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Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

United States Bankruptcy Court for the Southern District of New York

October 18, 2019, Decided

Adv. Proc. No. 08-01789 (SMB) (Substantively Consolidated) Adv. Proc. No. 10-05345 (SMB)

Opinion

 [*183]  SIPA LIQUIDATION

MEMORANDUM DECISION DENYING TRUSTEE'S MOTION FOR LEAVE TO FILE AMENDED COMPLAINT

STUART M. BERNSTEIN

United States Bankruptcy Judge

 [*184]  Plaintiff Irving H. Picard ("Trustee"), the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA") seeks to recover $343,084,590 in subsequent transfers made to Defendants Citibank, N.A. ("Citibank") and Citicorp North America, Inc. ("Citicorp") made by a BLMIS feeder fund.1 He has moved ("Motion") for leave to file and serve a Proposed Amended Complaint, dated Dec. 14, 2018 ("PAC")2 (ECF Doc. # 150-1).3 Defendants oppose the Motion. (Memorandum of Law in Opposition toTrustee's Motion for Leave to File an Amended Complaint, filed Mar. 29, 2019 ("Opposition") (ECF Doc. # [**2]  158).) For reasons that follow, the Motion is denied.

BACKGROUND

The background information is derived from the well-pleaded factual allegations of the PAC and other information the Court may consider in determining whether the pleading is legally sufficient.

A. The Ponzi Scheme

At all relevant times, Bernard Madoff operated the investment advisory arm of BLMIS as a Ponzi scheme. (¶ 79.)4 Beginning in 1992, Madoff told investors that he employed the "split-strike conversion" strategy ("SSC Strategy"), under which BLMIS purported to purchase a basket of stocks intended to track the S&P 100 Index, and hedged the investments by purchasing put options and selling call options on the S&P 100 Index. (¶¶ 85, 87.) In reality, BLMIS never purchased any securities on behalf of its investors and sent monthly statements to investors containing falsified [**3]  trades typically showing fictitious gains. (¶¶ 85, 86.) All investor deposits were commingled in a JPMorgan Chase Bank account held by BLMIS, and the funds were used to satisfy withdrawals by other investors, benefit Madoff and his  [*185]  family personally, and prop-up BLMIS's proprietary trading department. (¶ 85.)

The BLMIS Ponzi scheme collapsed when redemption requests overwhelmed the flow of new investments, (¶ 101), and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008 ("Filing Date"). (¶ 17.) 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 Securities Investor Protection Corporation ("SIPC") asserting that BLMIS's customers needed the protections afforded by SIPA. (¶¶ 17, 18.) On December 15, 2008, the District Court granted SIPC's application, appointed the Trustee and his counsel, and removed the SIPA liquidation to this Court. (¶ 19.)

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608 B.R. 181 *; 2019 Bankr. LEXIS 3301 **; 67 Bankr. Ct. Dec. 230; 2019 WL 5290849

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.In re: BERNARD L. MADOFF, Debtor.IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. CITIBANK, N.A., CITICORP NORTH AMERICA, INC., and CITIGROUP GLOBAL MARKETS LIMITED, Defendants.

Subsequent History: As Corrected October 28, 2019.

Prior History: Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC (In re Madoff), 590 B.R. 200, 2018 Bankr. LEXIS 1648 (Bankr. S.D.N.Y., June 5, 2018)

CORE TERMS

trading, Indemnity, options, Memo, funds, due diligence, allegations, blindness, counterparties, returns, renew, high probability, email, good faith, loans, subsequent transfer, general partner, invested, confirm, deliberate, transfers, customer, willful, Affiliates, Banks, original complaint, subsidiary, investors, discrepancies, implausible

Civil Procedure, Pleadings, Amendment of Pleadings, Leave of Court, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Bankruptcy Law, Estate Property, Avoidance, Transferee Liabilities & Rights, Responses, Affirmative Defenses, Evidence, Burdens of Proof, Allocation