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Picard v. Legacy Capital Ltd. (In re Bernard L. Madoff Inv. Sec. LLC)

United States Bankruptcy Court for the Southern District of New York

March 14, 2016, Decided

Case No. 08-99000 (SMB), Adv. Proc. No. 08-01789 (SMB), Adv. P. No. 10-05286 (SMB)





United States Bankruptcy Judge:

Defendants Legacy Capital Ltd. ("Legacy") and Khronos LLC ("Khronos," and together with Legacy, the "Defendants") have each moved to dismiss the Amended Complaint, dated July 2, 2015 (ECF Doc. # 112) filed by Irving H. Picard (the "Trustee"), the trustee of the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. §§ 78aaa, et seq. The Amended Complaint seeks to avoid and recover approximately $213 million in initial transfers made to Legacy and approximately $6.6 million in subsequent [**2]  transfers made to Khronos. For the reasons that follow, Legacy's motion to dismiss is granted except as to the portion of Count I seeking to avoid and recover fictitious profits transferred to Legacy within two-years of the BLMIS filing date, and Khronos' motion to dismiss is granted in its entirety.


A. The Ponzi Scheme1

The background information is taken from the well-pleaded factual allegations of the Amended Complaint and other information that the Court may consider on a motion to dismiss for failure to state a claim. The allegations are sometimes at odds with the documents they purport to describe, and the content of the documents is examined in more detail later in this opinion.

Beginning in the 1990s, Madoff outwardly ascribed the consistent investment success of BLMIS' investment advisory business to the "split-strike conversion" ("SSC") investment strategy. (¶ 20.)2 Madoff generally indicated that BLMIS would invest its investors' funds in a basket of common stocks within the Standard & Poor's 100 Index ("S&P 100"), [**3]  which was designed to correlate with the movement of the S&P 100. (¶ 20.) As a hedge, BLMIS would supposedly sell call options and buy put options on the S&P 100; this was commonly referred to as a "collar." (¶ 20.) Madoff claimed that he would carefully time purchases and sales to maximize value, and consequently, customer funds would intermittently be out of the market. During those times, Madoff claimed that the funds were invested in U.S. Treasury securities or mutual funds invested in treasury bills. (¶ 22.)

 [*18]  None of this actually happened. BLMIS never purchased or sold securities, and instead, used the money invested by customers to make distributions to other BLMIS customers. (¶ 24.) On December 11, 2008 (the "Filing Date"), Madoff was arrested for criminal violations of federal securities laws, including securities fraud, investment adviser fraud, and mail and wire fraud. (¶ 7.) The Securities and Exchange Commission ("SEC") contemporaneously commenced an action in the United States District Court for the Southern District of New York, and that action was consolidated with an application by the [**4]  Securities Investor Protection Corporation ("SIPC") alleging that BLMIS could not meet its obligations to securities customers as they came due and its customers needed the protections afforded by SIPA. (¶¶ 7-8.) District Judge Stanton granted SIPC's application to appoint the Trustee and his counsel and remove the case to this Court. (¶ 9.)

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548 B.R. 13 *; 2016 Bankr. LEXIS 777 **

In re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, LEGACY CAPITAL LTD. and KHRONOS LLC, Defendants.

Subsequent History: Summary judgment denied by Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC, 2019 Bankr. LEXIS 1874 (Bankr. S.D.N.Y., June 25, 2019)

Prior History: Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 546 B.R. 284, 2016 Bankr. LEXIS 519 (Bankr. S.D.N.Y., Feb. 17, 2016)


trades, options, Transfers, email, volume, funds, account statement, confirmations, blindness, allegations, invested, subsequent transfer, actual knowledge, good faith, red flag, purported, fraudulent transfer, customer, motion to dismiss, accounting services, documents, profits, pricing, investors, monthly, hedge, district court, due diligence, fictitious, dividends

Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Evidence, Judicial Notice, Adjudicative Facts, Adjudicative Facts, Public Records, Bankruptcy Law, Avoidance, Fraudulent Transfers, Intent, Estate Property, Limitations on Trustee Powers, Securities Law, Investment Advisers, Adviser, Broker & Dealer Liability, Value, Securities Exchange Act of 1934 Actions, Investment Schemes, Ponzi Schemes, Pleadings, Heightened Pleading Requirements, Fraud Claims, Transferee Liabilities & Rights, Complaints, Requirements for Complaint, Responses, Affirmative Defenses, Burdens of Proof, Allocation, Affirmative Defenses, Burdens of Proof, Contracts Law, Personal Property, Bona Fide Purchasers, Fraudulent Transfers, Governments, Legislation, Interpretation