Kruse v. Securities Investor Protection Corp.
2013 U.S. App. LEXIS 3774
2d Cir.2013Background
- Appellants invested in Spectrum Select funds, which invested in Rye Select Feeder Funds, which held BLMIS securities through Feeder Funds’ accounts.
- Appellants had no direct financial relationship with BLMIS, no BLMIS accounts in their names, and no BLMIS books showing them as customers.
- Feeder Funds held investors’ money and executed BLMIS trades through accounts in the Feeder Funds’ names, not in appellants’ names.
- Trustee and courts concluded appellants cannot pursue SIPA claims distinct from the Feeder Funds because appellants were not BLMIS customers.
- SIPA defines “customer” narrowly as someone who entrusts cash or securities to the broker-dealer for trading; appellants lack that entrustment.
- The appeal challenges the SIPA customer status determination and seeks recovery under SIPA up to $500,000 per customer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether appellants qualify as BLMIS customers under SIPA | Kruse (and others) | Madoff/BLMIS | No; appellants not customers under SIPA. |
| Whether lack of direct accounts with BLMIS defeats customer status | Appellants lacked direct BLMIS accounts | Morgan Kennedys framework applies | Yes; lack of direct accounts defeats customer status. |
| Whether control over Feeder Funds’ investments could establish customer status | Appellants exercise some control | Control is insufficient without direct entrustment | No; control alone insufficient for customer status. |
| Whether appellants’ intent to have funds invested in BLMIS matters for SIPA status | Intention to invest via BLMIS | Interests were in Feeder Funds, not BLMIS | No; ownership interests did not entrust cash/securities to BLMIS. |
Key Cases Cited
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (narrow interpretation of customer status; entrustment required)
- In re New Times Sec. Servs., Inc., 463 F.3d 125 (2d Cir. 2006) (narrow, purposive interpretation of SIPA customer)
- SIPC v. Morgan, Kennedy & Co., 533 F.2d 1314 (2d Cir. 1976) (employee-beneficiary analogy supports Morgan Kennedy framework)
- Pan Am. World Airways, Inc. v. Shulman Transp. Enters., Inc., 744 F.2d 293 (2d Cir. 1984) (agency/consultant framework for fiduciary relationships)
- In re Enron Corp., Midland Cogeneration Venture Ltd. P’ship v. Enron Corp., 419 F.3d 115 (2d Cir. 2005) (standard for appellate review of bankruptcy court findings of fact and law)