454 B.R. 285
Bankr. S.D.N.Y.2011Background
- This SIPA proceeding concerns whether feeder-fund investors, who invested indirectly in BLMIS through sixteen feeder funds, qualify as SIPA 'customers' with respect to the BLMIS liquidation.
- The Trustee denied the feeder-claimants' claims on the basis they were not customers because they lacked direct accounts at BLMIS in their names.
- Feeder Funds opened securities accounts at BLMIS and held assets there, with records in the Feeder Funds’ names; they entrusted assets to BLMIS for trading.
- Objecting Claimants owned interests in the Feeder Funds, not in BLMIS accounts, and did not have property interests in Feeder Funds’ BLMIS assets.
- SIPA defines 'customer' narrowly, focusing on persons with securities accounts at the debtor and/or a direct fiduciary relationship; the court must adjudicate on a transaction-by-transaction basis.
- The court grants the Trustee’s motion to affirm denials to the extent described herein, emphasizing that indirect investors lack the typical customer traits.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Objecting Claimants are SIPA 'customers' under the plain language | Picard argues they lack BLMIS accounts and direct relationship | Objecting Claimants contend indirect investment suffices under SIPA | No; they do not qualify as customers under SIPA |
| Whether the 78lll(2) conversion provision supports customer status | Objects Claimants claim conversion entitlement via Feeder Funds’ assets | Conversion applies only to claims tied to a debtor’s securities accounts | Not applicable; no direct securities accounts with BLMIS by Claimants |
| Whether Objecting Claimants had a fiduciary relationship with BLMIS | Trustee should treat them as customers given control through Feeder Funds | Feeder Funds were not agents; no control by BLMIS over Claimants | No fiduciary relationship; not customers under SIPA |
| Whether SIPA 78fff-3(a)(5) extends protection to indirect investors through feeder funds | Argues an indirect investor exception exists beyond banks/brokers | Exception limited to banks/brokers/dealers acting for their own customers | Not applicable; Feeder Funds were not banks/brokers/dealers; exception does not apply |
| Whether equity or policy considerations alter the outcome | Remedial nature of SIPA should aid indirect investors | Remedial goals do not override statutory text; protect true customers | Equity does not override the narrow SIPA definition; claims denied |
Key Cases Cited
- SIPC v. Morgan Kennedy & Co., 533 F.2d 1314 (2d Cir.1976) (customer status narrowed; trust accounts distinguished from individual beneficiaries)
- In re New Times Sec. Servs., 463 F.3d 125 (2d Cir.2006) (restrictive, transaction-by-transaction approach to 'customer')
- In re Adler, Coleman Clearing Corp., 216 B.R. 719 (Bankr.S.D.N.Y.1998) (customer status context in SIPA proceedings)
- In re Klein, Maus & Shire, Inc., 301 B.R. 408 (Bankr.S.D.N.Y.2003) (narrow construction of 'customer' with respect to SIPA)
- SEC v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir.1974) (remedial scope of SIPA; not all victims are customers)
- Morgan Kennedy & Co. (listed above), 533 F.2d 1314 (2d Cir.1976) (see above)
- First Ohio Sec. Co., 39 F.3d 1181 (6th Cir.1994) (extension of Morgan Kennedy to funds without direct investor dealings)