565 B.R. 510
S.D.N.Y.2017Background
- Bernard Madoff ran BLMIS as a Ponzi scheme; Irving Picard was appointed Trustee in the SIPA liquidation and pursued extensive avoidance actions to recover customer property.
- Trustee settled with the Picower Parties for $7.2 billion (return to estate and governmental forfeiture) and obtained a permanent injunction (2011) barring duplicative or derivative claims by BLMIS customers against the Picower Releasees.
- Multiple BLMIS customers repeatedly attempted to sue the Picower Parties; courts enjoined prior suits (Fox I/II, Goldman I/II) as derivative or duplicative of Trustee claims because they alleged generalized harms to all customers.
- The Goldman Parties filed Goldman III, asserting a Section 20(a) control-person claim against Jeffry Picower based on new allegations: (1) Picower “propped up” the Ponzi scheme via secret loans to BLMIS, and (2) Picower agreed to be listed as a counterparty on fabricated options trades, allegedly causing dissemination of false financial information to customers.
- The bankruptcy court enjoined Goldman III as barred by the Permanent Injunction; the district court affirmed, holding Goldman III asserted a general, derivative claim that injured the estate and all creditors alike rather than a particularized claim traceable to the plaintiffs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Goldman III pleads a non-derivative Section 20(a) claim escaping the Permanent Injunction | Goldman: propping‑up loans and counterparty role are distinct, particularized conduct causing direct misrepresentations to investors and thus a bona fide Section 20(a) claim | Trustee/Picower: allegations are functionally the same injuries that pushed BLMIS into bankruptcy and are therefore derivative and barred by the Permanent Injunction | Held: claim is general/derivative; enjoined under the Permanent Injunction |
| Whether allegations that conduct did not occur in Picower’s BLMIS accounts avoids derivative-bar | Goldman: conduct beyond mere withdrawals shows different, non-derivative wrongdoing | Defendants: substance controls over form; allegations still amount to steps that effectuated fraudulent withdrawals and harmed all investors equally | Held: immaterial; conduct still tied to the Ponzi scheme and derivative |
| Whether Hirsch and in pari delicto doctrines support allowing individual suits | Goldman: Hirsch suggests investors (not trustee) may have exclusive rights to particularized misrepresentation claims | Defendants: Hirsch is distinguishable because Goldman III lacks particularized allegations that Picower directly made representations to investors; hypothetical in pari delicto analysis doesn’t help plaintiffs | Held: Hirsch distinguishable; in pari delicto/JPMorgan do not revive Goldman’s claims |
| Whether conclusory “linking” allegations suffice to show particularized injury | Goldman: need not plead direct misrepresentations to state Section 20(a) | Defendants: linking allegations are conclusory and not tied to specific acts directed at plaintiffs or class members | Held: linking allegations are conclusory; plaintiffs failed to plead particularized conduct |
Key Cases Cited
- St. Paul Fire & Marine Ins. Co. v. PepsiCo., 884 F.2d 688 (2d Cir. 1989) (distinguishes general claims to the estate from particularized creditor claims)
- In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81 (2d Cir. 2014) (Marshall) (defines derivative v. particularized claims in BLMIS context)
- Picard v. JPMorgan Chase & Co., 721 F.3d 54 (2d Cir. 2013) (JPMorgan) (trustee standing and in pari delicto principles limiting trustee suits)
- Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) (distinguishes investor claims based on defendants’ direct role in preparing materials relied upon by investors)
- Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) (in pari delicto principle that one wrongdoer may not recover against another)
- Fox v. Picard, 848 F. Supp. 2d 469 (S.D.N.Y. 2012) (Fox I) (bankruptcy injunction appropriate where claims allege generalized harm to all BLMIS customers)