Bonnie Kansler IRA, Dale Kleinman, Marjorie Kleinman, Matthew
Kansler, Deborah Kaye, Elliot Kaye, Lawrence Kaye Trustee Evelyn Kaye Trust FBO Judith
Knight et al., Lawrence Kaye and Susan Kaye Trustees, Lawrence Kaye IRA, Paul Kaye, Robert
Kehlmann Trustee, Trust FBO Ephraim Kehlmann U/A DTD 12/30/72, Robert Kehlmann and
Diana Tosto Kehlmann, Robert Kehlmann Trustee Tst UW William Kehlmann 1/23/65, Zipora
Wagreich Trustee U/A Dtd 11/6/90, Donald S. Kent, Madeline R. Kent Living Trust, Sheila
Kolodny, The Korn Family Limited Partnership, Robert Korn Revocable Trust, Donna Lefkowitz
Revocable Trust dtd 12/13/04, Laurence E. Leif IRA, Rose Less, Ruth Mechaneck, The
Mechaneck Rev Liv Trust DTD 5/11/94, Harriet K. Meiss Trust, morse Family Foundation Inc.,
Linda Morese Revocable Trust dated 6/18/93, John Maccabee & Sherry More Maccabee Living
Trust Dated 1/24/97, The HO Marital Appointment Trust, Michael Oshry, Suzanne Oshry &
Meryl Evans Co-Trustees, White Orchard Investments, Ltd, Harry Pech and Jeffry Pech J/T
WROS, Lanny Rose, JIR Enterprises LLC, Kenneth E. Roth, Elaine C. Schlessberg Trust Dated
8/26/2004, Norman Schlessberg Trust/Trustee, Robert L. Schwartz 2004 Revocable Trust
Agreement, Anne Squadron IRA, Anne Strickland Squadron, Alana D. Gold, Alexander
Squadron, Anna Rothwell, Arthur and Eleanor Squadron, William Squadron and Debra Lagapa,
Catherine Shea, Daniel Squadron, Elena Prohaska Glinn, Elizabeth Shea, Eric Grode and
Elizabeth Harre, Sarah B. Harre, Swing and David Harre, Jacob Squadron, Justin Shea, Laurel
Squadron, Michael and Marcy Squadron, Neill P. Squadron, Pasquale and Marianna Bernardin,
Peter and Carol Gold, Richard Squadron and Theodosia Price, Robert Vas Dias and Margaret
Butcher, Samuel Squadron, Sarah D. Gold, Seth and Elizabeth Squadron, Vanessa Gang, Angelo
Viola, Angelo Viola IRA, Laura Weill, Bette Wilkes, Jennie Wilkes, Sanuel Wilkes, Stephen
Wilkes, Alan Goldstein IRA, Stephen Weisser, Barbara L. Larid c/o Roger Williams, Roger
Williams and Miriam L. Williams
KACHROO LEGAL SERVICES P.C.
245 Park Avenue, 39 th Floor
New York, New York 10167
Gaytri D. Kachroo, Esq.
Of Counsel
Attorneys for The Diana Melton Trust, Dated 12/05/05
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