In re: Bernard L. Madoff Investment Securities LLC
773 F.3d 411
| 2d Cir. | 2014Background
- Bernard L. Madoff Investment Securities LLC (BLMIS) ran a Ponzi scheme through its advisory unit: customers were promised securities trading (a split‑strike strategy) but no actual trades occurred; customer deposits were commingled and fictitious account statements were issued.
- When customers requested withdrawals (including fictitious profits), BLMIS paid cash from the commingled account; some customers withdrew more than they invested.
- Irving H. Picard (Trustee) under SIPA sued to claw back those net‑win withdrawals as transfers that "would have been customer property" absent the transfers, invoking Bankruptcy Code avoidance powers (§§ 548, 544) and New York fraudulent conveyance law.
- Defendants moved to dismiss under 11 U.S.C. § 546(e), which bars avoidance of certain securities‑related transfers made by a stockbroker (transfers "in connection with a securities contract" or "settlement payment[s]"); § 546(e) does not bar claims of actual fraud under § 548(a)(1)(A).
- The district court (Rakoff, J.) held § 546(e) barred the Trustee’s constructive‑fraud and state‑law clawback claims because (1) the BLMIS account documents constituted "securities contracts" and (2) the withdrawal payments were "in connection with" those contracts and were "settlement payments."
- The Second Circuit affirmed, holding the statutory definitions sweep broadly and protect transfers tied to breached or unperformed securities contracts and settlement payments, emphasizing statutory finality interests.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether transfers from BLMIS to customers are "made in connection with a securities contract" under § 546(e) | Trustee: § 546(e) should not apply because BLMIS never executed actual securities transactions; Account Documents do not create securities contracts for purposes of § 741(7) | Defendants: Account Documents (Customer Agreement, Trading Authorization, Option Agreement) establish broad securities contracts or related agreements; transfers are related to those contracts | Held: Account Documents fall within § 741(7)’s broad definition of "securities contract," and the payments were made "in connection with" those contracts; § 546(e) applies |
| Whether the withdrawals were "settlement payment[s]" under § 741(8) and thus protected by § 546(e) | Trustee: Payments are not "settlement payments" because no real securities trades occurred | Defendants: Withdrawals in fulfillment of customers’ sell/withdrawal requests function as settlement payments even if the broker failed to execute trades | Held: Transfers qualify as "settlement payments" because they completed the customers' intended securities transactions (liquidation/withdrawal) and § 546(e) protects such payments |
| Whether § 546(e) should be limited to transfers pursuant to performed trades (to avoid giving legal effect to fraud) | Trustee: Applying § 546(e) would give legal effect to Madoff’s fictitious profits and is inconsistent with prior net‑equity rulings | Defendants: Statutory text is broad; finality interests and market disruption concerns support sheltering these transfers | Held: Statutory language and Congressional balance for finality control; breadth of § 546(e) means it applies despite the fraud, except for claims of actual fraud under § 548(a)(1)(A) |
| Whether the Trustee’s state‑law fraudulent‑conveyance and § 548(a)(1)(B) claims survive § 546(e) | Trustee: State and constructive‑fraud claims should not be barred by § 546(e) | Defendants: § 546(e) bars constructive‑fraud and state‑law clawbacks because transfers are securities‑related | Held: § 546(e) bars the Trustee’s constructive‑fraud (§ 548(a)(1)(B)) and state‑law claims; only actual‑fraud claims survive |
Key Cases Cited
- In re Bernard L. Madoff Inv. Secs. LLC, 654 F.3d 229 (2d Cir. 2011) (interpreting SIPA net‑equity and rejecting legal recognition of fictitious profits for distribution purposes)
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (broad construction of § 546(e) to protect securities markets from disruptive unwindings)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) (broad "in connection with" interpretation in securities law)
- SEC v. Zandford, 535 U.S. 813 (2002) (broker misconduct can be "in connection with" securities transactions for enforcement purposes)