No.

In the Supreme Court of the United States

____________

IRVING H. PICARD, Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC,

Petitioner,

SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor pursuant to 15 U.S.C. §78eee(d),

Intervenor-Petitioner, v.

IDA FISHMAN REVOCABLE TRUST, et al., Respondents.

____________

On Petition for a Writ of Certiorari to the United States Court of Appeals for the

Second Circuit ____________

PETITION FOR WRIT OF CERTIORARI _____________

KEVIN H. BELL JOSEPHINE WANG CHRISTOPHER H. LAROSA Counsel of Record LAUREN T. ATTARD SECURITIES INVESTOR

PROTECTION CORPORATION 805 15th St., NW, Suite 800 Washington, DC 20005 Telephone: (202) 371-8300 Email: jwang@sipc.org

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QUESTIONS PRESENTED 1. Does the “stockbroker defense” under the Bankruptcy Code, 11 U.S.C. § 546(e), apply to payments that involve only fictitious securities transactions?

2. Is the application of the “stockbroker defense” under the Bankruptcy Code, 11 U.S.C. § 546(e), to payments that involve only fictitious securities transactions barred as inconsistent with the Securities Investor Protection Act, 15 U.S.C. § 78fff(b)?

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PARTIES TO THE PROCEEDING

SIPC is a party in interest as to all matters in a Securities Investor Protection Act liquidation proceeding, with the right to be heard on all such matters as if a petition for its intervention had been filed with, and allowed by, the court. 15 U.S.C. § 78eee(d). Petitioner, an appellant below, is SIPC. Also filing a petition is Irving H. Picard, as Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC, an appellant below. In an order filed on December 20, 2012, the Court of Appeals granted a motion by the parties for consolidation of the various appeals in this matter. In re Bernard L. Madoff Investment Securities LLC, Case No. 12-2497, Doc. No. 99-1 (2d Cir.). Because the number of respondents is extensive, a list of all parties to this proceeding as required under Supreme Court Rule 14.1(b) is separately filed with the Clerk of the Court.

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CORPORATE DISCLOSURE STATEMENT

SIPC is a federally chartered non-profit corporation. It has no parent corporation and there is no publicly held company that owns 10% or more of stock in it.

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TABLE OF CONTENTS

PAGE

INTRODUCTION ....................................................... 1

OPINIONS BELOW ................................................... 6

JURISDICTION .......................................................... 7

STATUTES INVOLVED ............................................ 7

STATEMENT OF THE CASE .................................... 7

REASONS FOR GRANTING THE PETITION ....... 12

I. THE DECISIONS BELOW UNNECESSARILY CREATE AN IRRECONCILABLE CONFLICT BETWEEN

THE EXERCISE OF CONGRESS’S BANKRUPTCY AND COMMERCE POWERS .. 12

1. The Decisions Below Fail to Interpret the Relevant Statutory Provisions According To Their Plain Meaning and In Context, And Thereby Lay the Groundwork For a Clash of Important Legislative Policies ........ 14 A. Securities Contracts Under Code Subsection 741(7)(A) ................................. 16 i. The Plain Meaning .............................. 16 ii. The Legislative History ....................... 20 B. Settlement Payments Under Code Section 741(8) ............................................ 25

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TABLE OF CONTENTS (continued…)

PAGE

II. THE CIRCUITS ARE DIVIDED ON WHETHER SECTION 546(e) APPLIES TO

PONZI TRANSFERS ........................................ 28

III. THE DECISIONS BELOW CREATE UNCERTAINTY IN THE ADMINISTRATION OF STOCKBROKER LIQUIDATIONS TO THE DETRIMENT OF CUSTOMERS ............ 32 CONCLUSION .......................................................... 38

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TABLE OF APPENDICES

PAGE

Appendix A: Opinion, Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Securities LLC), No. 12-2557 (lead) (2d Cir. December 8, 2014) .................................. 1a Appendix B: Opinion, Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC (In re: Madoff Securities), No. 12-MC-115 (lead) (S.D.N.Y. May 1, 2012) ..................................... 30a Appendix C: Supplemental Opinion and Order, Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC (In re: Madoff Securities), No. 12-MC-115 (lead) (S.D.N.Y. May 15, 2012) ................................... 69a Appendix D: Statutory Provisions, Securities Investor Protection Act ................................................... 71a

Appendix E: Statutory Provisions, Bankruptcy Code .......... 78a

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TABLE OF AUTHORITIES CASES PAGE Begier v. I.R.S., 496 U.S. 53 (1990) ............................ 1 In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229 (2d Cir. 2011), reh’g and reh’g en banc den., (2d Cir. Nov. 08, 2011), cert. dismissed, 132 S. Ct. 2712, and cert. denied, 133 S. Ct. 24 and 133 S. Ct. 25 (2012) .. 2-3 Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer Sav. & Loan Ass’n, 878 F.2d 742 (3d Cir. 1989) ............................ 13-14 Brandt v. B.A. Capital Co. (In re Plassein Int’l Corp.), 590 F.3d 252 (3d Cir. 2009), cert. denied, 559 U.S. 1093 (2010)............................................ 26 Buchwald v. Williams Energy Mktg. & Trading Co. (In re Magnesium Corp. of Am.), 460 B.R. 360 (Bankr. S.D.N.Y. 2011) .................. 17 C.I.R. v. Clark, 489 U.S. 726 (1989) ......................... 35 Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) ............................... 26 Cunningham v. Brown, 265 U.S. 1 (1924) ................. 1 Enron Creditors Recovery Corp. v. Alfa S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 651 F.3d 329 (2d Cir. 2011) ................................. 26

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TABLE OF AUTHORITIES (continued...)

CASES PAGE Exchange National Bank of Chicago v. Wyatt, 517 F.2d 453 (2d Cir. 1975) ................................... 2 FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000).............................................. 15 Grayson Consulting, Inc. v. Wachovia Sec. (In re Derivium Capital LLC), 716 F.3d 355 (4th Cir. 2013) ...................... 26, 30-31 Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir. 2014) ................................. 5 Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651 (2006)................................................ 1 Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406 (S.D.N.Y. 2001) ... 34 Johnson v. Neilson (In re Slatkin), 525 F.3d 805 (9th Cir. 2008) ......................... 29, 30 Jonas v. Resolution Trust Corp. (In re Comark), 971 F.2d 322 (9th Cir. 1992) ............................... 26 Kipperman v. Circle Trust F.B.O. (In re Grafton Partners), 321 B.R. 527 (B.A.P. 9th Cir. 2005) ... 30 Lowenschuss v. Resorts Intern., Inc. (In re Resorts Int’l, Inc.), 181 F.3d 505 (3d Cir.), cert. denied, 528 U.S. 1021 (1999).................................. 5, 13, 26

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TABLE OF AUTHORITIES (continued...)

CASES PAGE Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013) ............................... 31 Picard v. Taylor (In re Park South Securities, LLC), 326 B.R. 505 (Bankr. S.D.N.Y. 2005) .................. 34 Posadas v. National City Bank of New York, 296 U.S. 497 (1936).............................................. 35 QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545 (6th Cir. 2009), cert. denied, 558 U.S. 1148 (2010) ....................... 26 Ransom v. FIA Card Services, N.A., 562 U.S. 61 (2011) ............................................... 15 SEC v. Albert & Maguire Sec. Co., 378 F. Supp. 906 (E.D. Pa. 1974) .......................... 2 SEC v. Zandford, 535 U.S. 813 (2002) ..................... 27

SIPC v. Barbour, 421 U.S. 412 (1975) ..................... 32

Tolz v. Gawlick (In re Forex Fidelity Int’l),

222 F. App’x. 806 (11th Cir. 2007) ...................... 28 Turner v. Davis, Gillenwater & Lynch (In re Inv. Bankers, Inc.), 4 F.3d 1556 (10th Cir. 1993), cert. denied, 510 U.S. 1114 (1994) ....................... 34

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TABLE OF AUTHORITIES (continued...)

CASES: PAGE Union Bank v. Wolas, 502 U.S. 151 (1991) ................ 4 United States v. Kunzman, 125 F.3d 1363 (10th Cir. 1997), cert. denied, 523 U.S. 1053 (1998) .................. 13-14 United States v. Lanier, 520 U.S. 259 (1997) ........... 15 Utility Air Regulatory Group v. E.P.A., __ U. S. __, 134 S. Ct. 2427 (2014) ...................... 15 United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365 (1988) ....... 15 Wider v. Wootton, 907 F.2d 570 (5th Cir. 1990) .......................... 28-29

Young v. Higbee Co., 324 U.S. 204 (1945) ................ 34

Zuni Public School Dist. No. 89 v. Dept. of Educ., 550 U.S. 81 (2007) ............................................... 20 STATUTES AND RULES Securities Investor Protection Act, as amended, 15 U.S.C. ' 78bbb ........................................................................... 3 78ccc(a)(1) .................................................................. 32 78ccc(a)(2) .................................................................. 32 78ccc(c)(2) .................................................................. 32 78ddd(a)(1) ................................................................ 32

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TABLE OF AUTHORITIES (continued...)

STATUTES AND RULES PAGE Securities Investor Protection Act, as amended, 15 U.S.C. ' 78ddd(c) ..................................................................... 32 78ddd(h) ..................................................................... 33 78fff(b) ..................................................... 3, 7, 8, 21, 28 78fff-1........................................................................... 4 78fff-1(a) ................................................................ 7, 35 78fff-2(c) ....................................................................... 7 78fff-2(c)(1) .................................................................. 8 78fff-2(c)(1)(B) ....................................................... 4, 35 78fff-2(c)(3) ........................................................ 4, 8, 21 78fff-3(a) .................................................................... 33 78fff-3(b) .................................................................... 33 78lll(4) ............................................................... 4, 7, 35 Securities Exchange Act of 1934, 15 U.S.C. § 78i .............................................................................. 27 United States Bankruptcy Code, 11 U.S.C. § 101(46)(1984) ............................................................. 29 101(53A) .................................................................... 29 544 ....................................................................... 3, 7, 8 546 ................................................................... 7, 12, 26 546(a)(1)(A) .................................................................. 8 546(e) .................................................................. passim 546(d) ......................................................................... 20 546(f) .......................................................................... 12 547 ................................................................. 3, 7, 8, 13

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TABLE OF AUTHORITIES (continued...)

STATUTES AND RULES PAGE United States Bankruptcy Code, 11 U.S.C. § 548 ............................................................... 7, 8, 13, 34 548(a)(1) ..................................................................... 20 548(a)(1)(A) .................................................. 3, 9, 25, 37 548(a)(1)(B) .................................................................. 3 548(c) ........................................................................... 3 550(a) ........................................................................... 9 741 ..................................................................... 7, 9, 16 741(2) ......................................................................... 29 741(7) ................................14, 19, 20, 21, 22, 23, 24, 36 741(7)(A) .................................................. 12, 15, 16, 23 741(7)(A)(i) ............................... 9-10, 12, 15, 16, 18, 23 741(7)(A)(ii) ............................................................... 16 741(7)(A)(iv)............................................................... 16 741(7)(A)(v) ................................................................ 16 741(7)(A)(vii) ............................................................. 12 741(7)(A)(x) ................................... 11, 14-15, 16, 18, 19 741(7)(A)(xi)......................................................... 12, 19 741(8) ................................................... 10-11, 15, 25-28 749 ............................................................................. 21 749(a) ......................................................................... 21 749(b) ......................................................................... 21 Pub.L. No. 95-283, 92 Stat. 249 (1978) .................... 21 Pub.L. No. 95-598, 92 Stat. 2549 (1978) .................. 21

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TABLE OF AUTHORITIES (continued...)

STATUTES AND RULES PAGE Pub.L. No. 97-222, 96 Stat. 235 (1982) .............. 20, 21 Pub L. No. 98-353, 98 Stat. 333 (1984) .................... 12 Pub. L. No. 109-8, 119 Stat. 23 (2005) ............... 23, 24 Pub. L. 109-390, 120 Stat. 2692 (2006) .................... 25 28 U.S.C. § 157(d) ........................................................................... 9 1254(1) ......................................................................... 7 1334(b) ......................................................................... 9 N.Y. C.P.L.R. § 213(8) ........................................................................... 8 OTHER AUTHORITIES UNITED STATES CONSTITUTION Article I, §8 ................................................................. 2

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TABLE OF AUTHORITIES (continued...)

LEGISLATIVE MATERIALS PAGE

H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 .................... 4 H.R. Rep. No. 97-420 (1982), reprinted in 1982 U.S.C.C.A.N. 583 ............... 22-23 H.R. Rep. No. 108-40, pt. 1 (2003) ............................ 24 S. Rep. No. 95-763 (1978), reprinted in 1978 U.S.C.C.A.N. 764 ........................................ 33 PUBLICATIONS

Scott C. Barney, Bankruptcy Preferences and Insider Guarantees, 51 La. L. Rev. 1047 (1991) ..................................... 1

Sylvie A. Durham, Terminating Derivative Transactions (2011) ........................................ 17-18

PETITION FOR WRIT OF CERTIORARI

INTRODUCTION

An equal sharing of assets by similarly situated creditors has long been a fundamental goal of bankruptcy. See, e.g., Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 655 (2006) (“[T]he Bankruptcy Code aims, in the main, to secure equal distribution among creditors”); Begier v. I.R.S., 496 U.S. 53, 58 (1990) (“Equality of distribution among creditors is a central policy of the Bankruptcy Code. According to this policy, creditors of equal priority should receive pro rata shares of the debtor’s property”); Cunningham v. Brown, 265 U.S. 1, 13 (1924) (the seminal Ponzi scheme case) (“[E]quality is equity and this is the spirit of the bankrupt law”). For more than a century and a half, in order to achieve equality, and to maximize assets for creditors, bankruptcy trustees have had the power to avoid transfers made by debtors.1 This same authority, conferred under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”),2

1 See Scott C. Barney, Bankruptcy Preferences and Insider Guarantees, 51 La. L. Rev. 1047, 1053 (1991) (“Congress first provided for avoidance and recovery of preferential transfers in the second bankruptcy act of the United States (the Act of 1841). Since that time, all of the successor bankruptcy acts have also contained provisions for the avoidance and recovery of preferential transfers.” [footnote omitted]) 2 For convenience, references herein to provisions of SIPA shall omit “15 U.S.C.”

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upon trustees in SIPA liquidation proceedings of securities broker-dealers, is especially significant because the property being recovered and distributed is for a special class of creditors, namely, customers of the broker-dealer. The property is not merely property of the debtor used, for example, to pay a vendor. Instead, it is “customer property,” that is, property that belonged to the customer; that the customer entrusted to the debtor; and that, if not used for the purpose intended by the customer, the customer has every expectation, and every right to expect, will be returned. In one of the largest and longest-running Ponzi schemes in history involving the theft and misuse of tens of billions of dollars of customer money, however, the Second Circuit in this case affirmed the decision of the District Court below and construed expansively, instead of narrowly, an exception to the avoidance powers. In doing so, it obliterated, in almost all respects, the trustee’s powers to avoid, and thereby drastically reduced customers’ chances of recovery. As both a bankruptcy and a securities law grounded in Congress’s bankruptcy and commerce powers, SIPA is a hybrid statute. U.S. CONST. art. I, § 8, cl. 4 and cl. 3. See Exchange National Bank of Chicago v. Wyatt, 517 F.2d 453, 459 (2d Cir. 1975); SEC v. Albert & Maguire Sec. Co., 378 F. Supp. 906, 911 (E.D. Pa. 1974); In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229, 242 (2d Cir. 2011), reh’g and reh’g en banc den. (2d Cir. Nov. 08, 2011), cert. dismissed, 132 S. Ct. 2712

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(2012), and cert. denied, 133 S. Ct. 24 and 133 S. Ct. 25 (2012). On the one hand, except as otherwise provided in SIPA, the provisions of the Securities Exchange Act of 1934, 15 U.S.C. §78a et seq. (“the 1934 Act”), apply as if SIPA were an amendment to it and a section of it. SIPA §78bbb. On the other hand, the SIPA proceeding is to be conducted “in accordance with, and as though it were being conducted” under almost all of the provisions of Title 11 that apply in a Chapter 7 bankruptcy liquidation, but only “to the extent consistent with the provisions” of SIPA. SIPA §78fff(b). Section 546(e) of Title 11 (“Title 11” or the “Bankruptcy Code” or “Code”) applies to a SIPA proceeding so long as it is consistent with the provisions of SIPA. Section 546(e), the “stockbroker defense,” creates exceptions to, or a “safe harbor” from, avoidance. It allows avoidance actions to be brought under Code section 548(a)(1)(A) where the debtor makes a transfer with “intent to hinder, delay or defraud” unless the transferee provided value and acted in good faith under Code section 548(c). It otherwise prohibits avoidance of transfers that are preferences (section 547 of the Code) or constructively fraudulent (section 548(a)(1)(B) of the Code), or avoidable under state law (section 544 of the Code). See Appendix (“App.”) 78a-79a, 86a-98a. While the focus of section 548(a)(1)(A) is fraud, actions under the other aforementioned sections further bankruptcy objectives: they allow avoidance of transfers made by the debtor outside of the ordinary course of business and while the debtor is financially

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troubled, when the transfers have favored certain creditors over others. In short, they promote equal treatment. See, e.g., Union Bank v. Wolas, 502 U.S. 151, 161 (1991) (“[T]he preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor” (quoting H.R. Rep. No. 95-595, at 177-78 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6138)). The goal of SIPA is to reinforce investor confidence by instilling in customers the knowledge that even if their broker fails financially, cash and securities that they entrusted to their broker will be returned to them. Under SIPA section 78lll(4), customer property includes, among other things, “property unlawfully converted.” App. 76a. Under SIPA section 78fff-2(c)(1)(B), customers share in customer property equally and in proportion to the amount of their allowed claims. App. 73a. The customer property returned to customers in a SIPA case is not limited to what the trustee finds on hand when he takes control. Rather, for the benefit of customers, the trustee may seek the return of customer property, using the avoidance powers given to him by Congress. Under SIPA section 78fff-1, the trustee has the same powers and title as a bankruptcy trustee, including expressly, “the same rights to avoid preferences….” App. 72a. Under SIPA section 78fff-2(c)(3), where customer property is insufficient, the trustee may recover customer property transferred by the debtor if the transfer is void or voidable under the Code. App. 74a-75a. Since the adoption of SIPA in 1970, trustees have had the power to avoid preferences, constructively fraudulent transfers, and

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preferential transfers under state law, as well as actual fraudulent transfers. If the Second Circuit’s construction of section 546(e) is upheld, except for the last, all of these powers have now been withdrawn. Section 546(e) addresses the potential domino effect of the failure of a brokerage firm causing others to default on their securities obligations. “By preventing one large bankruptcy from rippling through the securities industry in this way, the § 546(e) safe harbor protects the market from systemic risk and allows parties in the securities industry to enter into transactions with greater confidence.” Grede v. FCStone, LLC, 746 F.3d 244, 252 (7th Cir. 2014). Yet, however important the policies to be effectuated under section 546(e) are, if the section is to apply at all, it must be construed in the context of a SIPA proceeding and must be shown to be “consistent with the provisions of SIPA.” In this regard, at least two principles of statutory construction are significant. One, an exception to a general rule must be construed narrowly. And, two, repeals by implication are not favored. The issue presented is of national importance. As the Third Circuit has observed, section 546 “stands ‘at the intersection of two important national legislative policies on a collision course – the policies of bankruptcy and securities law.’” Lowenschuss v. Resorts Intern., Inc. (In re Resorts Int’l, Inc.), 181 F.3d 505, 515 (3d Cir.), cert. denied, 528 U.S. 1021 (1999). The same is true of SIPA. The Court’s decision means that concerns over

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systemic risk, even if non-existent or illusory, as here, override, in every instance, bankruptcy considerations. But, the Second Circuit is wrong. Because enumerated bankruptcy provisions apply to a SIPA proceeding only if consistent with SIPA, the Court must construe section 546(e) in a way that is consistent with SIPA, while fulfilling the purposes of both SIPA and section 546(e) to the extent possible. While it is important that the failure of a securities brokerage not implicate the soundness of the financial system, it also is important that the markets not turn a blind-eye to fictitious pricing and conversion of customer assets. After all, while section 546(e) purports to address, among other things, concerns in the securities marketplace, the federal securities laws, of which SIPA is a part, also make unlawful, price manipulation and the theft of customer property. In the same vein, if investor confidence is to be reinforced, investors must know that, in the absence of an overriding concern, the trustee will have at his disposal every tool in the avoidance arsenal that he would in ordinary bankruptcy, to recover their property. In this way, the goal of SIPA of returning customer property to customers, without arbitrary limitation, is met.

OPINIONS BELOW

The opinion of the Court of Appeals is reported at 773 F.3d 411 (2d Cir. 2014), and reprinted at App. 1a-29a. The opinion of the District Court is reported at 476 B.R. 715 (S.D.N.Y. 2012). That opinion, and the District Court’s unreported May

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15, 2012 order supplementing the opinion, are reprinted at App. 30a-70a.

JURISDICTION

The Court of Appeals entered judgment on December 8, 2014. On February 25, 2015, Justice Ginsburg granted petitioner’s timely application for an extension of time until April 7, 2015, within which to file this petition. This Court has jurisdiction under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

Sections 78fff(b), 78fff-1(a), 78fff-2(c), and 78lll(4) of SIPA and sections 544, 546, 547, 548, and 741 of the Bankruptcy Code are set forth at App. 71a-101a.

STATEMENT OF THE CASE

Customers investing through BLMIS, an investment advisor and broker-dealer, signed one or more of the following account opening documents: a “Customer Agreement,” an “Option Agreement,” and/or a “Trading Authorization Limited to Purchases and Sales of Securities and Options” (collectively, the “Account Opening Documents”). App. 2a. These documents established customer accounts at BLMIS and gave BLMIS authority to buy and sell securities on the customers’ behalves without effecting any specific purchase or sale. Having opened accounts at BLMIS, the customers received statements purporting to show securities bought and sold by

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BLMIS for them. App. 33a. But the “trades” were fictitious and the prices shown on the account statements were based on advantageous historical price information. App. 9a, 33a. “Profit,” meaning funds withdrawn by the customer in excess of funds deposited by the customer, was fictitious. When paid to customers, the fictitious profit was actually money deposited with the broker by other customers. App. 10a, 33a-34a. If not withdrawn, “profit” in an account would be “reinvested” in other fictitious purchases so that “securities” supposedly in an account were not paid for by the customer. Pursuant to avoidance provisions of the Bankruptcy Code, made applicable under SIPA sections 78fff(b) and 78fff-2(c)(3), with sizeable amounts of customer property missing, the Trustee for the liquidation of BLMIS (“Trustee”) sued in bankruptcy court to avoid billions in transfers made to customers that exceeded the amounts of their deposits with the brokerage. The transfers dated back either two years from the date of the court order placing BLMIS in SIPA liquidation, see 11 U.S.C. § 546(a)(1)(A), if sought to be avoided under section 547 or 548 of the Code, or up to six years, if avoidance was sought under New York fraudulent conveyance law, see N.Y. C.P.L.R. §213(8), made applicable under section 544 of the Code. Amounts recovered were to be re-distributed to customers in the liquidation proceeding. See SIPA § 78fff-2(c)(1) (App. 73a). The District Court withdrew the reference of the cases to the Bankruptcy Court under 28 U.S.C.

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§ 157(d), and exercised jurisdiction over the cases under 28 U.S.C. § 1334(b). App. 13a. Respondents moved to dismiss the complaints. Based on section 546(e) of the Bankruptcy Code, the District Court granted the motions, as to all of the Trustee’s claims except for those brought under section 548(a)(1)(A).3 App. 60a. In pertinent part, section 546(e) provides:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a … settlement payment as defined in section 101 or 741 of this title, made by or to … a … stockbroker, … or that is a transfer made by or to … a … stockbroker …, in connection with a securities contract, as defined in section 741(7), … that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

In pertinent part, under section 741,

(7) “securities contract” –

(A) means –

3 The Court also allowed claims under Code section 550(a) to proceed since they were not barred under section 546(e). Section 550(a) actions involve subsequent transfers of property where the initial transfer is avoided.

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(i) a contract for the purchase, sale, or loan of a security…;

* * *

(vii) any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph;

* * *

(x) a master agreement that provides for

an agreement or transaction referred to in clause (i)…, except that such master agreement shall be considered to be a securities contract under this subparagraph only with respect to each agreement or transaction under such master agreement that is referred to in clause (i) …;

(xi) any security agreement or

arrangement or other credit enhancement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker … in connection with any agreement or transaction referred to in this subparagraph, but not to exceed the damages in connection with any such agreement or transaction, measured in accordance with section 562, …;

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(8) “settlement payment” means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade ….”

Under section 741(7)(A)(x) of the Code, the District Court found each of the Account Opening Documents to be “master agreements” and therefore, securities contracts. Alternatively, under section 741(8) of the Code, the court concluded that the withdrawals of fictitious profits were “settlement payments,” all within the scope of section 546(e). App. 37a-40a. The Trustee and SIPC appealed. On appeal, the Second Circuit affirmed the lower court’s decision. The court noted that the “Customer Agreement” provided for the opening of the customer account with BLMIS; under the “Trading Authorization,” the customer designated BLMIS as agent and attorney-in-fact to buy and sell securities for his or her account; and under the “Option Agreement,” the customer authorized BLMIS to trade options for the customer’s account. App. 17a. The court agreed with the lower court that the Account Opening Documents were “master agreements” and that the payments of fictitious profits were “settlement payments” on non-existent

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trades. On its own initiative, the court found that the account opening documents also qualified as securities contracts as:

1) contracts for the purchase or sale of a security (section 741(7)(A)(i) of the Code);

2) any other agreements or transactions similar to contracts for the purchase, sale or loan of securities (section 741(7)(A)(vii)); and

3) security agreements or arrangements related to any agreement or transaction referred to in subsection 741(7)(A), including any guarantee or reimbursement obligation by a stockbroker, but not to exceed the damages measured in accordance with section 562 of Title 11 (section 741(7)(A)(xi)).

App. 18a-20a, 26a-27a.

REASONS FOR GRANTING THE PETITION

I. THE DECISIONS BELOW UNNECESSARILY CREATE AN

IRRECONCILABLE CONFLICT BETWEEN THE EXERCISE OF CONGRESS’S

BANKRUPTCY AND COMMERCE POWERS In 1984, section 546 was amended to include a subsection (f) which limited avoidance actions to the same extent as section 546(e), but with respect to repurchase agreements or “repos.”4 In 4 Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, §393, 98 Stat. 333, 365 (1984). A

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considering Bankruptcy Code section 546(f) in Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer Sav. & Loan Ass’n, 878 F.2d 742, 751 (3d Cir. 1989), the Third Circuit remarked on the important national legislative policies underlying the section and observed that the policies were on a collision course. On the one hand was the bankruptcy policy which gave trustees broad powers to avoid transactions, specifically, under sections 547 and 548 of the Bankruptcy Code. On the other hand was the desire of Congress to remove from the trustee the power to avoid such transactions with respect to margin and settlement payments except in cases of fraud. The court noted that Congress was addressing problems in the repo market which served “a crucial aspect of the country’s major institutional and fiduciary interests,” and that Congress “sought to avoid a domino effect whereby ‘the collapse of one institution involved in repo transactions could start a chain reaction, putting at risk hundreds of billions of dollars and threatening the solvency of many additional institutions.’” Id. at 751. In the court’s view, this latter concern of Congress reflected a policy of securities law. See Lowenschuss, 181 F.3d at 515. The securities laws derive from Congress’s power under the Commerce Clause. See United States v. Kunzman, 125 F.3d 1363, 1365 (10th Cir. 1997), cert. denied, 523 U.S. 1053 (1998) (“The Commerce Clause clearly repo involves the purchase of securities by one party (the buyer) for cash, with an agreement by the buyer to repurchase the securities from the seller at an agreed upon future date and at an agreed upon price. Bevill, Bresler, 878 F.2d at 743.

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empowers Congress to regulate the sale of securities.”) There are few cases that illustrate more pointedly than this one that section 546(e) is indeed at the intersection of two important national legislative policies on a collision course. Nevertheless, while the Second Circuit could have interpreted section 546(e) so as to harmonize the policies in question of bankruptcy and securities law, as it should have, it chose instead to construe section 546(e) in a way that advanced what it perceived to be securities policy only, to the exclusion of bankruptcy policy, and ultimately, to no end. This court’s review is critical to restore to the construction of section 546(e) the proper balance between bankruptcy and securities law, as Congress intended, so that the soundness of the financial system is maintained, but customers are not victimized in the process.

1. The Decisions Below Fail to Interpret

the Relevant Statutory Provisions According to Their Plain Meaning and In Context, And Thereby Lay the Groundwork For a Clash of Important Legislative Policies

The District Court concluded that section 546(e) applied because the payments of fictitious profit were “in connection with” a “securities contract,” as defined in section 741(7) of the Bankruptcy Code. In the court’s view, the account opening documents were “securities contracts” because they were “master agreements” under

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subsection 741(7)(A)(x). Alternatively, section 546(e) applied because the payments of fictitious profit were “settlement payments” under section 741(8) of the Code. App. 37a-40a. The Court of Appeals agreed with the analysis by the District Court, but independently found the Account Opening Documents to be, among other things, contracts for the purchase or sale of a security under section 741(7)(A)(i), and therefore, “securities contracts.” App. 18a. The decisions below incorrectly construe subsection 741(7)(A). “[T]he words of a statute must be read in their context and with a view to their place in the overall statutory scheme.’” Utility Air Regulatory Group v. E.P.A., __ U.S. __, 134 S. Ct. 2427, 2441 (2014) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)). See also U.S. v. Lanier, 520 U.S. 259, 267 n. 6 (1997) (“The legislative intent of Congress is to be derived from the language and structure of the statute itself, if possible….”). Thus, a statutory provision “‘that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme…because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.’” Utility Air Regulatory Group, 134 S. Ct. at 2442 (quoting United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371 (1988)). Moreover, wherever possible, every word of a statute is to be given effect. The fact that Congress uses different words is evidence of its intent to achieve a different result. Ransom v. FIA Card Services, N.A., 562 U.S. 61, 69-70 (2011). The

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decisions below failed to give effect to these basic principles of statutory interpretation and, in doing so, reached results inconsistent with the plain meaning of terms and their purposes.

A. Securities Contracts Under Code Subsection 741(7)(A)

i. The Plain Meaning

Section 741 lists eleven categories of instruments that are securities contracts. Notably, almost every category is prefaced by the word “any” (e.g., “any” option (§741(7)(A)(ii)); “any” margin loan (§741(7)(A)(iv)); “any” extension of credit (§741(7)(A)(v)), and so on). In contrast, under subsection 741(7)(A)(i), a securities contract is “a contract for the purchase, sale, or loan of a security…. [emphasis added].” The Account Opening Documents were not a contract for the purchase or sale of a security, namely, for the purchase or sale of a specific security. Rather, they were a grant of authority to the broker generally to buy or sell securities for the customer. On its face, subsection 741(7)(A)(i) of the Bankruptcy Code reasonably is construed to require, and to pertain to, an actual purchase or sale. The accuracy of this interpretation is reinforced by the definition of “master agreement” as a “securities contract” under subsection 741(7)(A)(x) which references subsection 741(7)(A)(i). Both the District Court and the Second Circuit concluded that the Account Opening

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Documents were “master agreements.” App. 18a-19a and 39a. The term “master agreement” has special meaning in the securities industry. See App. 18a-19a. A master agreement sets forth terms, and governs the transactions, between parties. Examples of master agreements can be found on the web site of the Securities Industry and Financial Markets Association (“SIFMA”). See http://www.sifma.org/services/standard-forms-and-documentation/mra,-gmra,-msla-and-msftas/. There, a “master securities loan agreement” is defined as an “agreement for use when parties may enter into transactions in which one party (a ‘Lender’) will lend to the other party (a ‘Borrower’) certain securities against a transfer of collateral.” Id. Sample master agreements on the site all refer to agreements between counterparties such as buyer/seller or borrower/lender, and not to the creation of an agency relationship, such as customer to broker. Id. Master agreements also commonly document derivative transactions. As one commentator notes: “These master agreements serve as the primary contractual agreements between the parties for all derivative trades that they will enter into in the future. Thousands of derivative transactions may be documented under a single master agreement between two parties.” Sylvie A. Durham, Terminating Derivative Transactions (2011) (“Durham”) at 1-23. See also Buchwald v. Williams Energy Mktg. & Trading Co. (In re Magnesium Corp. of Am.), 460 B.R. 360, 374 (Bankr. S.D.N.Y. 2011). Such “master agreements” require both counterparties (i.e., the parties to the

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transaction) to execute supplements or confirmations that describe the particular terms of any specific trade between them and incorporate the general terms of the master agreement. The “master agreement” thus does not provide for any specific transaction, but rather, in contemplation of transactions, fixes the general terms governing them. See Durham at 1-22 – 1-24. The latter distinction is critical. In the first instance, the Account Opening Documents in BLMIS are not between counterparties, and do not document the general terms governing the transactions to occur between counterparties, as is typically the case. Second, they do not contain the kinds of information or level of detail common to such agreements. Cf., e.g., the global master repurchase agreement (2011), at http://www.icmagroup.org/assets/documents/Legal/ GMRA-2011/GMRA-2011/GMRA%202011_2011. 04.20_ formular.pdf. Finally, and most importantly, for present purposes, under subsection 741(7)(A)(x), a master agreement

shall be considered to be a securities contract… only with respect to each agreement or transaction under such master agreement that is referred to in clause (i) …. [emphasis added].

The plain language of subsection 741(7)(A)(x) states that the master agreement is a “securities contract” only with respect to the actual security bought or sold under subsection 741(7)(A)(i). The master

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agreement then governs the terms of that transaction. Subsection 741(7)(A)(x) thus signals a clear distinction between a general “master agreement,” which authorizes potential transactions but does not mandate any specific transaction in a particular security or other financial instrument, and a “master agreement” that becomes a “securities contract” because it applies to, and fixes the terms of, an actual trade or transaction. The Account Opening Documents at issue were not master agreements as to any purchase or sale of a security, and were not contracts for the purchase or sale of a security, because there was no purchase or sale. Contrary to the conclusion reached in the decisions below, the Account Opening Documents were not “securities contracts” under section 741(7) and the payments made were not in connection with a securities contract under section 546(e). The Second Circuit also wrongly concluded that the Account Opening Documents were “security agreements” within the meaning of subsection 741(7)(A)(xi). The text of that subsection makes plain that, for purposes of subparagraph (xi), a “security agreement” is one that secures – i.e., provides collateral or some other assurance of repayment – for some other specific financial market transaction. But, as discussed, there were no such transactions here. Furthermore, a “security agreement” is described in subparagraph (xi) as a species of “credit enhancement” like a “guarantee” or “reimbursement obligation.” See 11 U.S.C. §

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741(7)(A)(xi) (App. 100a-101a). The Second Circuit insisted that the Account Opening Documents obligated BLMIS to honor cash withdrawal requests by the account holders, and that obligation was sufficient to qualify as a “security agreement.” App. 19a. But the obligation to honor account withdrawal requests, even assuming, arguendo, that such obligations extended to the payment of fictitious profit or the release of proceeds from the fictitious “sale” of “securities” never paid for by the customer, 1) has no connection to specific securities trades between counterparties in the securities markets; and 2) is entirely unrelated to guarantees or other “credit enhancements” provided to facilitate such trades.

ii. The Legislative History Any doubt by the lower courts about the scope of sections 546(e) and 741(7) would have been put to rest by their review of the relevant legislative history. See Zuni Public School Dist. No. 89 v. Dept. of Educ., 550 U.S. 81, 90 (2007) (“Considerations other than language provide us with unusually strong indications” of Congress’s intent.) Both section 546(e) (then designated as section 546(d), but referred to below as section 546(e) for ease of reference) and section 741(7) became law in 1982. See Bankruptcy Act Amendments, Pub. L. No. 97-222 §§ 4, 8, 96 Stat. 235, 236, 237 (1982). As enacted, section 546(e) excepted from avoidance only settlement and margin payments, unless avoidable under section 548(a)(1) of the Code. See 96 Stat. 236. Securities contracts, as defined in section 741(7), were not

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mentioned in section 546(e). However, the term did appear in section 749(b), also adopted in 1982.5 Section 749(b) barred the trustee in a “stockbroker” liquidation under the Bankruptcy Code from avoiding any transfer or liquidation of a “securities contract” made before seven days after the order for relief in the liquidation, if the transfer was approved by the Securities and Exchange Commission (“SEC”). See 11 U.S.C. § 749(b); Pub. L. No. 97-222 § 14, 96 Stat. 238. In other words, so long as the SEC approved the transfer of customers’ securities or their liquidation, the transfer, if made within the applicable time period, could not be avoided. In pertinent part, “securities contract,” referenced in section 749(b), was defined in section 741(7), as it is today, as a “contract for the purchase, sale, or loan of a security….” Pub. L. No. 97-222, § 8, 96 Stat. 237.6 5 Section 749 is contained in Subchapter III of Chapter 7 of Title 11 which does not apply in a SIPA case. See SIPA § 78fff(b). Notably, SIPA subsection 78fff-2(c)(3) is the mirror image of subsection 749(a) to the extent of enabling, rather than limiting, the recovery of customer property. Both provisions were enacted into law in 1978. Both empowered the trustee to avoid transfers of customer property, to the extent of any shortfall, if the transfer was void or voidable under Title 11. See Pub. L. No. 95-283, § 8, 92 Stat. 249, 263 (1978), and Pub. L. No. 95-598, 92 Stat. 2549, 2614 (1978). In 1982, although subsection 749(b), which limited the allowable recoveries under subsection 749(a), was adopted, no comparable change was made to SIPA. Cf., Pub. L. No. 97-222, § 14, 96 Stat. 238, and SIPA § 78fff-2(c)(3). 6 In 1982, subsection 741(7) provided:

“securities contract” means contract for the purchase, sale or loan of a security,

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Congress made the above and other related changes to the Bankruptcy Code in 1982 in order to mitigate counterparty risk in the securities markets; specifically, the risk that unwinding transfers made in connection with settled financial market transactions could trigger cascading insolvencies among financial market intermediaries, with dire effects on the stability of the financial system as a whole. As explained in the House Report to the 1982 legislation:

The thrust of several of the amendments contained in H.R. 4935 is to clarify and, in some instances, broaden the commodities market protections and expressly extend similar protections to the securities market. The amendments will ensure that the avoiding powers of a trustee are not construed to permit margin or settlement payments to be set aside except in cases of fraud and that, except as otherwise provided, the stay provisions of the Code are not construed to prevent brokers from closing out the open accounts of insolvent customers or brokers. The prompt closing out or liquidation of such open accounts freezes the status quo and minimizes the potentially

including an option for the purchase or sale of a security, or the guarantee of any settlement of cash or securities by or to a securities clearing agency….

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massive losses and chain reactions that could occur if the market were to move sharply in the wrong direction.

H.R. Rep. No. 97-420, at 2 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583-84. Given the text of section 741(7), and the expressed concern about the systemic impact of counterparty risk in the securities markets, Congress clearly intended the section to cover actual contracts involving specific financial instruments between market counterparties, not mere authorizing or account-opening agreements. Later amendments to the definition of securities contract compel the same conclusion. Congress amended and expanded the definition of “securities contract” in 2005. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. No. 109-8 § 907(a)(2), 119 Stat. 23, 173 (2005). While Congress added other financial instruments to the definition of securities contract in subsection 741(7)(A)(i) – e.g., mortgage loans, certificates of deposit, certain options, etc. – it did not alter the portion that defined it as “a contract for the purchase, sale, or loan of a security.” See id. Congress thus did not change the text of subsection 741(7)(A) – in any way suggesting that it intended to expand the subsection to encompass account-opening or other authorizing agreements, in addition to already-covered, transaction-specific contracts between market counterparties.

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Instead, in the 2005 BAPCPA, Congress added the “master agreement” provision that appears in subparagraph (x) of the current statute. See Pub. L. No. 109-8, § 907(a)(2), 119 Stat. 174. As discussed, supra, through that provision, Congress signaled a clear distinction between authorizing agreements like a “master agreement” and the kind of transaction-specific contracts described in most of the subparagraphs of section 741(7), particularly the “purchase, sale, or loan” provision in subparagraph (i). Congress’s other additions to section 741(7), including the catch-all provision relied upon by the Second Circuit and covering “any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph,” do nothing to suggest the contrary. See Pub. L. No. 109-8, § 907(a)(2), 119 Stat. 174. Rather, given the phenomenal growth both in the number of financial products and in their notional value, Congress added the “similar to” catch-all to the definition of “securities contract” “to provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of [these] transactions matured.” See H.R. Rep. No. 108-40, pt. 1, at 232 (2003) (House report on earlier version of House bill later enacted as BAPCPA in 2005). Otherwise stated, Congress added the catch-all to avoid having to amend the statute for every new kind of transaction-specific contract developed by the financial services industry, not to sweep standard account opening agreements, whose use long pre-dated the amendment, into the definition of “securities contract.” The same considerations

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underscore the amendments to section 546(e) in 2006. See Financial Netting Improvements Act of 2006, Pub. L. No. 109-390, § 5(b)(1), 120 Stat. 2692, 2697-2698 (2006).

B. Settlement Payments Under Code Section 741(8)

The decisions below found the payments of fictitious profit, associated with securities transactions that never actually occurred, to be “settlement payments” under section 741(8) of the Bankruptcy Code. App. 26a-27a and 39a-40a. As such, under section 546(e), the payments were exempt from avoidance only under subsection 548(a)(1)(A) of the Code. In so holding and turning fiction into reality, the decisions not only failed to carry out the will of Congress with respect to securities policy, but perversely undermined it. Section 546(e) incorporates by reference the definition of “settlement payment” found in Bankruptcy Code section 741(8). In the latter section, with near perfect circularity, Congress defined “settlement payment,” as:

a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account of a final settlement payment, or any other similar payment commonly used in the securities trade….

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11 U.S.C. § 741(8). See Enron Creditors Recovery Corp. v. Alfa S.A.B. de C.V. (In re Enron Creditors Recovery Corporation), 651 F.3d 329, 341 (2d Cir. 2011) (dissent) (“It is in fact difficult to imagine a more circular, less clear statute than one that defines ‘settlement payment’…”); QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545, 549 (6th Cir. 2009), cert. denied, 558 U.S. 1148 (2010). Despite this circularity, the courts of appeals almost uniformly have found a “settlement payment” to be the transfer of cash or securities to complete an actual transaction between counterparties in the securities markets. See Grayson Consulting, Inc. v. Wachovia Sec. (In re Derivium Capital LLC), 716 F.3d 355, 364 (4th Cir. 2013); Brandt v. B.A. Capital Co. (In re Plassein Int’l Corp.), 590 F.3d 252, 258 (3d Cir. 2009), cert. denied, 559 U.S. 1093 (2010); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 985-86 (8th Cir. 2009); Lowenschuss, 181 F.3d at 515; Jonas v. Resolution Trust Corp. (In re Comark), 971 F.2d 322, 325 (9th Cir. 1992). This emphasis on an exchange of property fully accords with the understanding of “settlement” in the securities industry and with the legislative history to section 546, which, as discussed, confirms that Congress intended the section to mitigate counterparty risk. See supra. But both courts below stated that BLMIS never bought or sold securities or executed any transactions for any of the respondents. App. 9a, 33a. “Securities” paid for out of fictitious profit

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were never paid for by the respondents and therefore, any “sales” proceeds were not owed to them. All “profit” was fictitious, and based on backdated pricing. As such, BLMIS could not have made payments in settlement of any transactions since there were no transactions. In spite of this, the courts below concluded that “settlement payment” encompassed the Ponzi payments that BLMIS made to the respondents because the respondents intended that BLMIS sell securities in order to fund account withdrawals and BLMIS reported to the respondents that it had done so. See App. 27a, 41a. In effect, a payment made to further a fraud is a “settlement payment” even if not owed to the investor. But nothing in the plain language of section 741(8), the understanding of “settlement” in the securities industry, or the relevant legislative history, indicates that Congress ever intended the “settlement payment” provision in section 546(e) to sweep so broadly. Moreover, the lower courts’ holdings do nothing to mitigate counterparty risk in the securities markets, the one object of Congress’s concern. Indeed, instead of furthering securities policy, the decisions undercut it. Federal law makes unlawful both price manipulation and the deceptive conversion of customer assets by a broker. Cf., 15 U.S.C. § 78i (manipulation of security prices); SEC v. Zandford, 535 U.S. 813, 822 (2002). Instead of advancing securities policy, the lower court decisions legitimize and give effect to activity that violates securities law.

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II. THE CIRCUITS ARE DIVIDED ON WHETHER SECTION 546(e) APPLIES TO

PONZI TRANSFERS

As previously mentioned, SIPA is not only a securities law, but it also is a bankruptcy law. Unless inconsistent with SIPA, a SIPA proceeding is to be conducted in accordance with, and as though it were, a Title 11 liquidation. SIPA § 78fff(b). In a number of Ponzi scheme bankruptcies, courts have declined to lend judicial support to the schemes. While those cases are distinguishable on the grounds that unlike the present one, the Ponzi operator was not a registered stockbroker, all involved Ponzi activity, with no market impact of the kind addressed by section 546(e). Given that the SIPA proceeding is to be conducted as though it were a Title 11 proceeding, the outcome here should be no different. A review by this Court is imperative to resolve the conflict. Recognizing that limiting avoidance of transfers in Ponzi schemes does nothing to further the purposes of section 546(e), several courts have held simply that section 546(e) does not apply to Ponzi scheme bankruptcies. See, e.g., Tolz v. Gawlick (In re Forex Fidelity Int’l), 222 F. App’x 806, 808 (11th Cir. 2007) (noting that district court held that section 546(e) stockbroker defense does not apply to Ponzi schemes, but affirming on other grounds). Several other courts, including the Fifth Circuit, have read the language of the definitions of several of the key terms in section 546(e) to exclude Ponzi payments. Thus, for instance, in Wider v.

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Wootton, 907 F.2d 570, 572-73 (5th Cir. 1990), the Fifth Circuit held that an investment adviser that operated a Ponzi scheme was not a “stockbroker” for purposes of section 546(e) because the operator had no “customers,” as required to fulfill the definition of “stockbroker” in Bankruptcy Code subsection 101(46)(1984). In particular, the Fifth Circuit held that, as Ponzi scheme payments, the subject transfers were not made in the ordinary course of the debtor’s business as a “stockbroker,” as required by the applicable definition of the term “customer” in Code section 741(2), but rather in furtherance of the Ponzi scheme. See id. The court explained that, “[t]ransfers made in a ‘Ponzi’ scheme are not made in the ordinary course of business” and that, “[t]o apply the stockbroker defense” in this context “would lend judicial support to ‘Ponzi’ schemes by rewarding early investors at the expense of later victims.” Id. The Ninth Circuit adopted a slightly different approach in Johnson v. Neilson (In re Slatkin), 525 F.3d 805 (9th Cir. 2008). In that case, the court held that a Ponzi scheme operator who solicited investments and purported to use investor funds to purchase securities was not a “stockbroker” for purposes of Code sections 101(53A) and 546(e). See id. at 809, 817-19. According to the court, while the debtor had “customers” within the meaning of section 741(2), the debtor was not a registered securities broker-dealer and the debtor did not hold himself out as such. See id. at 818-19. Moreover, the court found that the debtor was operating a Ponzi scheme, not a legitimate securities business, and therefore could not be a “stockbroker” for

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purposes of section 546(e). See id. at 819 (explaining the debtor was not a “stockbroker” because, among other things, “[a]ll but a very few of the transactions conducted by” the debtor “were illegitimate” (emphasis in original)). In a similar vein, in Kipperman v. Circle Trust F.B.O. (In re Grafton Partners), 321 B.R. 527, 529 (B.A.P. 9th Cir. 2005), the Ninth Circuit’s Bankruptcy Appellate Panel held that payments made in furtherance of a Ponzi scheme are not “commonly used in the securities trade” and therefore cannot constitute “settlement payments” for purposes of section 546(e). The court noted the limited number of decisions concerning the applicability of section 546(e) to Ponzi schemes, but explained that “[t]he few decisions that involve outright illegality or transparent manipulation reject § 546(e) protection.” Id. at 539. In Grayson Consulting, Inc. v. Wachovia Securities, LLC (In re Derivium Capital LLC), 716 F.3d 355 (4th Cir. 2013), the Fourth Circuit held commissions paid to a broker in connection with the transfers into and out of brokerage accounts, to be “settlement payments” shielded under section 546(e), even though indirectly related to a Ponzi scheme. However, the court underscored that not all payments to brokers, labeled as commissions, would be settlement payments. The commissions would have to be “paid to stockbrokers as part of settling a regular securities transaction.” Excluded, for example, would be commissions paid for soliciting investors or “commissions the amount of which, when compared to the transaction

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amount, indicates that they were not actually related to closing trades.” Id. at 364. Ultimately, the court declined to create an extra-statutory fraud exception to section 546(e). Id. at 366. The Seventh Circuit has taken a clearly more expansive view of the applicability of section 546(e) to Ponzi scheme transfers. In Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013), the Seventh Circuit held that payments made by a Ponzi scheme operator to several institutional investors to redeem shares held by the investors in the mutual funds through which the scheme was operated were shielded under section 546(e). Id. at 747-750. The court explained that the redemption of investor mutual fund shares involved the exchange of cash for securities, the hallmark of a securities market transaction, and thus the kind of exchange within the “settlement payment” provision in section 546(e). See id. at 749. Even in those cases advocating a broader approach, actual market transactions occurred. No such exchange occurred in the present case, as BLMIS investors held no securities, and surrendered nothing in exchange for the fictitious profit that they withdrew. Thus, even among court decisions applying section 546(e) to Ponzi transfers, the lower court decisions here are outliers.

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III. THE DECISIONS BELOW CREATE UNCERTAINTY IN THE ADMINISTRATION

OF STOCKBROKER LIQUIDATIONS TO THE DETRIMENT OF CUSTOMERS

The decisions below represent one extreme along the wide spectrum of approaches taken by the courts of appeals and other lower courts to the question of whether section 546(e) applies, as here, to Ponzi scheme transfers. Resolution of that question is profoundly important to the proper and effective liquidation of stockbrokers and to SIPC’s mission of customer protection. See SIPC v. Barbour, 421 U.S. 412, 415 (1975) (among other things, Congress enacted SIPA “to restore investor confidence in the capital markets”). SIPC, created under SIPA section 78ccc(a)(1), is a non-profit corporation whose membership is comprised, with narrow exceptions, of all registered securities broker-dealers. § 78ccc(a)(2). SIPC is governed by a seven-member Board of Directors, five of whom are appointed by the President of the United States and confirmed by the Senate. One Director is appointed by the Secretary of the Treasury from among the officers and employees of the Treasury, and one Director is appointed by the Federal Reserve Board from among its officers and employees. § 78ccc(c)(2). SIPC members pay assessments to SIPC which become part of a SIPC Fund. §§ 78ddd(a)(1) and (c). The Fund is used to finance SIPC’s operations, and in the liquidation of broker-dealers under SIPA.

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Once a SIPC member firm is placed in liquidation, SIPC may advance funds to the SIPA trustee for the satisfaction of customer claims and to pay the administrative expenses of the liquidation proceeding, if the debtor’s general estate is insufficient. SIPA § 78fff-3(a) and (b). To the extent of any shortfall in customer property, each customer is protected by SIPC up to a total of $500,000. § 78fff-3(a). The SIPC advance is a supplement to, and not a substitute for, the customer’s share of customer property. Id. To the extent SIPC funds become insufficient for its needs, SIPC may borrow up to $2.5 billion from the Treasury. § 78ddd(h). SIPC’s role in the proceeding extends to beyond advancing funds. As Congress noted:

This right, including the right of appeal, is essential for SIPC to carry out its proper functions as the entity charged with the administration of SIPA, as an advisor to the court, as the party initiating a liquidation proceeding, and as the party which, to a large extent, is responsible for overseeing the funds available for use in a liquidation proceeding.

S. Rep. No. 95-763, at 11 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 774. The differing approaches by the courts, and now, the decisions below, create confusion for trustees as to when transfers can be avoided, a lack of confidence among investors as to their prospects for recovery, and uncertainty for

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SIPC in its oversight of stockbroker liquidations which are nationwide. There will be few, if any, instances in which customers do not sign Account Opening Documents in order to do business through a broker-dealer. Thus, the decisions of the lower courts mean that in every stockbroker case, trustees will no longer be able to avoid transfers that are preferences, constructively fraudulent conveyances, or avoidable under state law. The avoidance powers long-held by SIPA trustees have been critical to customers’ recovery of property. See, e. g., Picard v. Taylor (In re Park South Securities, LLC), 326 B.R. 505, 512-13 (Bankr. S.D.N.Y. 2005) (holding that the trustee had standing to bring fraudulent transfer claims against customers); Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.) 263 B.R. 406, 438-464, 479 (S.D.N.Y. 2001) (affirming judgment that fraudulent transfers to customers were avoidable in a SIPA liquidation, and finding that “the spirit that infuses the whole of SIPA and the Bankruptcy Code is Congress’s determination, reflected in a trustee’s avoidance powers under [Bankruptcy Code] § 548 as well as SIPC Rule 300.503, that ‘a few individuals should not be allowed to benefit from transfers by an insolvent entity at the expense of the many…’… citing Young v. Higbee Co., 324 U.S. 204, 210 n.8 (1945)”). See also Turner v. Davis, Gillenwater and Lynch (In re Inv. Bankers, Inc.), 4 F.3d 1556, 1565 (10th Cir. 1993) (affirming judgment against the debtor’s lawyer for receipt of fraudulent and preferential transfers), cert. denied, 510 U. S. 1114 (1994). This is illustrated no more clearly than in this case where billions of dollars

35

 

belonging to customers are at stake. If customers are to share equally and to maximize their recovery, and taxpayer monies are not to be implicated by making SIPC the only source of customer relief, the trustee must have the power to avoid transfers, to the maximum extent. That this outcome comports with the legislative intent is clear from Congress’s vesting in the SIPA trustee the same avoidance powers as a bankruptcy trustee, specifically, “including the same rights to avoid preferences,” SIPA § 78fff-1(a); from its inclusion in customer property, unlawfully converted customer property, SIPA § 78lll(4); and from its requiring such property to be shared pro rata by customers. SIPA § 78fff-2(c)(1)(B). Section 546(e) creates an exception to the trustee’s avoidance powers. Statutory exceptions generally are narrowly read “in order to preserve the primary operation of the provision.” C.I.R. v. Clark, 489 U.S. 726, 739 (1989). See id. (“Given that Congress has enacted a general rule …, we should not eviscerate that legislative judgment through an expansive reading of a somewhat ambiguous exception.”). In view of the customer protection purposes of SIPA, and the means established by Congress by which that protection is to be afforded, courts should be reluctant to withdraw such powers unless “clearly and manifestly” within the intent of Congress. See Posadas v. National City Bank of New York, 296 U.S. 497, 503 (1936) (“The cardinal rule is that repeals by implication are not favored …. [T]he intention of the legislature to repeal must be clear and manifest.”)

36

No reach is required to conclude that section 546(e) does not apply to this case by its own terms and that it is not consistent with SIPA under the facts presented. Had the lower court decisions correctly construed the relevant provisions and their purposes, both SIPA and section 546(e) could have been harmonized. Unfortunately, the courts not only seriously misread the language of section 741(7), but also the purposes of section 546(e). With the benefit of no factual record, the Second Circuit opined that “[p]ermitting the clawback of millions, if not billions, of dollars from BLMIS clients – many of whom are institutional investors and feeder funds – would likely cause the very [securities market] ‘displacement’ that Congress hoped to minimize in enacting § 546(e).” App. 21a-22a. In other words, in the Court’s view, judgments entered against the respondents might threaten the solvency of those respondents and thereby threaten securities market stability. But the Second Circuit’s argument proves too much. The risk identified by the court exists in any avoidance action brought against a defendant with positions in the securities markets, even if the transfers under attack were not made by or to a “stockbroker” or other financial market intermediary of the kind described in section 546(e), and are clearly outside the reach of section 546(e). If Congress had intended the kind of nearly unlimited market protection posited by the Second Circuit, it would have enacted a far broader statute than section 546(e). But, of course, Congress did no such thing. Instead, Congress limited section 546(e) to transfers with a direct connection to

37

trades between counterparties in the securities markets, none of which was the case here. Nevertheless, as a result, persons who already have suffered the most by losing the most, that is, net losers who withdrew less than they deposited with BLMIS, must suffer even more, while net winners, persons who withdrew more than they deposited, enjoy the fruit of Bernard Madoff’s misdeeds. To be sure, section 548(a)(1)(A) provides some limited relief to victims, but far less than if preferential payments or constructively fraudulent ones under both the Bankruptcy Code and state law are avoided. As noted above, those causes of action in particular are aimed at restoring equal treatment of customers. In sum, application of section 546(e) in cases such as the one at hand sacrifices equity for creditors without enhancing stability in the securities markets or mitigating counterparty risk caused by transactional default in those markets. In the absence of actual market transactions, payments of fictitious profit to net winners implicate neither the plain language nor the purposes of section 546(e). Applying that section to insulate such transfers from the reach of all of the trustee’s avoidance powers, except the limited power conferred by Code section 548(a)(1)(A), merely creates inequity between and among creditors while perpetuating and giving life and legitimacy to the fraud that gave rise to the inequity in the first place.

38

CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted,

JOSEPHINE WANG General Counsel Counsel of Record KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution CHRISTOPHER H. LAROSA Senior Associate General Counsel – Litigation LAUREN T. ATTARD Assistant General Counsel SECURITIES INVESTOR PROTECTION CORPORATION 805 15th Street, N.W. Suite 800 Washington, D. C. 20005-2215 Telephone: (202) 371-8300 E-mail: jwang@sipc.org Date: March 17, 2015 Washington, D. C.

APPENDICES

1a

__________

APPENDIX A __________

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT __________

August Term, 2013

Nos. 12‐2557‐bk(L), 12‐2497‐bk(con), 12‐2500‐bk(con), 12‐2616‐bk(con), 12‐3422‐bk(con), 12‐

3440‐bk(con), 12‐3582‐bk(con), 12‐3585‐bk(con) __________

IN RE: BERNARD L. MADOFF INVESTMENT

SECURITIES LLC,

Debtor. __________

IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,

Plaintiff‐Appellant,

SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor pursuant to Securities Investor Protection Act, 15 U.S.C.

§78eee(d), Intervenor‐Appellant,

v.

IDA FISHMAN REVOCABLE TRUST, PAUL S. SHURMAN, in his capacity as co‐trustee of the

2a

Ida Fishman Revocable Trust, WILLIAM SHURMAN, in his capacity as co‐trustee of the

Ida Fishman Revocable Trust and as Executor of the estate of Ida Fishman,

Defendants‐Appellees. __________

Appeal from the United States District Court for

the Southern District of New York. Nos. 11‐bk‐7603, 12‐mc‐0115 — Jed S. Rakoff,

Judge. __________

Argued: March 5, 2014

Decided: December 8, 2014

Before: PARKER, LYNCH, and DRONEY,

Circuit Judges.

Appeal from judgments of the United States District Court for the Southern District of New York (Rakoff, J.). Irving H. Picard, as trustee for debtor Bernard L. Madoff Securities LLC, sued to avoid fictitious profits paid by the debtor to hundreds of customers over the life of the Ponzi scheme operated by Madoff. The defendant customers moved to dismiss certain of these avoidance claims pursuant to 11 U.S.C. § 546(e), which shields from recovery securities‐related payments made by a stockbroker. The district court agreed that § 546(e) barred the claims, dismissed them, and certified the dismissal as a final judgment. The trustee appealed.

3a

Affirmed. __________

DAVID J. SHEEHAN (Oren J. Warshavsky, Tracy L. Cole, Seanna R. Brown; Howard L. Simon, Windels Marx Lane & Mittendorf LLP; Matthew B. Lunn, Young Conaway Stargatt & Taylor LLP, on the brief), Baker Hostetler LLP, New York, NY, for Plaintiff‐Appellant Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC. JOSEPHINE WANG, General Counsel (Kevin H. Bell, Lauren T. Attard, on the brief), Securities Investor Protection Corporation, Washington, D.C., for Intervenor‐Appellant Securities Investor Protection Corporation, Statutory Intervenor pursuant to Securities Investor Protection Act, 15 U.S.C. §78eee(d). RICHARD LEVY, JR. (David C. Rose, on the brief), Pryor Cashman LLP, New York, NY, for Defendants‐Appellees Kara Fishbein Goldman, Steven Goldman, et al. P. GREGORY SCHWED (Walter H. Curchack, Daniel B. Besikof, Michael Barnett, on the brief), Loeb & Loeb LLP, New York, NY, for Defendants‐Appellees Jonathan M. Aufzien, Lisa Aufzien, et al. HELEN DAVIS CHAITMAN, Becker & Poliakoff, LLP, New York, NY, for Defendants‐Appellees David Abel, James Greiff, et al. Deborah A. Skakel, Shaya M. Berger, Dickstein Shapiro LLP, New York, NY, for Defendant‐

4a Appellee PetCareRx, Inc. Carole Neville, Dentons US LLP, New York, NY, for Defendants‐Appellees Harold J. Hein, Kelman Partners Limited Partnership, et al. Jennifer L. Young, Matthew A. Kupillas, Millberg LLP, New York, NY; Parvin K. Aminolroaya, SeegerWeiss LLP, New York, NY, for Defendants‐ Appellees Gerald Blumenthal, Harold A. Thau, et al. David Parker, Matthew J. Gold, Kleinberg, Kaplan, Wolff & Cohen, P.C., New York, NY, for Defendants‐Appellees Kenneth Hubbard, Lawrence Elins, et al. Parvin K. Aminolroaya, SeegerWeiss LLP, New York, NY for Defendants‐Appellees David J. Bershad, Bershad Investment Group LP, et al. Richard A. Kirby, Laura L. Clinton, Martha Rodriguez‐Lopez, K&L Gates LLP, Washington D.C., for Defendants‐Appellees Chesed Congregations of America, Linda Berger, et al. Philip Bentley, Elise S. Frejka, Kramer Levin Naftalis & Frankel LLP, New York, NY, for Defendants‐Appellees 1096‐1100 River Road Associates LLC, Fred A. Daibes LLC, et al. Marcy Ressler Harris, Jennifer M. Opheim, Mark D. Richardson, Schulte Roth & Zabel LLP, New York, NY, for Defendants‐Appellees Thomas H. Lee, HHI Investment Trust #2, et al.

5a William P. Weintraub, Gregory W. Fox, Stutman, Treister & Glatt, PC, New York, NY, for Defendants‐Appellees Jeffrey Hinte, Robert Nystrom, et al. Paul Steven Singerman, Ilyse M. Homer, Isaac Marcushamer, Berger Singerman LLP, for Amicus Curiae National Association of Bankruptcy Trustees. Philip D. Anker, Alan E. Schoenfeld, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY; Craig Goldblatt, Danielle Spinelli, Shivaprasad Nagaraj, Allison Hester‐Haddad, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., for Amicus Curiae Securities Industry and Financial Markets Association. Thomas J. Moloney, David E. Brodsky, Lawrence B. Friedman, Carmine D. Boccuzzi, Jr., Breon S. Peace, Charles J. Keeley, Shira A. B. Kaufman, Cleary Gottlieb Steen & Hamilton LLP, NewYork, NY, for Amici Curiae HSBC Bank plc, HSBC Holdings plc, et al. Marco E. Schnabl, Susan L. Saltzstein, Jeremy A. Berman, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Amicus Curiae UniCredit S.p.A. Franklin B. Velie, Jonathan G. Kortmansky, Mitchell C. Stein, Sullivan & Worcester LLP, New York, NY, for Amicus Curiae UniCredit Bank Austria AG.

6a Michael Feldberg, Allen & Overy LLP, for Amicus Curiae ABN Amro Bank N.V. (presently known as the Royal Bank of Scotland N.V.). Joseph Cioffi, James R. Serritella, Davis & Gilbert LLP, New York, NY, for Amici Curiae Natixis S.A., Natixis Financial Products LLC, et al. Fran M. Jacobs, Duane Morris LLP, for Amicus Curiae East Star SICAV. Marshall R. King, Gibson, Dunn & Crutcher LLP, New York, NY, for Amici Curiae UBS AG and UBS (Luxembourg) S.A. Marc J. Gottridge, Andrew M. Behrman, Hogan Lovells US LLP, New York, NY, for Amici Curiae Barclays Bank (Suisse) S.A., Barclays Bank S.A., and Barclays Private Bank & Trust Limited. Thomas B. Kinzler, Daniel Schimmel, Kelley Drye & Warren LLP, New York, NY, for Amici Curiae Caceis Bank France and Caceis Bank Luxembourg. Jodi Kleinick, Barry Sher, Mor Wetzler, Paul Hastings LLP, for Amici Curiae FIM Limited and FIM Advisors LLP. Eric Fishman, Kerry A. Brennan, Brandon Johnson, Pillsbury Winthrop Shaw Pittman LLP, New York, NY, for Amicus Curiae Falcon Private Bank Ltd. Richard L. Spinogatti, Proskauer Rose LLP, New York, NY, for Amici Curiae Grosvenor Investment Management Ltd., Grosvenor Private Reserve Fund

7a Limited, et al. William J. Sushon, Shiva Eftekhari, O’Melveny & Myers LLP, New York, NY, for Amici Curiae Credit Suisse AG, Credit Suisse AG, Nassau Branch, et al. David J. Onorato, Jessica R. Simonoff, Susan A. Higginsshra, Freshfields Bruckhaus Deringer US LLP, New York, NY, for Amicus Curiae Tensyr Limited. Brian H. Polovoy, Christopher R. Fenton, Andrew Z. Lipson, Shearman & Sterling LLP, for Amicus Curiae Nomura International plc. John Westerman, Mickee Hennessy, Westerman Ball Ederer Miller & Sharfstein, LLP, Uniondale, NY, for Amici Curiae DOS BFS Family Partnership II, L.P. and Donald and Bette Stein Family Trust.

__________ BARRINGTON D. PARKER, Circuit Judge:

Bernard L. Madoff orchestrated a massive Ponzi scheme through the investment advisory unit of Bernard L. Madoff Investment Securities LLC (“BLMIS”). After the scheme collapsed, Irving H. Picard (the “Trustee”) was appointed trustee for BLMIS pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”). Under SIPA, a trustee is empowered to “recover” (or claw back) money paid out by the debtor, as long as the money “would have been customer property” had the payment not occurred, and the transfers could be avoided under the Bankruptcy Code. Id. § 78fff‐2(c)(3).

8a

Section 546(e) of the Bankruptcy Code, in

turn, establishes an important exception to a trustee’s clawback powers. See 11 U.S.C. § 546(e). Section 546(e) provides generally that certain securities‐related payments, such as transfers made by a stockbroker “in connection with a securities contract,” or “settlement payment[s]” cannot be avoided in bankruptcy.

Invoking his clawback powers, the Trustee sued

hundreds of BLMIS customers who withdrew more from their accounts than they had invested and, as a result, profited (whether knowingly or not) from Madoff’s scheme. The Trustee contends that, if BLMIS had not preferentially paid these customers, the money would have been customer property available to be distributed ratably to all customers, including those who, over time, had withdrawn less than they had invested.

Several defendants moved to dismiss the

actions on the ground that the payments received by BLMIS customers were securities‐related payments that cannot be avoided under § 546(e). The dispositive issue presented by this appeal is whether the payments that BLMIS made to its customers are the type of securities‐related payments that are shielded by § 546(e) from clawback.

The United States District Court for the

Southern District of New York (Rakoff, J.) concluded that the payments were shielded by § 546(e) and dismissed the relevant claims under Federal Rule of Civil Procedure 12(b)(6). We agree

9a and therefore we affirm.

BACKGROUND

Because this appeal is from dismissals under

Rule 12(b)(6), we assume the truth of all well pleaded facts in the underlying complaints and draw all reasonable inferences in favor of the Trustee. See Gibbons v. Malone, 703 F.3d 595, 599 (2d Cir. 2013).1

I

BLMIS purported to execute a “split strike

conversion strategy” for customers of its investment advisory unit. This strategy, had it actually been executed, would have consisted of timing the market to purchase a basket of stocks on the S&P 100 Index, and then hedging those purchases with related options contracts. See SIPC v. Bernard L. Madoff Inv. Secs. LLC (In re Bernard L. Madoff Inv. Secs. LLC), 424 B.R. 122, 129‐30 (Bankr. S.D.N.Y. 2010) (“SIPC v. BLMIS”).

In reality, however, BLMIS’s investment

advisory business conducted no actual securities or options trading on behalf of its customers. Instead, BLMIS deposited customer investments into a single commingled checking account and, for

1 According to the Trustee, the hundreds of complaints in this case are substantially identical with respect to the issues raised in this appeal. Trustee’s Br. 9 n.4. As a result, when we refer to the Trustee’s allegations, we cite the complaint in Picard v. Greiff, Adv. Pro. No. 10‐4357 (Bankr. S.D.N.Y. Nov. 30, 2010), J.A. 594‐623.

10a years, fabricated customer statements to show fictitious securities trading activity and returns ranging between 10 and 17 percent annually. When customers sought to withdraw money from their accounts, including withdrawals of the fictitious profits that BLMIS had attributed to them, BLMIS sent them cash from the commingled checking account. The Trustee seeks to claw back funds from customers who, over time, were able to take out more money than they had invested with BLMIS.

II

In December 2008, the Madoff scheme was exposed and liquidation proceedings began in the district court. As a SIPA trustee, Picard was obligated to collect and set aside a fund of “customer property” specifically earmarked to repay BLMIS customers ratably in proportion to each customer’s “net equity.” See 15 U.S.C. §§ 78lll(4), 78fff‐2(c); see also In re Bernard L. Madoff Inv. Secs. LLC, 654 F.3d 229, 233 (2d Cir. 2011) (“In re BLMIS”). Where, as here, the customer property fund is not sufficient to pay customers in full, SIPA empowers a trustee to claw back any transferred funds “which, except for such transfer[s], would have been customer property.” 15 U.S.C. § 78fff‐2(c)(3). But a trustee can only claw back those transferred funds “if and to the extent that [they are] voidable or void under the provisions of” the Bankruptcy Code. Id.

The Trustee invokes two different theories

under the Bankruptcy Code to avoid transfers of fictitious profits to customers. The Trustee’s first

11a theory is that certain transfers are voidable as “fraudulent transfers” under 11 U.S.C. §§ 548(a)(1)(A) and (B). Section 548(a)(1)(A) applies to transfers made “with actual intent to hinder, delay, or defraud” creditors (often referred to as “actual fraud”). Section 548(a)(1)(B) applies to transfers made without “a reasonably equivalent value in exchange for such transfer” under certain circumstances. This provision is aimed at “constructive fraud,” and does not require proof of fraudulent intent. Importantly, a trustee can invoke these provisions to recover payments only if the payments were “made . . . within 2 years before the date of the filing of the petition.” Id. § 548(a)(1).

Because § 544(b) of the Bankruptcy Code

permits a trustee to avoid any transfers that an unsecured creditor could avoid under applicable state law, the Trustee’s second theory is that the transfers may be clawed back pursuant to New York’s fraudulent conveyance law. See N.Y. Debt. & Cred. L. §§ 273‐76. These state law provisions allow a creditor to avoid a debtor’s improper transfer of property, including many of the same kinds of actually and constructively fraudulent transfers covered by §§ 548(a)(1)(A) and (B). But unlike the Bankruptcy Code, New York’s fraudulent conveyance law has a six‐year statute of limitations. See N.Y. C.P.L.R. § 213.

Many clawback defendants moved to dismiss

the Trustee’s claims as barred by § 546(e) of the Bankruptcy Code, which prevents a bankruptcy trustee from avoiding certain securities‐related

12a payments made by a stockbroker, including payments made in connection with a securities contract and settlement payments. Section 546(e) is a very broadly‐worded safe‐harbor provision that was enacted to “minimiz[e] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.” Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 651 F.3d 329, 334 (2d Cir. 2011) (quoting H. R. Rep. No. 97‐420, at 2 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583). The theory underlying this section is that, “[i]f a firm is required to repay amounts received in settled securities transactions, it could have insufficient capital or liquidity to meet its current securities trading obligations, placing other market participants and the securities markets themselves at risk.” Id. Because § 546(e) is expressly inapplicable to claims of actual fraud brought under § 548(a)(1)(A), the clawback defendants invoked § 546(e) to dismiss only the constructive‐fraud claims under § 548(a)(1)(B) and all New York state law claims.

The clawback defendants first litigated the

applicability of § 546(e) in two cases before the bankruptcy court. The bankruptcy court (Lifland, Bankr. J.) declined to reach the issue, concluding that the question of whether § 546(e) applies to the transfers at issue should not be determined at the pleading stage of the litigation. Picard v. Merkin, 440 B.R. 243, 266‐67 (Bankr. S.D.N.Y. 2010); Picard v. Madoff, 458 B.R. 87, 115‐16 (Bankr. S.D.N.Y. 2011).

13a

Following the bankruptcy court’s decisions, the district court withdrew the bankruptcy reference in one clawback action—the Katz case. After reexamining the issue, Judge Rakoff held that § 546(e) applied because BLMIS was a stockbroker, the account documents executed by the defendant customers were securities contracts, and the various payments BLMIS made to those customers were in connection with securities contracts, or were settlement payments. Accordingly, Judge Rakoff dismissed all of the clawback claims, except claims for actual fraud invoking § 548(a)(1)(A). Picard v. Katz, 462 B.R. 447, 452 (S.D.N.Y. 2011). After the district court refused to certify the case for interlocutory appeal, Picard v. Katz, 466 B.R. 208 (S.D.N.Y. 2012), the parties settled and stipulated to dismiss the remaining claims with prejudice, Picard v. Katz, No. 11‐cv‐3605‐JSR, Doc. Nos. 192‐93 (S.D.N.Y. June 1, 2012).

Judge Rakoff’s decision in Katz represented

the first successful assertion of the § 546(e) defense by any of the clawback defendants. After the district court issued the Katz opinion, hundreds of other clawback defendants moved to withdraw the bankruptcy references and, invoking Katz, sought in the district court to dismiss the clawback suits on § 546(e) grounds.

In SIPC v. BLMIS, Judge Rakoff granted the

motions to withdraw the bankruptcy reference in 84 additional clawback cases. 476 B.R. 715 (S.D.N.Y. 2012). For substantially the same reasons articulated in Katz, the district court held that the payments that BLMIS made to the

14a clawback defendants were in connection with securities contracts, or were settlement payments, and were therefore shielded by § 546(e). SIPC v. BLMIS, 476 B.R. at 718‐19. The district court then dismissed the clawback claims in these 84 suits, again with the exception of actual‐fraud claims invoking § 548(a)(1)(A). SIPC v. BLMIS, 476 B.R. at 723‐24.

To streamline this Court’s review, the Trustee

agreed to a limited consolidation of all pending actions brought by the Trustee raising the § 546(e) issue. See Consent Order, SIPC v. Bernard L. Madoff Inv. Secs. LLC (In re Madoff Secs.), No. 12‐MC‐0115, Doc. No. 13 (S.D.N.Y. May 16, 2012). The district court certified its dismissals as final judgments, see Fed. R. Civ. P. 54(b), and the Trustee appealed.

DISCUSSION

Section 546(e) of the Bankruptcy Code provides

that a bankruptcy trustee

may not avoid a transfer that is a . . . settlement payment, as defined in section . . . 741 of this title, made by [a] . . . stockbroker . . . , or that is a transfer made by [a] . . . stockbroker . . . in connection with a securities contract, as defined in section 741(7), . . . except under section 548(a)(1)(A) of this title.

11 U.S.C. § 546(e). It is not disputed that BLMIS was a “stockbroker” for the purposes of § 546(e).

15a Consequently, this appeal turns on whether the transfers either were “made in connection with a securities contract” or were “settlement payment[s].” Id.

The Trustee argues that § 546(e) should not

apply because BLMIS never initiated, executed, completed, or settled the securities transactions contemplated by the customer agreements. He also contends that the transfers were not “made in connection with a securities contract” or “settlement payment[s]” as those terms are defined in § 741. Finally, the Trustee maintains that permitting the application of § 546(e) in this case would be tantamount to giving legal effect to Madoff’s fraud. See In re BLMIS, 654 F.3d 229, 235 (2d Cir. 2011). For the following reasons, we reject these arguments, which flow from the premise that § 546(e) would only apply if Madoff had actually completed the securities transactions he purported to effectuate. Instead, we conclude that § 546(e) shields these transfers from avoidance because they were “made in connection with a securities contract,” and were also “settlement payment[s].”

I

Section 741(7) of the Bankruptcy Code, to

which § 546(e) refers, defines “securities contract” with extraordinary breadth to include:

(i) a contract for the purchase, sale or loan of a security . . . or . . . option to purchase or sell any such security

16a

. . . ; [or]

. . .

(vii) any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph . . . . [or]

. . .

(x) a master agreement that provides for an agreement or transaction referred to in clause (i) [or] . . . (vii) . . . , except that such master agreement shall be considered to be a securities contract under this paragraph only with respect to each agreement or transaction under such master agreement that is referred to in [clauses (i) through (ix)]; or

(xi) any security agreement or arrangement . . . related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker . . . .

11 U.S.C. §§ 741(7)(A)(i),(vii),(x), (xi).

Thus, the term ʺsecurities contractʺ expansively includes contracts for the purchase or sale of securities, as well as any agreements that are similar or related to contracts for the purchase or

17a sale of securities. Id. This concept is broadened even farther because § 546(e) also protects a transfer that is “in connection” with a securities contract.

While neither the Bankruptcy Code nor SIPA

defines purchase or sale, the Securities Exchange Act of 1934 – of which SIPA is a part – defines the terms to “include any contract to buy, purchase, or otherwise acquire . . . [or] to sell or otherwise dispose of” a security. 15 U.S.C. § 78c(a)(13)‐(14) (emphasis added). For the reasons that follow, we conclude that BLMIS and its customers entered into agreements that satisfy the broad definition of “securities contracts” under § 741(7)(A).

The clawback defendants argue that a

“securities contract” was created by three of the documents that BLMIS customers were required to execute when opening their accounts. In the first, a “Customer Agreement,” each customer authorized BLMIS to “open [ ] or maintain [ ] one or more accounts” for his benefit. J.A. 1257. In a second document, a “Trading Authorization,” each customer appointed BLMIS to be the customer’s “agent and attorney in fact to buy, sell and trade in stocks, bonds, and any other securities in accordance with [BLMIS’s] terms and conditions for the [customer’s] account.” J.A. 1264. And in a third document, an “Option Agreement,” each customer authorized BLMIS to engage in options trading for the customer’s account. J.A. 1261‐62. The defendants contend that these three account opening documents (together, the “Account Documents”) authorized BLMIS to engage in

18a securities transactions on behalf of its customers, although they did not expressly require BLMIS to conduct any such transactions, and consequently established a “securities contract.”

We agree. On their face, the Account Documents

are agreements by which BLMIS will “acquire or dispose of securities” on behalf of its customers. The Customer Agreement established the broker‐customer relationship, and the Trading Authorization authorized BLMIS to trade in securities for the customer’s account. A‐2147‐49, A‐2144. These documents also specify the terms by which BLMIS will acquire and dispose of securities for the customer. Were it not for the Account Documents, there would be no basis for a customer to make deposits or request withdrawals. Thus, the transfers at issue originated with, and could not have been possible but for, the relationship created by the Account Documents. Accordingly, we conclude that they fall within the statute’s broad definition of “securities contract.” See § 741(7)(A)(i).

The function contemplated for the Account

Documents also satisfies the definition of “securities contract” in § 741(7)(A)(x), which includes “a master agreement that provides for an agreement or transaction referred to in clause (i) [i.e., ‘a contract for the purchase, sale, or loan of a security’]).” As the Trustee acknowledges in his brief, “master agreement” is a “term of art in the securities industry” meaning “a contract establishing the mutual undertakings between two counterparties that anticipate executing future securities transactions with each other. . . .”

19a Trustee Br. 43 (citing Paul C. Harding, Mastering the ISDA Master Agreements (1992 and 2002) 19‐27 (2d ed. 2004)). Taken together, this is precisely what the Account Documents contemplate and accomplish. The Trustee’s own complaints further support this conclusion. He alleges that “Madoff promised [his] clients that their funds would be invested in a basket of common stocks within the S&P 100 Index,” and hedged with corresponding options contracts. J.A. 601 ¶ 21 (emphasis added). Additionally, because the Account Documents obligate BLMIS to reimburse its customers upon a request for withdrawal, they also fit the definition of “securities contract” in § 741(7)(A)(xi), which includes, again quite expansively, “any security agreement or arrangement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker.”

Yet another indication that Congress intended §

546(e) to sweep broadly is supplied by the text of § 741(7)(A)(vii) which expands the definition of “securities contract” to include “any other agreement or transaction that is similar to” a “contract for the purchase, sale or loan of a security[.]” Few words in the English language are as expansive as “any” and “similar.” See Deravin v. Kerik, 335 F.3d 195, 204 (2d Cir. 2003) (“[R]ead naturally, the word “any” has an expansive meaning,’ and . . . so long as ‘Congress did not add any language limiting the breadth of that word,’ the term ‘any’ must be given literal effect.” (quoting United States v. Gonzales, 520 U.S. 1, 5 (1997)). In ordinary usage, the word

20a “similar” means “having characteristics in common,” or “alike in substance or essentials.” Webster’s 3d New Int’l Dictionary 2120 (1993). In light of these definitions, we conclude that the relationship between BLMIS and its customers established by the Account Documents involved “agreement[s]” that are “similar to” “contracts for the purchase, sale or loan of a security . . . .” 11 U.S.C. §§ 741(7)(A)(i), (vii).

The Trustee advances several arguments why,

in his view, these agreements do not constitute a “securities contract” and the transfers at issue should not be shielded from avoidance. None are persuasive. First, the Trustee argues that § 546(e) does not apply because BLMIS never initiated, executed, completed or settled the securities transactions it promised to engage in. Trustee’s Br. 25‐35. Citing our decision in Enron, the Trustee contends that the purpose of § 546(e) is to “minimiz[e] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.” Id. at 27 (quoting Enron, 651 F.3d at 334). Because “there are no securities transactions to unwind,” the Trustee argues that no such disruption would occur, and correspondingly, § 546(e) is inapplicable. Trustee’s Br. 25.

This argument misses the point. It does not

engage with the language Congress chose for § 741(7) and § 546(e). Because those provisions do not contain a purchase or sale requirement, whether or not BLMIS actually transacted in

21a securities is not determinative.2 Section 546(e) only requires that a covered transfer be broadly related to a “securities contract,” not that it be connected to an actual securities transaction.3 In other words, whether an agreement satisfies the definition of “securities contract” does not depend on the broker’s performance, because a breach of a contract neither changes nor nullifies the nature of the underlying agreement. The existence of a securities contract is not vitiated because a broker fails to make good on his commitment. See Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 581 (2d Cir. 2006).

Furthermore, the interpretation pressed by the

Trustee risks the very sort of significant market

2 Similarly, the Exchange Act’s inclusion of contracts to “otherwise acquire” or “dispose of” securities in its definition of “buy” and “sell” necessarily contemplates agreements beyond those for a simple sale or purchase. See 15 U.S.C. §§ 78c(a)(13)‐(14). 3 This conclusion is congruent with the broad interpretation of the “in connection with a purchase or sale of any security” requirement of Rule 10b‐5 in the context of federal securities laws. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85 n.10 (2006) (“[A] broker who accepts payment for securities that he never intends to deliver . . . violates §10(b) and Rule 10b‐5.”) (citations and quotations omitted); SEC v. Zandford, 535 U.S. 813, 819 (2002) (holding that the SEC may bring a public enforcement action against a broker who accepted payment for securities that he never delivered); see also Grippo v. Perazzo, 357 F.3d 1218, 1220‐24 (11th Cir. 2004) (“A plaintiff does not need to identify a specific security, or demonstrate that his money was actually invested in securities” for purposes of Rule 10b‐5.).

22a disruption that Congress was concerned with. The magnitude of BLMIS’s scheme, which included thousands of customers and billions of dollars under management, is unprecedented. Permitting the clawback of millions, if not billions, of dollars from BLMIS clients – many of whom are institutional investors and feeder funds – would likely cause the very “displacement” that Congress hoped to minimize in enacting § 546(e). See Enron, 651 F.3d at 339. The clawback defendants, having every reason to believe that BLMIS was actually engaged in the business of effecting securities transactions, have every right to avail themselves of all the protections afforded to the clients of stockbrokers, including the protection offered by § 546(e).

Second, the Trustee argues that the Account

Documents are not securities contracts because they do not specifically “identify any security, issuer, quantity, price, or other terms necessary to describe a security transaction.”4 See Trustee Br. 38. This argument constructs a requirement that the law does not contain. The Trading Authorization identifies a specific category of public securities (S&P 100 stocks) to be traded. A‐1646 ¶ 21. Nothing in our reading of § 741(7)(A) indicates that any greater specificity, much less the degree of detail called for by the Trustee, is required. To the contrary, if Congress intended to mandate securities contracts to identify

4 The Securities Investor Protection Corporation (“SIPC”), also an appellant in this case, assumed arguendo for the purposes of its brief that the Account Documents are securities contracts. See SIPC Br. 2, 14.

23a transactions with the precision the Trustee claims is required, Congress would hardly have included the reference to “master agreements” in subsection (x) or adopted the broad “similar to” catch‐all in subsection (vii) or the “any . . . arrangement . . . related to any agreement . . .” language in subsection (xi). See Penn. Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 562 (1990).

Third, the Trustee argues that the Account

Documents merely authorize BLMIS to conduct securities transactions on behalf of its customers, but never expressly obligate BLMIS to carry out any such transactions. Trustee’s Br. 38‐39. Accordingly, the Trustee contends that even if customers reasonably expected that BLMIS would conduct securities transactions on their behalf, this would establish an obligation sounding in “quasi‐contract” at most, but would not constitute a true contractual obligation. Id. at 39. Alternatively, the Trustee argues that the Account Documents establish an “agency” relationship between BLMIS and its customers, similar to that between a real estate broker and a home buyer, and “are no more contracts for the purchase and sale of a security than a real estate brokerage agreement is a contract for the purchase or sale of a house.” Id. at 42.

The Trustee might be correct that the record

reflects no written contract for the purchase or sale of a specific security between BLMIS and its customers. Further, the Trustee is right that the Account Documents function by authorizing BLMIS to act as an agent for the customer in unspecified expected future securities

24a transactions. The Trustee is also correct that, standing alone, the Account Documents would not effectuate the purchase or sale of any particular security.

But, as we have seen, the statutory definition of

a “securities contract” is not limited in the way the Trustee would have us read it, and to the contrary, encompasses the relationship created by the Account Documents. As discussed above, the definition includes “any other agreement . . . that is similar to” a “contract for the purchase, sale or loan of a security.” 11 U.S.C. §§ 741(7)(A)(i), (vii) (emphases added). “An agreement is a manifestation of mutual assent on the part of two or more persons,” and it “has in some respects a wider meaning than contract, bargain or promise.” Restatement (Second) of Contracts § 3 (1979), § 3 cmt. a. The Account Documents established that BLMIS and its customers “manifest[ed] their mutual assent” that BLMIS would conduct securities transactions on the customers’ behalf pursuing a specific investment strategy. See id. § 3. This is, in our view, an agreement sufficiently “similar to” a contract for the purchase or sale of a security to fall within the catch‐all provision of § 741(7)(A)(vii). Of course, BLMIS secretly intended to violate the agreement by using the deposits to fund the ongoing Ponzi scheme. But this is of no moment, because “[a]n agreement is a manifestation of mutual assent,” and “[t]he conduct of a party may manifest assent even though he does not in fact assent.” Id. §§ 3, 19(3) (emphasis added).

We similarly have little difficulty concluding

25a that the payments BLMIS made to its customers were made “in connection with” the securities contracts identified above. In the context of § 546(e), a transfer is “in connection with” a securities contract if it is “related to” or “associated with” the securities contract. See Webster’s 3d New Int’l Dictionary 481 (1993) (defining “connection” as “relationship or association in thought”); cf. Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983) (interpreting “relates to” to mean “a connection with or reference to”). Here, BLMIS promised its customers that it would transact securities, and BLMIS’s customers deposited money relying on that promise. This agreement constitutes a securities contract as defined in the statute and the customers’ subsequent withdrawals from their accounts were therefore related to, and associated with, this securities contract.

SIPC argues that Ponzi scheme payments, by

definition, are not “in connection with” a securities contract. SIPC’s Br. 16. SIPC contends that in order for the payments to have been made “in connection with” a securities contract, there must necessarily have been some relation or connection between the payment and the contract. Id. at 27‐28. According to SIPC, although the payments of fictitious profits were purported to have been made in connection with the agreements, they were not in fact made in connection with the agreements because the agreements were either irrelevant or the payments were not authorized by the agreements. Id. at 28‐30.

26a

We are not persuaded. Section 546(e) sets a low bar for the required relationship between the securities contract and the transfer sought to be avoided. Congress could have raised the bar by requiring that the transfer be made “pursuant to,” or “in accordance with the terms of,” or “as required by,” the securities contract, but it did not. Instead, Congress merely required that the transfer have a connection to the securities contract, which these payments do.

Certainly SIPC and the Trustee are correct that these transfers were also made “in connection with” a Ponzi scheme and, as a result, were fraudulent. See id. at 29. Indeed, BLMIS’s conduct was in flagrant breach of the agreements it made with its customers. But the fact that a payment was made in connection with a Ponzi scheme does not mean that is was not at the same time made in connection with a (breached) securities contract. After all, a transfer can be connected to, and can be made in relation to, multiple documents or purposes simultaneously.

II

We also conclude that the transfers constituted “settlement payments,” which provides another basis to shield the transfers from avoidance under § 546(e). As described above, § 546(e) provides that a trustee “may not avoid a transfer that is a . . . settlement payment, as defined in . . . this title, made by [a] . . . stockbroker.” Section 741(8) defines “settlement payment” as a “preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement

27a payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.”

The Trustee again contends that these transfers did not constitute “settlement payment[s]” because BLMIS never engaged in actual securities trading. But we have held that the statutory definition should be broadly construed to apply to “the transfer of cash or securities made to complete [a] securities transaction.” Enron, 651 F.3d at 334 (citations omitted). That is what the BLMIS clients received. Each time a customer requested a withdrawal from BLMIS, he or she intended that BLMIS dispose of securities and remit payment to the customer. See N.Y.U.C.C. § 8‐501(b)(1) & cmt. 2 (broker’s written crediting of securities to a customer’s account creates an enforceable securities entitlement). The statutory definition and Enron compel the conclusion that, for example, if I instruct my broker to sell my shares of ABC Corporation and remit the cash, that payment is a “settlement” even if the broker may have failed to execute the trade and sent me cash stolen from another client. As the district court correctly concluded, because the customer granted BLMIS discretion to liquidate securities in their accounts to the extent necessary to implement their sell orders or withdrawal requests, each transfer in respect of a such an order or request constituted a settlement payment.

III

Finally, we disagree with the Trustee’s contention that affirming the district court’s

28a decision would be inconsistent with our decision in In re BLMIS, 654 F.3d 229 (2d Cir. 2011). There, we faced the question of how to calculate each BLMIS customer’s “net equity,” as that term is defined in SIPA. Id. at 233. We said that it would be “absurd” to calculate customers’ net equity using BLMIS’s fictitious account statements, because that would “have the . . . effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations.” Id. at 235. According to the Trustee, this case is similar. The Trustee argues that, to allow customers to retain the fictitious profits Madoff arbitrarily bestowed on them amounts to giving legal effect to his fraud. Trustee’s Br. 51‐55.

This argument, albeit compelling, is ultimately not convincing. In our earlier decision, we interpreted “net equity” in a manner that would harmonize it with the SIPA statutory framework as a whole. See In re BLMIS, 654 F.3d at 237. Section 546(e) however, is part of the Bankruptcy Code, not SIPA, and was not in issue in In re BLMIS. This is important because, in enacting the Bankruptcy Code, Congress struck careful balances between the need for an equitable result for the debtor and its creditors, and the need for finality. See In re Century Brass Prods., Inc., 22 F.3d 37, 40 (2d Cir. 1994). For example, a bankruptcy trustee can recover fraudulent transfers under § 548(a)(1) only when the transfers took place within two years of the petition date. And avoidance claims must be brought “two years after the entry of the order for relief” at the latest. 11 U.S.C. § 546(a). These statutes of limitations

29a reflect that, at a certain point, the need for finality is paramount even in light of countervailing equity considerations. Similarly, by enacting § 546(e), Congress provided that, for a very broad range of securities‐related transfers, the interest in finality is sufficiently important that they cannot be avoided by a bankruptcy trustee at all, except as actual fraudulent transfers under § 548(a)(1)(A). We are obliged to respect the balance Congress struck among these complex competing considerations.

CONCLUSION

The judgment of the district court is AFFIRMED.

30a

__________

APPENDIX B __________

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

__________

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.

BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

__________

In re: MADOFF SECURITIES

_________

PERTAINS TO THE FOLLOWING CASES: Picard v. Greiff, 11 Civ. 3775;

Picard v. Blumenthal, 11 Civ. 4293; Picard v. Goldman, 11 Civ. 4959;

Picard v. Hein, 11 Civ. 4936; and cases listed in Appendix A.

__________

No. 12 MC 115 (JSR) __________

May 1, 2012 __________

31a

OPINION AND ORDER

JED S. RAKOFF, District Judge.

A “Ponzi” scheme, by definition, involves the use of funds received from new victims to pay monies transferred to prior victims who seek to withdraw the promised returns on their investments. A perennial issue when the scheme topples is whether and to what extent such transferred funds can be recaptured by a representative of the debtor’s estate or otherwise. See generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231 (2d Cir. 2011). Often, moreover, the resolution of this issue is partly a function of just what kind of Ponzi scheme was involved and what specialized laws were applicable thereto. Thus, in the case of the massive Ponzi scheme perpetrated by Bernard L. Madoff through the instrument of his securities brokerage business, Bernard L. Madoff Investment Securities (“Madoff Securities”), the issue of how to apportion the monies already paid to innocent investors raises complicated questions involving the interaction of federal securities laws, federal bankruptcy laws, and New York State debtor and creditor laws.1 In the instant four cases -- and eighty other cases listed in Appendix A to this Opinion and Order, to which these rulings are, on consent, also made applicable -- Irving Picard, the trustee for the Madoff Securities estate appointed under the 1 Accordingly, this Court previously withdrew the reference of these cases to the Bankruptcy Court in order to resolve issues that require substantial interpretation of non-bankruptcy federal law.

32a Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq., seeks to “avoid” (and thereby recapture), pursuant to 11 U.S.C. §§ 548(a)(1)(A) & (B), § 550(a), and comparable provisions of New York law incorporated by reference under § 544(b), various prior transfers made by Madoff Securities to these defendants. The defendants, in turn, move to dismiss these claims. The complaints in these cases, of which the Amended Complaint in Picard v. Blumenthal, 11 Civ. 4293, dated December 2, 2011 (“AC”) is typical,2 each set forth the following allegations. For many years prior to filing for bankruptcy, Madoff Securities -- a securities broker-dealer registered with the Securities and Exchange Commission (“SEC”) under § 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(b) -- purported to operate three business units: an investment advisory unit, a market making unit, and a proprietary trading unit. AC ¶ 19. Clients investing in the investment advisory unit, including the defendants here, signed either a “Customer Agreement,” an “Option Agreement,” a “Trading Authorization Limited to Purchases and Sales of Securities and Options,” or some combination of the three (collectively, the “account agreements”). Id. ¶ 35.3 Pursuant to these 2 See also the Amended Complaint in Picard v. Hein dated January 25, 2012; the Amended Complaint in Picard v. Goldman dated January 25, 2012; and the Complaint in Picard v. Greiff dated November 12, 2010. 3 The Court agrees with defendants that it may take cognizance on these motions of the terms of these agreements, since the agreements are referenced in the complaints. See

33a agreements, Madoff Securities purported to make securities investments on the clients’ behalf. Id. ¶ 36. Accordingly, Madoff Securities sent monthly or quarterly statements to each of its investment advisory clients showing the securities that Madoff Securities claimed to hold for the client and the trades that it claimed to have executed on the client’s behalf during the applicable period. Id. ¶ 22. In reality, the investment advisory unit of Madoff Securities never, or almost never, made the trades or held the securities described in the statements it sent to investment advisory clients, at least during all years here relevant. Id. ¶ 22.4 Instead, Madoff Securities operated its investment advisory division as a Ponzi scheme. Id. ¶ 25. Thus,

Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002) (permitting consideration of “documents attached to the complaint as an exhibit or incorporated in it by reference, . . . matters of which judicial notice may be taken, or . . . documents either in plaintiffs’ possession or of which plaintiffs had knowledge and relied on in bringing suit” (quoting Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993))). All these agreements indicated that Madoff Securities would trade securities on the clients’ behalf. See Declaration of Carole Neville dated January 4, 2012 in Picard v. Hein, 11 Civ. 4936 (“Neville Decl.”) Ex. D. 4 By contrast, according to the Declaration of Joseph Looby, the Trustee’s forensic accountant, which the Trustee submitted to the Bankruptcy Court and which it seems clear was relied on by the Trustee in drafting the instant complaints, the “market making and proprietary business units appear to have been largely involved in legitimate trading with institutional counterparties and utilized live computer systems.” Neville Decl. Ex. C (“Looby Decl.”) ¶ 28.

34a when clients withdrew money from their accounts with Madoff Securities, they did not actually receive returns on successful investments, but instead only the very money that they and others had deposited with Madoff Securities for the purpose of purchasing securities. Id. Defendants contend that these allegations fail to state a claim against them. On a motion to dismiss under Rule 12(b)(6), a court must assess whether the complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Additionally, “[a]n affirmative defense may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint.” Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998). The defendants first argue that 11 U.S.C. § 546(e) prohibits the Trustee from avoiding transfers under sections 544 and 548(a)(1)(B), i.e., the provisions that, respectively, incorporate New York law and permit avoidance of constructively fraudulent transfers. The Court has previously concluded that § 546(e) “precludes the Trustee from bringing any action to recover from any of Madoff’s customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud.” Picard v. Katz, 462 B.R. 447, 452 (S.D.N.Y. 2011). Under ordinary principles of collateral estoppel, this determination likely bars

35a the Trustee from relitigating the issue against these defendants, who are for all relevant purposes similarly situated to the defendants in Katz. See Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006) (“Under New York law, collateral estoppel bars relitigation of an issue when (1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior action.”). Nonetheless, the Court has considered the matter de novo, and, having done so, again concludes, essentially for the reasons stated in Katz, incorporated here by reference, that the rulings there apply equally to the instant cases. Because the Trustee raises some arguments here that were not raised in Katz, however, a few further words may be in order. Section 546(e) provides that:

Notwithstanding sections 544 [and] 548(a)(1)(B) . . . of this title, the trustee may not avoid a transfer that is a . . . settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a . . . stockbroker . . . or that is a transfer made by or to (or for the benefit of) a . . . stockbroker . . . in connection with a securities contract, as defined in section 741(7). . ..

36a The Trustee argues that § 546(e) does not apply in these cases because Madoff Securities was not a “stockbroker” under the Bankruptcy Code and/or because defendants’ withdrawals from their accounts were neither “settlement payment[s]” nor payments made “in connection with a securities contract.” The arguments are unpersuasive. As to whether Madoff Securities was a “stockbroker” under the Bankruptcy Code, section 101(53A) of the Code defines “stockbroker” to include entities that “engage[ ] in the business of effecting transactions in securities.”5 Overall, Madoff Securities, which was registered as a stockbroker with the SEC, clearly engaged in securities transactions. Even though the complaints here allege that Madoff Securities’ investment advisory division did not actually engage in securities transactions, see AC ¶ 22, the Trustee’s accountant’s analysis on which that allegation was based also concluded that Madoff Securities as a whole engaged in “legitimate trading” through its market making and proprietary divisions. Looby Decl. ¶ 28. Indeed, it was only by virtue of such trading and its other trappings of legitimacy that Madoff Securities could maintain its registration with the SEC. See id. ¶ 30 (noting that Madoff Securities’ market making and proprietary trading divisions generated “outputs for regulatory review including 5 Section 101(53A) also requires a stockbroker to have a “customer, as defined in section 741.” The Trustee does contend that Madoff Securities lacked customers.

37a FINRA [and] the Securities & Exchange Commission (‘SEC’)”). Thus, even assuming the truth of the allegation that Madoff Securities’ investment advisory division never traded securities on behalf of clients, Madoff Securities nonetheless qualifies as a stockbroker by virtue of the trading conducted by its market making and proprietary trading divisions. See In re Baker & Getty Fin. Servs., Inc., 106 F.3d 1255, 1262 (6th Cir. 1997) (applying § 101(53A)’s definition “not on a customer-by-customer basis,” but instead on the basis of “the underlying business at issue”). Alternatively, even if one artificially separated Madoff Securities into its component parts for purposes of § 546(e) -- so that Madoff Securities could somehow be said to be a stockbroker and not a stockbroker -- Madoff Securities clearly held itself out to all its customers, including its investment advisory clients, as a firm engaged in the business of effecting transactions in securities. Those clients, the defendants here, having every reason to believe that Madoff Securities was actually engaged in the business of effecting securities transactions, have every right to avail themselves of all the protections afforded the customers of stockbrokers, including the protection offered by § 546(e). Turning to the Trustee’s argument that defendants’ withdrawals from their Madoff Securities accounts did not constitute transfers “in connection with a securities contract, as defined in section 741(7),” the definition of securities contract includes, inter alia, “a master agreement that

38a provides for an agreement or transaction referred to in clause (i)” -- i.e., “a contract for the purchase, sale, or loan of a security” -- and “any security agreement . . . related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker.” § 741(7)(a)(i), (x), & (xi). Under this definition, the account agreements between Madoff Securities and the defendants clearly qualify as securities contracts. The Trustee’s complaints explicitly acknowledge that the “Account Agreements were to be performed . . . through securities trading activities.” AC ¶ 35. Moreover, the complaints further allege that the defendants had a specific idea of what performance under the agreements entailed, since Madoff Securities promised “that their funds would be invested in a basket of common stocks within the S & P 100 Index” and that it would “hedge such purchases with option contracts.” AC ¶ 21. Thus, the “Trading Authorization Limited to Purchases and Sales of Securities and Options” specifically “authorizes Bernard L. Madoff . . . to buy, sell and trade in stocks.” Neville Decl. Ex. D. Similarly, the “Option Agreement” authorizes Madoff Securities “to carry accounts (‘Option Accounts’) for . . . transactions in option contracts.” Id. Finally, the “Customer Agreement” makes numerous references to securities transactions, such as requiring that such transactions “shall be subject” to the securities laws and permitting the customer, “upon appropriate demand, to receive physical delivery of fully paid securities in the Customer’s Account.” Id.

39a Each of these agreements constitutes a “securities contract” under § 741(7), and Madoff Securities thus made transfers to defendants “in connection with a securities contract.” As described above, each agreement qualifies as a “a master agreement that provides for” the purchase and sale of securities. § 741(7)(a)(x). The complaints themselves acknowledge that the defendants invested with Madoff Securities in the expectation that Madoff Securities would perform under the account agreements by purchasing specific securities. AC ¶¶ 21, 35.6 The fact that the transfers that the Trustee seeks to avoid under § 544 and § 548(a)(1)(B) are transfers “made by . . . [a] stockbroker . . . in connection with a securities contract” is alone sufficient to bring them within the “safe harbor” of § 546(e). Alternatively, however -- although the Court concedes it is a closer question -- the Court concludes that the defendants’ withdrawals from their accounts constituted “settlement payments” from a stockbroker and therefore fall within the coverage of § 546(e) for that independent reason. Section 741(8) defines a settlement payment as “a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment

6 Alternatively, the account agreements also qualify as securities contracts under § 741(7)(a)(xi) because they “related to an[ ] agreement or transaction” in securities, and they obligated Madoff Securities, a stockbroker, to reimburse customers.

40a commonly used in the securities trade.” The Second Circuit has interpreted this “extremely broad” definition to apply, inter alia, to “the transfer of cash or securities made to complete [a] securities transaction.” Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 334 (2d Cir. 2011) (citations omitted). Although the Trustee, sounding a familiar theme, argues that, because Madoff Securities did not trade securities on behalf of its investment advisory clients, withdrawals by those clients did not complete any securities transactions, this ignores the fact that what clients had contracted for was Madoff Securities’ implementation of its investment strategy and that the clients’ withdrawals therefore constituted partial settlement of these securities contracts. Under those contracts, the clients exchanged money for access to an investment strategy that would be implemented over time, creating, if the strategy was successful, an obligation that was settled when payment was made, in whole or part, from Madoff Securities to the defendants. From the defendants’ perspective, then, withdrawals from their Madoff Securities accounts completed securities transactions. Just as a broker who sells a security to a third party on behalf of a customer does not complete the transaction until the customer gains control over the resulting money, see 17 C.F.R. § 240.15c1–1(b)(4), so a broker that executes a discretionary strategy on behalf of a customer does not complete its transaction until the customer has regained control over whatever

41a funds result from the implementation of the strategy. This approach comports with Enron, where the Second Circuit found that an issuer’s retirement of debt completed a transaction in securities even though it did not involve the purchase or sale of a security. 651 F.3d at 336–37. Accordingly, the defendants’ withdrawals completed securities transactions and constituted settlement payments under § 741(8) and Enron. The Trustee’s more global response to all the above is that defrauded clients of Madoff Securities cannot avail themselves of § 546(e)’s protections because such customers are not within the ambit of those the statute was designed to protect. As the Second Circuit noted in Enron, Congress enacted § 546(e)’s safe harbor in 1982 as a means of “minimiz[ing] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.” 651 F.3d at 334 (quoting H.R. Rep. No. 97–420, at 1 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583). The Trustee reads this as limiting § 546(e)’s coverage to bankruptcy proceedings involving legitimate brokerage firms and transactions -- as if disruptive securities bankruptcies were not commonly the end-result of massive fraud. See, e.g., Enron, 651 F.3d at 331–32. But whereas some courts in this Circuit have accepted this argument, e.g., In re MacMenamin’s Grill Ltd., 450 B.R. 414, 428 (Bankr. S.D.N.Y. 2011) (postulating a purported “illegal conduct exception to section 546(e)”), in this Court’s view it cannot survive the broad and literal interpretation given § 546(e) in Enron. See generally In re Plassein Int’l Corp., 590

42a F.3d 252, 257–58 (3d Cir. 2009); In re QSI Holdings, Inc., 571 F.3d 545, 549 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 986–87 (8th Cir. 2009). Most fundamentally this is because, as stated in Katz, “courts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992). Indeed, to deviate from what Congress has clearly and constitutionally decreed is a power the judiciary does not possess. See Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004). Nothing in the express language of § 546(e) suggests that it is not designed to protect the legitimate expectations of customers, as well as the securities market in general, even when the stockbroker is engaged in fraud. Moreover, the Trustee’s arguments wholly overlook the fact that § 546(e), by its plain terms, already contains an exception for certain kinds of fraud. Specifically, § 546(e) permits the Trustee to avoid actually fraudulent transfers under § 548(a)(1)(A). The Trustee offers no explanation for why Congress, if it had in fact wanted to enact the general fraud exception the Trustee advocates, did not express that intention in the statute, when it did express its desire to exempt § 548(a)(1)(A). Finally, the application of § 546(e) to the instant case is, in fact, wholly consistent with the legislative history cited by the Trustee. Indeed, given the magnitude of Madoff Securities -- 4,900

43a clients and $65 billion under management in 2008, AC ¶ 31 -- avoidance of its transfers to clients, who included other investment businesses, would likely cause the very “displacement” that Congress hoped to minimize. See Enron, 651 F.3d at 339; Neville Decl. Ex. B, Trustee’s First Interim Report dated July 9, 2009 ¶¶ 99, 101.7 The Court concludes, therefore, that § 546(e) bars the Trustee from pursuing the claims here made under § 548(a)(1)(B) and § 544. Conversely, however, § 546(e) does not bar the Trustee from

7 The Trustee makes two final arguments that require only brief responses. First, the Trustee argues that § 546(e) conflicts with SIPA because “applying the safe harbor provision would eliminate most avoidance powers granted to a trustee under SIPA, negating its remedial purpose.” In re Bernard L. Madoff Inv. Securities, LLC, 440 B.R. 243, 267 (Bankr. S.D.N.Y. 2010). However, SIPA gives the Trustee “the same powers and title with respect to the debtor and the property of the debtor . . . as a trustee in a case under Title 11.” 15 U.S.C. § 78fff–1(a). Thus, SIPA expressly incorporates the limitations Title 11 places on trustee’s powers, including § 546(e). Second, the Trustee contends that applying § 546(e) conflicts with a recent Second Circuit decision by “hav[ing] the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations.” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir. 2011). But, in fact, the decision cited does not even mention § 546(e). Taken literally, moreover, the Trustee’s position would have “the absurd effect” of displacing even statutes of limitation, which prevent the Trustee from recovering any fictitious profits that a client received more than six years prior to the date on which Madoff Securities filed for bankruptcy. In re Bernard L. Madoff Inv. Sec. LLC does not permit the Trustee to suspend the whole legal order in pursuit of a result he regards as equitable.

44a pursuing the claims he here makes under § 548(a)(1)(A) and § 550(a). Section 548(a)(1)(A) permits the Trustee to avoid transfers that Madoff Securities made during the two years prior to bankruptcy “with actual intent to hinder, delay, or defraud any” of its creditors. Moreover, where the Trustee can avoid an initial transfer under § 548(a)(1)(A), § 550(a) then allows the Trustee to recover “the property transferred” from “any immediate or mediate transferee of [the] initial transfer.” Here, as in Katz, the complaints plainly allege that “Madoff Securities’ transfers during the two-year period were made with actual intent to defraud present and future creditors, i.e., those left holding the bag when the scheme was uncovered.” 462 B.R. at 453. Thus, the Court concludes that the Trustee has adequately pled a prima facie case under § 548(a)(1)(A).8

8 As described below, the defendants argue based on § 548(c) that they have provided value for the transfers they received from Madoff Securities. To the extent that any defendant argues that such value not only entitles her to invoke the affirmative defense provided by § 548(c), but also prevents the Trustee from establishing a prima facie case, the Court, as in Katz, rejects that argument. Greiff, for example, argues that transfers that satisfy a debtor’s creditors do not defraud its other creditors. See In re Sharp Int’l Corp., 403 F.3d 43, 54 (2d Cir. 2005) (“A conveyance which satisfies an antecedent debt made while the debtor is insolvent is neither fraudulent nor otherwise improper, even if its effect is to prefer one creditor over another.”) (quoting Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A., 191 A.D.2d 86, 90–91 (1st Dept. 1993)). This line of reasoning traces back to Boston Trading Grp., Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987), then-Judge Breyer’s exposition of the history of bankruptcy avoidance law. Under Boston Trading, “[t]he basic object of fraudulent conveyance law,” as opposed to preferential

45a

conveyance law, “is to see that the debtor uses his limited assets to satisfy some of his creditors; it normally does not try to choose among them.” Id. at 1509. Thus, “to find an actual intent to defraud creditors when, as in our example, an insolvent debtor prefers a less worthy creditor, would tend to deflect fraudulent conveyance law from one of its basic functions (to see that an insolvent debtor’s limited funds are used to pay some worthy creditor), while providing it with a new function (determining which creditor is the more worthy).” Id. at 1511. Judge Breyer gave three examples in which a conveyance diminished the amount of resources available to creditors: (1) where a debtor transfers resources to someone the debtor expects will use them for the debtor’s benefit, (2) where a debtor transfers property to a friend or family member, and (3) where a debtor exchanges assets creditors can reach for assets they cannot. Id. at 1508. Nonetheless, Sharp and Boston Trading do not govern this case because the Trustee has adequately alleged that transfers not only preferred one creditor over another, but also defrauded Madoff Securities’ creditors and depleted the funds available to pay any of them. See In re Bayou Group, LLC, 362 B.R. 624, 638 (Bankr. S.D.N.Y. 2007) (“In contrast to the lawful and disclosed payment of a valid contractual antecedent debt in Sharp, the redemption payments at issue here of non-existent investor account balances as misrepresented in fraudulent financial statements were themselves inherently fraudulent and constituted an integral and essential component of the fraudulent Ponzi scheme alleged in the amended complaints.”). While they do not fall within any of the three paradigmatic examples described by Judge Breyer, Madoff Securities’ transfers defrauded creditors and diminished the assets available to them by, among other things, extending the life of the Ponzi scheme. In order to perpetuate its fraud, Madoff Securities had to make transfers in accordance with the fraudulent account statements it issued. Perpetuating the fraud harmed creditors. Madoff Securities’ did not simply funnel money from one client to another. Instead, it also squandered money by, for example, purchasing the appearance of a legal enterprise, see Looby Decl. ¶ 27 (neither the market making

46a Nonetheless, the defendants can prevail on their motion to dismiss these claims if they prove that, “on the face of the complaint[s],” they can invoke the affirmative defense provided by § 548(c). Section 548(c) prevents the Trustee from avoiding transfers under § 548(a)(1)(A) if the transferee “takes for value and in good faith.” The parties primarily dispute whether the defendants received transfers from Madoff Securities “for value.”9 nor the proprietary trading division “would have been viable without the fraudulent” investment advisory division), and funding Madoff’s lavish lifestyle. The longer the scheme lasted, then, the larger the gap between Madoff Securities’ debts and its ability to pay became. Moreover, as described in greater detail below, the defendants have shown neither that they could have enforced their claims for profits against Madoff Securities nor that their claims shared the same priority with those of other debtors. Accordingly, because transfers of profits depleted the estate’s resources without providing offsetting benefits, the transfers at issue here prevented the use of Madoff Securities’ funds to pay creditors. 9 While the Trustee does not allege that the defendants either knew of the fraud or should have known of it, he argues that, if the Court finds that defendants took “for value,” it should impute Madoff Securities’ bad faith to defendants because Madoff Securities acted as their agent. Cf. Kirschner v. KPMG LLP, 15 N.Y.3d 446, 465 (2010) (“[T]he acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals.”). However, “when an agent is engaged in a scheme to defraud his principal, either for his own benefit or that of a third person, the presumption that knowledge held by the agent was disclosed to the principal fails because he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose.” Ctr. v. Hampton Affiliates, 66 N.Y.2d 782, 784 (1985), cited with approval in Kirschner, 15 N.Y.3d at 466. Thus, because the Trustee’s allegations describe in detail how Madoff Securities “engaged in a scheme

47a Under § 548(d)(2)(A), “value” includes “satisfaction . . . of a[n] . . . antecedent debt of the debtor.” The Bankruptcy Code defines “debt” as “liability on a claim.” 11 U.S.C. § 101(12). “Claim” means “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5)(A). “When the Bankruptcy Code uses the word ‘claim’ -- which the Code itself defines as a ‘right to payment,’ 11 U.S.C. § 101(5)(A) -- it is usually referring to a right to payment recognized under state law.” Travelers Cas. & Sur. Co. v. Pac. Gas and Elec. Co., 549 U.S. 443, 451 (2007). Nonetheless, state law need not apply if “some federal interest requires a different result.” Butner v. United States, 440 U.S. 48, 55 (1979), cited with approval in Travelers, 549 U.S. at 451. The defendants argue that, under applicable New York State law, they had a claim against Madoff Securities for the amounts it transferred. The Second Circuit has found that investors in Madoff Securities “are customers with claims for securities within the meaning of SIPA.” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 236. The New York Uniform Commercial Code provides that “a person acquires a security entitlement if a securities intermediary . . . indicates by book entry that a financial asset has been credited to the to defraud” these defendants, the Trustee cannot impute Madoff Securities’ bad faith to them.

48a person’s securities account.” § 8–501(b)(1). That person has such an entitlement “even though the securities intermediary does not itself hold the financial asset.” Id. § 8–501(c). According to the defendants, these state law entitlements reflect the federal securities scheme, under which customers do not receive certificates for their securities, but instead must rely on statements required by Rule 10b–10. See 17 C.F.R. § 240.10b–10. Defendants argue that state law emphasizes “book entry” because investors have no other means for enforcing their rights. The fact that Madoff Securities engaged in fraud does not suspend the application of the securities law. See SEC v. Zandford, 535 U.S. 813, 819 (2002) (“[The SEC] has maintained that a broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, violates § 10(b) and Rule 10b–5.”). Moreover, defendants argue that, despite the fraud, they had a claim for benefit-of-the-bargain damages. See Visconsi v. Lehman Bros., Inc., 244 F. App’x. 708, 713–14 (6th Cir. 2007) (“Plaintiffs thus could have reasonably believed that they were entitled to the full $37.9 million balance shown, regardless of the amounts of their previous deposits and withdrawals.”). Thus, defendants conclude that their monthly or quarterly statements from Madoff Securities, AC ¶ 22, gave them a claim against Madoff Securities, that Madoff Securities’ transfers discharged its liability on defendants’ claim, and that the defendants thus took “for value” under § 548(d)(2)(A).

49a Notwithstanding these arguments, however, the Court concludes that those transfers from Madoff Securities to defendants that exceeded the return of defendants’ principal, i.e., that constituted profits, were not “for value.” Unlike the situation under § 546(e), Congress has here created no “safe harbor” to shelter receipts that might otherwise be subject to avoidance. Accordingly, in this context, the transfers must be assessed on the basis of what they really were; and they really were artificial transfers designed to further the fraud, rather than any true return on investments. It is not surprising, therefore, that every circuit court to address this issue has concluded that an investor’s profits from a Ponzi scheme, whether paper profits or actual transfers, are not “for value.” See Donell v. Kowell, 533 F.3d 762, 771–72 (9th Cir. 2008) (“Amounts transferred by the Ponzi scheme perpetrator to the investor are netted against the initial amounts invested by that individual. If the net is positive, the receiver has established liability. . .”). In the context of Ponzi schemes:

[t]he injustice in allowing [a fortunate investor] to retain his profit at the expense of the defrauded investors is avoided by insisting on commensurability of consideration. [The fortunate investor] is entitled to his profit only if the payment of that profit to him, which reduced the net assets

50a

of the estate now administered by the receiver, was offset by an equivalent benefit to the estate.

Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995) (Posner, J.); see In re Hedged–Invs. Assocs., 84 F.3d 1286, 1290 (10th Cir. 1996) (“Because she had no claim against HIA Inc. for damages in excess of her original investment, HIA Inc. had no debt to her for those amounts. Therefore, the transfers could not have satisfied an antecedent debt of HIA Inc., which means HIA Inc. received no value in exchange for the transfers.”). The defendants cite only one case in which defrauded investors recovered the amounts reflected on fraudulent brokerage statements: Visconsi v. Lehman Bros., Inc., 244 F. App’x. 708, 713–14 (6th Cir. 2007). The immediate cases differ from Visconsi in three important respects. First, unlike in Visconsi, the Court has no reliable basis on which to determine how defendants would have benefited from their bargains with Madoff Securities. See 244 F. App’x. at 713 (“In fact, the fictitious statements issued by Lehman, which were designed to track Plaintiffs’ funds as if they had been properly invested, indicate that Plaintiffs’ accounts would have grown to more than $37.9 million (even accounting for the withdrawal of more than $31.3 million).” (emphasis added)). Here, in contrast, Madoff Securities’ statements did not “track [defendants’] funds as if they had been properly invested,” but instead constituted an integral part of the fraud, AC ¶ 22, consistently representing favorable returns based on trading that could not have occurred, Looby Decl. ¶¶ 62, 63,

51a 72, & 103. Second, the court in Visconsi considered innocent investors alongside a defendant who, although not the perpetrator of fraud, “was aware of significant irregularities in [the perpetrator’s] practices at the time of [its] purchase of this part of SG Cowen’s business, and purchased it despite this knowledge,” id. at 714 n. 2, whereas here, in contrast, the Court considers the defendants relative to other investors, many of whom were equally innocent. Conferring the benefit of the bargain where a more culpable party bears the cost differs from doing so where similarly situated investors, who have no hope of realizing the benefits of their bargains, bear that cost. Third, the court in Visconsi did not focus on investors’ status as creditors when giving them the benefit of the bargain, but instead on “the harm suffered.” Id. at 713. Defendants have undoubtedly suffered harm as a result of investing with Madoff Securities, but they have not shown that this harm in any way corresponds to the amounts reflected on customer statements. Thus, the Court sees no reason to depart from the general rule that investors in a Ponzi scheme did not receive their profits “for value.” The defendants also argue that the circuit court precedents that permitted avoidance dealt with equity investors rather than creditors. For example, at least one court has found that a Ponzi scheme “received a dollar-for-dollar forgiveness of a contractual debt” where it paid investors “agreed

52a upon interest” at a “reasonable” rate. In re Carrozzella & Richardson, 286 B.R. 480, 491 (D.Conn. 2002). Defendants implicitly refer to the long recognized principle that, while an insolvent corporation may not pay a dividend to its shareholders, see N.Y. Bus. Corp. Law § 510, subject to the preference provisions, it may pay its creditors, see Sharp, 403 F.3d at 54–55. According to defendants, a concern for finality underlies the preferential treatment of creditors: “to permit in every case of the payment of a debt an inquiry as to the source from which the debtor derived the money, and a recovery if shown to have been dishonestly acquired, would disorganize all business operations and entail an amount of risk and uncertainty which no enterprise could bear.” Banque Worms v. BankAmerica Int’l, 77 N.Y.2d 362, 372 (1991). While the law does provide some support for defendants’ distinction between equity investors and creditors, in the immediate context, it is a distinction without a difference. Unlike in Carrozzella, where investors in a Ponzi scheme contracted for “reasonable” interest on their investments, 286 B.R. at 490–91, here the defendants faced the same risks as equity investors. See In re Bayou Group, LLC, 439 B.R. 284, 337 (S.D.N.Y. 2010) (distinguishing Carrozzella because the “fictitious profits Appellants received were not promised to them when they initially invested in the Bayou Funds”). Indeed, had Madoff Securities invested as promised, it would have purchased a basket of equity shares in large, publicly traded companies

53a for defendants. AC ¶ 21. Like equity investors, rather than contracting for a definite return on their investment, defendants contracted for another to use its best efforts to try to generate a profit. Any entitlement defendants had to a return on their investment, then, depended on a representation that Madoff Securities had in fact generated a profit. The complaints allege that Madoff Securities’ representations in this regard were wholly fraudulent. Thus, defendants, in effect, ask the Court to enforce the fraud on the ground that the vehicle of this particular Ponzi scheme, in contrast to others, styled itself as a stockbroker. Such a distinction pays only lip service to the underlying realities of the Ponzi scheme, and the Court rejects it. While defendants correctly point out that a general rule that prevented creditors from retaining payments from a fraud would create great uncertainty, see Banque Worms, 77 N.Y.2d at 372, the rule adopted here applies very narrowly, reaching only this unusual kind of “creditor,” whose claims to profits depend upon enforcing fraudulent representations, see In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 241.10 Finally, the Court finds that, even if the defendants had enforceable claims for the amounts reported on their brokerage statements, a

10 The defendants might well establish, for example, that under a “constant dollar” approach, Madoff Securities owed them a reasonable return of interest on their investment. This Court, however, has declined to withdraw the reference to address this question, and the bankruptcy court will decide it on remand.

54a conclusion that satisfaction of those claims gave “value” to Madoff Securities would conflict with SIPA. Satisfaction of an antecedent debt gives value to an estate because the “basic object of fraudulent conveyance law is to see that the debtor uses his limited assets to satisfy some of his creditors,” not “to choose among them.” Boston Trading Grp., 835 F.2d at 1509. SIPA, however, does choose among creditors. Specifically, SIPA differentiates between the fund of “customer property” and the “general estate.” See 15 U.S.C. § 78fff–2(c)(1) (allowing customers to participate in the distribution of the general estate if customer property does not satisfy their net equity claims). Section 78lll(4) defines customer property as “cash and securities . . . at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor.” In a SIPA proceeding, the trustee allocates customer property according to statutorily-established priorities. Id. § 78fff–2(c)(1). Customers, including the defendants and others who invested with Madoff Securities, In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 236, “share ratably in such customer property on the basis and to the extent of their respective net equities.” 15 U.S.C. § 78fff–2(c)(1)(B) (emphasis added). Whenever customer property does not suffice to pay priority claims, SIPA permits the trustee to “recover any property transferred by the debtor which . . . would have been customer property if and to the extent that such transfer is voidable or void under the provisions of Title 11.” Id. 78fff–

55a 2(c)(3). In other words, the Trustee can invoke the avoidance provisions such as § 548(a)(1)(A) to recover “customer property” for distribution according to SIPA’s priorities. The Second Circuit has recently held that the Trustee correctly concluded that customers, like defendants, who withdrew more from their Madoff Securities accounts than they deposited have no “net equity,” and thus cannot benefit from priority distributions under § 78fff–2(c)(1). In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 233. To allow defendants, who have no net equity claims, to retain profits paid out of customer property on the ground that their withdrawals satisfied creditor claims under state law would conflict with the priority system established under SIPA by equating net equity and general creditor claims. Indeed, as described above, courts typically find that satisfaction of antecedent debt provides value to the debtor because the fraudulent transfer provisions do not try “to choose among” a debtor’s creditors. SIPA, however, prioritizes net equity claims over general creditor claims. Moreover, SIPA specifically connects its priority system to its incorporation of the fraudulent transfer provisions, empowering a trustee to invoke those provisions “[w]henever customer property is not sufficient to pay in full” the priority claims. 15 U.S.C. § 78fff–2(c)(3). A presumption that the fraudulent transfer provisions do not choose between creditors should not and logically cannot apply to frustrate the Trustee’s efforts to satisfy priority claims.

56a The situation here is exactly the one for which SIPA provides. The Trustee cannot satisfy the claims described in 15 U.S.C. § 78fff–2(c)(1)(A)-(D). AC ¶ 18. The defendants have no net equity claims, but nonetheless have allegedly received fraudulent transfers of customer property. Id. Thus, the Trustee may, upon appropriate proof, avoid those fraudulent transfers of customer property for distribution in accordance with SIPA’s priorities. In other words, the Court finds that, when determining whether an transferee provides value, SIPA requires consideration not only of whether the transfer diminishes the resources available for creditors generally, but also whether it depletes the resources available for the satisfaction of customers’ net equity claims and other priority claims.11 As described above, a

11 The defendants have argued that, because SIPA creates priority claims only after a SIPA liquidation has commenced, priority claims have no bearing on whether a transferee has provided value. According to defendants, since state law hypothetically governs what claims exist before a SIPA liquidation, a court considering whether a SIPA trustee may avoid transfers of customer property cannot refer to the priorities SIPA creates. This approach, however, completely ignores that SIPA empowers a trustee to avoid transfers to recover customer property in order to pay priority claims. 15 U.S.C. § 78fff–2(c)(3). Had Congress wanted to give the Trustee only a general power to avoid fraudulent transfers, it could have relied on § 78fff–1(a), which amply serves that purpose. Instead, it explicitly empowered the Trustee to recover fraudulent transfers in order to satisfy claims that would not exist before the commencement of a SIPA proceeding. Defendants’ narrow temporal argument disconnects the powers conferred by § 78fff–2(c)(3) from the purpose specifically described, effectively rendering § 78fff–2(c)(3) a superfluous reiteration of the general grant of power

57a different approach would ignore both SIPA’s distinctions between creditors and its specific concern for the depletion of the fund of “customer property” available for distribution according to customers’ “net equities.” Neither bankruptcy law nor state law require the Court to disregard SIPA in this fashion. See 15 U.S.C. § 78fff(b); Travelers, 549 U.S. at 451. Because defendants’ withdrawals allegedly depleted the resources available for satisfying priority claims without satisfying such claims, the Court finds that they did not take “for value.”12 Two of the defendants, Blumenthal and Hein, also argue that, even if they did not receive their profits for value, provisions of the Internal Revenue Code (“IRC”) prohibit the Trustee from certain avoiding withdrawals from individual retirement accounts (“IRAs”) that they held with Madoff Securities.13 Specifically, 26 U.S.C. § conferred by § 78fff–1(a). 12 Having concluded that defendants’ customer statements do not entitle them to § 548(c)’s affirmative defense, the Court need not address the further issue of whether the Trustee could have avoided any obligations those statements created by invoking § 78fff–1(a) and § 78fff–2 (c)(3). 13 Hein and Blumenthal also invoke state law, but it provides them no support. While N.Y. C.P.L.R. § 5205(c) exempts money in certain trusts, including IRAs, from “application to the satisfaction of a money judgment,” § 5205(c)(5) specifically provides that the exemption does not apply to “[a]dditions to” the trust that are “fraudulent conveyances.” Although Hein and Blumenthal argue that § 5205(c)(5) applies only to additions to an IRA, and not distributions from it, § 5205(d)(1) exempts distributions from IRAs only where “the principal . . .

58a 401(a)(9)(C) requires minimum distributions from IRAs beginning when the beneficiary reaches the age of 70 ½, and § 4974(a) imposes a tax of 50% on any portion of the minimum amount that the IRA fails to distribute. According to Hein and Blumenthal, these provisions “ensure that the beneficiary uses the IRA in his retirement years.” Rousey v. Jacoway, 544 U.S. 320, 332 (2005). Hein and Blumenthal argue that many courts have found that trustees cannot avoid transfers that the law requires as fraudulent. See In re Whaley, 190 B.R. 818, 822 (Bankr. N.D. Miss. 1995) (finding that payments of alimony could not be avoided because debtor “was under a court order to make these payments”). In contrast to Whaley, however, the Internal Revenue Code did not require Madoff Securities to make any payment, but instead ostensibly required Hein and Blumenthal to receive payments. Thus, no third party comparable to the alimony-recipient sought to enforce the law’s requirements against Madoff Securities, and avoidance of transfers will not deprive any such third party of its legal rights. Having rejected the claim that Madoff Securities owed the defendants the profits that it transferred to them, the Court declines to conclude that Hein is exempt under subdivision (c).” Thus, where Madoff Securities fraudulently transferred profits into Hein’s and Blumenthal’s IRAs, distributions of those profits are not protected by § 5205(d)(1). Since Madoff Securities apparently did not segregate customer accounts as it claimed to do, Looby Decl. ¶ 18, the record before the Court suggests that additions to and distributions from IRAs occurred simultaneously in the form of payment to the transferee.

59a and Blumenthal may now keep their profits because they feared that the IRC would deprive them of half of a benefit to which they had no entitlement. Furthermore, where Congress intends to exempt certain types of transfers from avoidance, it does so not by implication through other law, but instead directly through the fraudulent transfer provisions. See, e.g.,11 U.S.C. § 548(a)(2) (exempting certain “charitable contribution[s]” from avoidance under § 548(a)(1)(B)); see also § 547(c)(7) (preventing avoidance of “domestic support obligation[s]” as preferences). Accordingly, the Court concludes that the IRC does not require dismissal of the Trustee’s claims under § 548(a)(1)(A) and § 550(a). As for the calculation of how much the Trustee may recover under these claims, the Court adopts the two-step approach set forth in Donell v. Kowell, 533 F.3d 762, 771–72 (9th Cir. 2008). First, amounts transferred by Madoff Securities to a given defendant at any time are netted against the amounts invested by that defendant in Madoff Securities at any time. Second, if the amount transferred to the defendant exceeds the amount invested, the Trustee may recover these net profits from that defendant to the extent that such monies were transferred to that defendant in the two years prior to Madoff Securities’ filing for bankruptcy. Any net profits in excess of the amount transferred during the two-year period are protected from recovery by the Bankruptcy Code’s statute of limitations. See 11 U.S.C. § 548(a)(1).

60a In sum, for the reasons stated above as well as the reasons set forth in Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011), as amended by 2012 WL 127397 (S.D.N.Y. Jan. 17, 2012), the Court dismisses all of the Trustee’s claims except those proceeding under § 548(a)(1)(A) and § 550(a). The Clerk of the Court is hereby directed to close the motions to dismiss in the four above-captioned cases and the eighty additional cases set forth in Appendix A so that all these cases may—except to the extent required by a subsequent motion to withdraw—now be returned to the Bankruptcy Court for further proceedings consistent with this Opinion and Order. SO ORDERED.

Appendix A

Defendants

Adv. Pro. Docket No.

(Bankr. S.D.N.Y.)

Docket No. (S.D.N.Y.)

Gary Albert, individually and his capacity as shareholder of Impact Designs Ltd.

10–04966 11–04390

Aspen Fine Arts Co. 10–04335 11–04391 The Aspen Company and Harold Thau

10–05070 11–04400

Jan Marcus Capper 10–05197 11–04389 Norton Eisenberg 10–04576 11–04388

61a P. Charles Gabriele 10–04724 11–04481 Stephen R. Goldenberg

10–04946 11–04483

Ruth E. Goldstein 10–04725 11–04371 Harnick Bros. Partnership and Gary Harnick individually and as general partners of The Harnick Brothers Partnership

10–05157 11–04729

John Denver Concerts, Inc. Pension Plan Trust and Harold Thau as the Trustee

10–05089

11–04387

Anita Karimian 10–04706 11–04368 Lester Kolodny 10–04515 11–04502 Laurence Leif 10–04601 11–04392

62a Steven V. Marcus Seperate Property of the Marcus Family Trust; The Marcus Family Limited Partnership; Steven V. Marcus, individually and in his capacity as Trustee of the Steven V. Marcus Seperate Property of the Marcus Family Trust, General Partner of the Marcus Family Limited Partnership and Guardian of O.M., K.M. and H.M; and Denise C. Marcus, in her capacity as Trustee of the Steven V. Marcus Separate Property of the Marcus Family Trust

10–04906 11–04504

Trust U/W/O Harriette Myers

10–05401 11–04397

Robert Potamkin and Alan Potamkin

10–04352 11–04401

Potamkin Family Foundation, Inc.

10–05069 11–04398

63a Delia Gail Rosenberg and Estate of Ira S. Rosenberg

10–04978 11–04482

Miriam Ross 10–05020 11–04480 Leon Ross 10–04723 11–04479 Richard Roth 10–05136 11–04501 Lynn Lazarus Serper

10–04737 11–04370

Harold A. Thau 10–04951 11–04399 William M. Woessner Family Trust, Sheila A. Woessner Family Trust, William M. Woessner individually, and as Trustee of the William M. Woessner Family Trust and the Sheila A. Woessner Family Trust, Sheila A. Woessner, individually, and as Trustee of the William M. Woessner Family Trust and the Sheila A. Woessner Family Trust

10–04741 11–04503

Elbert R. Brown, Viola Brown, and Do Stay Inc.

10–05398 11–05155

64a Lewis Franck individually and in his capacity as Trustee for the Florence Law Irrevocable Trust dtd 1/24/05

10–04759

11–04723

Michael Mathias, Individually and in his capacity as Joint Tenant of the Michael Mathias and Stacey Mathias J/T WROS, and Stacey Mathias, Individually and in her capacity as Joint Tenant of the Michael Mathias and Stacey Mathias J/T WROS

10–04824

11–04725

Nur C. Gangji Trust Dated 10/16/00, a Virginia trust, and Nur C. Gangji, as trustor, as trustee, and as an individual

10–04754

11–04724

65a Joseph S. Popkin Revocable Trust DTD 2/9/2006 a Florida trust, Estate of Joseph S. Popkin, Robin Pokin Logue as trustee of the Joseph S. Popkin Revocable Trust Dated Feb. 9, 2006, as the personal representative of the Estate of Joseph S. Popkin, and as an individual

10–04712

11–04726

Bernard Seldon 10–04848 11–04727 Jonathan Sobin 10–04540 11–04728 Patrice M. Auld, Merritt Kevin Auld, and James P. Marden

10–04343 11–05005

Boslow Family Limited Partnership et al.

10–04575 11–05006

Bernard Marden Profit Sharing Plan et al.

10–05168 11–05007

Helene R. Cahners Kaplan et al.

10–05042 11–05008

Charlotte M. Marden et al.

10–05118 11–05008

Robert Fried and Joanne Fried

10–05239 11–05156

66a Jordan H. Kart Revocable Trust & Jordan H. Kart

10–04718

11–05157

James P. Marden et al.

10–04341 11–05158

Marden Family Limited Partnership et al.

10–04348 11–05160

Norma Fishbein 10–04649

11–05161

Norma Fishbein Revocable Trust et al.

10–04814

11–05162

Oakdale Foundation Inc. et al.

10–05397

11–05163

Bruce D. Pergament et al.

10–05194

11–05216

Sharon A. Raddock 10–04494

11–05217

The Murray & Irene Pergament Foundation, Inc. etal.

10–04565

11–05218

David S. Wallenstein 10–04467

11–05219

Avram J. Goldberg et al.

10–05439

11–05220

Pergament Equities, LLC et al.

10–04944

11–05221

Wallenstein/NY Partnership & David S. Wallenstein

10–04988

11–05222

Bell Ventures Limited et al.

10–05294

11–05507

Kelman Partners Limited Partnership et al.

10–05158

11–05513

67a Barbara J. Berdon 10–04415 11–07684 Laura E. Guggenheimer Cole

10–04882

11–07670

Sidney Cole 10–04672

11–07669

Epic Ventures, LLC & Eric P. Stein

10–04466

11–07681

Ida Fishman Revocable Trust et al.

10–04777

11–07603

The Frederica Ripley French Revocable Trust et al.

10–05424

11–07622

Alvin Gindel Revocable Trust & Alvin Gindel

10–04925

11–07645

Rose Gindel Trust et al.

10–04401

11–07601

S & L Partnership et al.

10–04702 11–07600

Joel I. Gordon Revocable Trust & Joel I. Gordon

10–04615

11–07623

Toby T. Hobish et al. 10–05236 11–07559 Helene Cummings Karp Annuity & Helene Cummings Karp

10–05200 11–07646

Lapin Children LLC 10–05209 11–07624 BAM L.P. et al. 10–04390 11–07667 David R. Markin et al.

10–05224 11–07602

Stanley T. Miller 10–04921 11–07579 The Murray Family Trust et al.

10–04510 11–07683

68a Estate of Marjorie K. Osterman et al.

10–04999 11–07626

Neil Regger Profit Sharing Keogh & Neil Reger

10–05384 11–07577

Eugene J. Ribakoff 2006 Trust et al.

10–05085 11–07644

Sage Associates et al. 10–04362 11–07682 Sage Realty et al. 10–04400 11–07668 The Norma Shapiro Revocable Declaration of Trust Under Agreement Dated 9/16/2008 et al.

10–04486 11–07578

Estate of Jack Shurman et al.

10–05028 11–07625

Barry Weisfeld 10–04332 11–07647

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__________

APPENDIX C __________

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

__________

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.

BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

__________

In re: MADOFF SECURITIES

_________

PERTAINS TO THE FOLLOWING CASES: Picard v. Greiff, 11 Civ. 3775;

Picard v. Blumenthal, 11 Civ. 4293; Picard v. Goldman, 11 Civ. 4959;

Picard v. Hein, 11 Civ. 4936; and cases listed in Appendix A.

__________

No. 12 MC 115 (JSR) __________

May 15, 2012 __________

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SUPPLEMENTAL OPINION AND ORDER

JED S. RAKOFF, District Judge. On April 30, 2012 the Court entered an Order (ECF No. 57) dismissing certain claims of the Trustee in the above actions except those proceeding under Sections 548(a)(1)(A) and 550(a) of the Bankruptcy Code. On May 1, 2012, the Court entered an Opinion and Order (ECF No. 72) explaining the reasons for its decision. The Court now supplements the Opinion and Order to make explicit that Section 546(e) of the Bankruptcy Code applies to the Trustee’s claims in the above actions for avoidance and recovery of preferences under Section 547 of the Bankruptcy Code. The supplemental list of cases attached As Appendix A to the Opinion and Order inadvertently omitted Picard v. Marital Trust Under Article X of the Charles D. Kelman Revocable Trust, which was consolidated by Order of the Court dated January 25, 2012 under Picard v. Hein, 11 Civ. 4936. Appendix A is hereby amended, nunc pro tunc, to include that action as well. SO ORDERED.

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____________

APPENDIX D ____________

1. 15 U.S.C. §78fff(b) (as of 12/11/2008) provides:

APPLICATION OF TITLE 11 To the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and II of chapter 7 of title 11. For the purposes of applying such title in carrying out this section, a reference in such title to the date of the filing of the petition shall be deemed to be a reference to the filing date under this chapter.

72a 2. 15 U.S.C. §78fff-1(a) (as of 12/11/2008)

provides: TRUSTEE POWERS A trustee shall be vested with the same powers and title with respect to the debtor and the property of the debtor, including the same rights to avoid preferences, as a trustee in a case under title 11. In addition, a trustee may, with the approval of SIPC but without any need for court approval—

(1) hire and fix the compensation of all personnel (including officers and employees of the debtor and of its examining authority) and other persons (including accountants) that are deemed by the trustee necessary for all or any purposes of the liquidation proceeding;

(2) utilize SIPC employees for all or any

purposes of a liquidation proceeding; and (3) margin and maintain customer accounts

of the debtor for the purposes of section 78fff-2(f) of this title.

73a 3. 15 U.S.C. §78fff-2(c) (as of 12/11/2008)

provides: CUSTOMER RELATED PROPERTY (1) ALLOCATION OF CUSTOMER

PROPERTY

The trustee shall allocate customer property of the debtor as follows:

(A) first, to SIPC in repayment of advances made by SIPC pursuant to section 78fff-3(c)(1) of this title, to the extent such advances recovered securities which were apportioned to customer property pursuant to section 78fff(d) of this title;

(B) second, to customers of such debtor,

who shall share ratably in such customer property on the basis and to the extent of their respective net equities;

(C) third, to SIPC as subrogee for the

claims of customers; (D) fourth, to SIPC in repayment of

advances made by SIPC pursuant to section 78fff-3(c)(2) of this title.

Any customer property remaining after allocation in accordance with this paragraph shall become part of the general estate of the debtor. To the extent customer property and

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SIPC advances pursuant to section 78fff-3(a) of this title are not sufficient to pay or otherwise satisfy in full the net equity claims of customers, such customers shall be entitled, to the extent only of their respective unsatisfied net equities, to participate in the general estate as unsecured creditors. For purposes of allocating customer property under this paragraph, securities to be delivered in payment of net equity claims for securities of the same class and series of an issuer shall be valued as of the close of business on the filing date.

(2) DELIVERY OF CUSTOMER NAME SECURITIES

The trustee shall deliver customer name securities to or on behalf of a customer of the debtor entitled thereto if the customer is not indebted to the debtor. If the customer is so indebted, such customer may, with the approval of the trustee, reclaim customer name securities upon payment to the trustee, within such period of time as the trustee determines, of all indebtedness of such customer to the debtor.

(3) RECOVERY OF TRANSFERS

Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if

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and to the extent that such transfer is voidable or void under the provisions of title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding.

76a 4. 15 U.S.C. §78lll (as of 12/11/2008) provides: DEFINITIONS (4) CUSTOMER PROPERTY

The term "customer property" means cash and securities (except customer name securities delivered to the customer) at any time received, acquired, or held by or for the account of a debtor from or for the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted. The term "customer property" includes—

(A) securities held as property of the debtor to the extent that the inability of the debtor to meet its obligations to customers for their net equity claims based on securities of the same class and series of an issuer is attributable to the debtor's noncompliance with the requirements of section 78o(c)(3) of this title and the rules prescribed under such section;

(B) resources provided through the use or realization of customers' debit cash balances and other customer-related debit items as defined by the Commission by rule;

(C) any cash or securities apportioned to customer property pursuant to section 78fff(d) of this title; and

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(D) any other property of the debtor which, upon compliance with applicable laws, rules, and regulations, would have been set aside or held for the benefit of customers, unless the trustee determines that including such property within the meaning of such term would not significantly increase customer property.

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_________

APPENDIX E __________

11 U.S.C. § 544. Trustee as lien creditor and as successor to certain creditors and purchasers (a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-- (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; (2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom

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applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists. (b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title. (2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in section 548(d)(3)) that is not covered under section 548(a)(1)(B), by reason of section 548(a)(2). Any claim by any person to recover a transferred contribution described in the preceding sentence under Federal or State law in a Federal or State court shall be preempted by the commencement of the case.

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§ 546. Limitations on avoiding powers

(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of--

(1) the later of--

(A) 2 years after the entry of the order for relief; or

(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

(b)(1) The rights and powers of a trustee under sections 544, 545, and 549 of this title are subject to any generally applicable law that--

(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection; or

(B) provides for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.

(2) If--

(A) a law described in paragraph (1) requires

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seizure of such property or commencement of an action to accomplish such perfection, or maintenance or continuation of perfection of an interest in property; and

(B) such property has not been seized or such an action has not been commenced before the date of the filing of the petition;

such interest in such property shall be perfected, or perfection of such interest shall be maintained or continued, by giving notice within the time fixed by such law for such seizure or such commencement.

(c)(1) Except as provided in subsection (d) of this section and in section 507(c), and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods--

(A) not later than 45 days after the date of receipt of such goods by the debtor; or

(B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.

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(2) If a seller of goods fails to provide notice in the manner described in paragraph (1), the seller still may assert the rights contained in section 503(b)(9).

(d) In the case of a seller who is a producer of grain sold to a grain storage facility, owned or operated by the debtor, in the ordinary course of such seller's business (as such terms are defined in section 557 of this title) or in the case of a United States fisherman who has caught fish sold to a fish processing facility owned or operated by the debtor in the ordinary course of such fisherman's business, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 of this title are subject to any statutory or common law right of such producer or fisherman to reclaim such grain or fish if the debtor has received such grain or fish while insolvent, but--

(1) such producer or fisherman may not reclaim any grain or fish unless such producer or fisherman demands, in writing, reclamation of such grain or fish before ten days after receipt thereof by the debtor; and

(2) the court may deny reclamation to such a producer or fisherman with a right of reclamation that has made such a demand only if the court secures such claim by a lien.

(e) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 or

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741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), commodity contract, as defined in section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

(f) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer made by or to (or for the benefit of) a repo participant or financial participant, in connection with a repurchase agreement and that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

(g) Notwithstanding sections 544, 545, 547, 548(a)(1)(B) and 548(b) of this title, the trustee may not avoid a transfer, made by or to (or for the benefit of) a swap participant or financial participant, under or in connection with any swap agreement and that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

(h) Notwithstanding the rights and powers of a trustee under sections 544(a), 545, 547, 549, and 553, if the court determines on a motion by the trustee made not later than 120 days after the date

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of the order for relief in a case under chapter 11 of this title and after notice and a hearing, that a return is in the best interests of the estate, the debtor, with the consent of a creditor and subject to the prior rights of holders of security interests in such goods or the proceeds of such goods, may return goods shipped to the debtor by the creditor before the commencement of the case, and the creditor may offset the purchase price of such goods against any claim of the creditor against the debtor that arose before the commencement of the case.

(i)(1) Notwithstanding paragraphs (2) and (3) of section 545, the trustee may not avoid a warehouseman's lien for storage, transportation, or other costs incidental to the storage and handling of goods.

(2) The prohibition under paragraph (1) shall be applied in a manner consistent with any State statute applicable to such lien that is similar to section 7-209 of the Uniform Commercial Code, as in effect on the date of enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or any successor to such section 7-209.

(j) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) the trustee may not avoid a transfer made by or to (or for the benefit of) a master netting agreement participant under or in connection with any master netting agreement or any individual contract covered thereby that is made before the commencement of the case, except under section 548(a)(1)(A) and except to the extent that the trustee could otherwise avoid such a

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transfer made under an individual contract covered by such master netting agreement.

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§ 547. Preferences (a) In this section—

(1) “inventory” means personal property leased or furnished, held for sale or lease, or to be furnished under a contract for service, raw materials, work in process, or materials used or consumed in a business, including farm products such as crops or livestock, held for sale or lease; (2) “new value” means money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation; (3) “receivable” means right to payment, whether or not such right has been earned by performance; and (4) a debt for a tax is incurred on the day when such tax is last payable without penalty, including any extension.

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed

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by the debtor before such transfer was made; (3) made while the debtor was insolvent;

(4) made— (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.

(c) The trustee may not avoid under this section a transfer—

(1) to the extent that such transfer was— (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

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(B) in fact a substantially contemporaneous exchange;

(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was— (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or

(B) made according to ordinary business terms; (3) that creates a security interest in property acquired by the debtor— (A) to the extent such security interest secures new value that was— (i) given at or after the signing of a security agreement that contains a description of such property as collateral; (ii) given by or on behalf of the secured party under such agreement; (iii) given to enable the debtor to acquire such property; and (iv) in fact used by the debtor to acquire such property; and

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(B) that is perfected on or before 30 days after the debtor receives possession of such property; (4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor— (A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor; (5) that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent that the aggregate of all such transfers to the transferee caused a reduction, as of the date of the filing of the petition and to the prejudice of other creditors holding unsecured claims, of any amount by which the debt secured by such security interest exceeded the value of all security interests for such debt on the later of— (A)(i) with respect to a transfer to which subsection (b)(4)(A) of this section applies, 90 days before the date of the filing of the petition; or (ii) with respect to a transfer to which subsection (b)(4)(B) of this section applies, one year before the date of the filing of the petition; or (B) the date on which new value was first given under the security agreement creating such

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security interest; (6) that is the fixing of a statutory lien that is not avoidable under section 545 of this title; (7) to the extent such transfer was a bona fide payment of a debt for a domestic support obligation; (8) if, in a case filed by an individual debtor whose debts are primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $600; or (9) if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of all property that constitutes or is affected by such transfer is less than $5,4751.

(d) The trustee may avoid a transfer of an interest in property of the debtor transferred to or for the benefit of a surety to secure reimbursement of such a surety that furnished a bond or other obligation to dissolve a judicial lien that would have been avoidable by the trustee under subsection (b) of this section. The liability of such surety under such bond or obligation shall be discharged to the extent of the value of such property recovered by the trustee or the amount paid to the trustee. 1 Dollar amount as adjusted by the Judicial Conference of the United States. See Adjustment of Dollar Amounts notes set out under this section and 11 U.S.C.A. § 104.

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(e)(1) For the purposes of this section—

(A) a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee; and (B) a transfer of a fixture or property other than real property is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee.

(2) For the purposes of this section, except as provided in paragraph (3) of this subsection, a transfer is made—

(A) at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after, such time, except as provided in subsection (c)(3)(B); (B) at the time such transfer is perfected, if such transfer is perfected after such 30 days; or (C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of— (i) the commencement of the case; or

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(ii) 30 days after such transfer takes effect between the transferor and the transferee.

(3) For the purposes of this section, a transfer is not made until the debtor has acquired rights in the property transferred.

(f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.

(g) For the purposes of this section, the trustee has the burden of proving the avoidability of a transfer under subsection (b) of this section, and the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.

(h) The trustee may not avoid a transfer if such transfer was made as a part of an alternative repayment schedule between the debtor and any creditor of the debtor created by an approved nonprofit budget and credit counseling agency.

(i) If the trustee avoids under subsection (b) a transfer made between 90 days and 1 year before the date of the filing of the petition, by the debtor to an entity that is not an insider for the benefit of a creditor that is an insider, such transfer shall be considered to be avoided under this section only with respect to the creditor that is an insider.

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§ 548. Fraudulent transfers and obligations

(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily--

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or (B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or

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(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. (2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which-- (A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions. (b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation. (c) Except to the extent that a transfer or obligation voidable under this section is voidable

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under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation. (d)(1) For the purposes of this section, a transfer is made when such transfer is so perfected that a bona fide purchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee, but if such transfer is not so perfected before the commencement of the case, such transfer is made immediately before the date of the filing of the petition. (2) In this section-- (A) “value” means property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor; (B) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency that receives a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 or 741 of this title, takes for value to the extent of such payment;

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(C) a repo participant or financial participant that receives a margin payment, as defined in section 741 or 761 of this title, or settlement payment, as defined in section 741 of this title, in connection with a repurchase agreement, takes for value to the extent of such payment; (D) a swap participant or financial participant that receives a transfer in connection with a swap agreement takes for value to the extent of such transfer; and (E) a master netting agreement participant that receives a transfer in connection with a master netting agreement or any individual contract covered thereby takes for value to the extent of such transfer, except that, with respect to a transfer under any individual contract covered thereby, to the extent that such master netting agreement participant otherwise did not take (or is otherwise not deemed to have taken) such transfer for value. (3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution— (A) is made by a natural person; and (B) consists of-- (i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code

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of 1986); or (ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means-- (A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or (B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986. (e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if-- (A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

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(2) For the purposes of this subsection, a transfer includes a transfer made in anticipation of any money judgment, settlement, civil penalty, equitable order, or criminal fine incurred by, or which the debtor believed would be incurred by-- (A) any violation of the securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))), any State securities laws, or any regulation or order issued under Federal securities laws or State securities laws; or (B) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l and 78o(d)) or under section 6 of the Securities Act of 1933 (15 U.S.C. 77f). § 741. Definitions for this subchapter

In this subchapter-- (7) “securities contract”-- (A) means-- (i) a contract for the purchase, sale, or loan of a security, a certificate of deposit, a mortgage loan, any interest in a mortgage loan, a group or index of securities, certificates of deposit, or mortgage loans or interests therein (including an interest therein or based on the value thereof), or option on any of the foregoing, including an option to purchase or

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sell any such security, certificate of deposit, mortgage loan, interest, group or index, or option, and including any repurchase or reverse repurchase transaction on any such security, certificate of deposit, mortgage loan, interest, group or index, or option (whether or not such repurchase or reverse repurchase transaction is a “repurchase agreement”, as defined in section 101); (ii) any option entered into on a national securities exchange relating to foreign currencies; (iii) the guarantee (including by novation) by or to any securities clearing agency of a settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of securities, or mortgage loans or interests therein (including any interest therein or based on the value thereof), or option on any of the foregoing, including an option to purchase or sell any such security, certificate of deposit, mortgage loan, interest, group or index, or option (whether or not such settlement is in connection with any agreement or transaction referred to in clauses (i) through (xi)); (iv) any margin loan; (v) any extension of credit for the clearance or settlement of securities transactions; (vi) any loan transaction coupled with a securities collar transaction, any prepaid forward securities transaction, or any total return swap transaction coupled with a securities sale

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transaction; (vii) any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph; (viii) any combination of the agreements or transactions referred to in this subparagraph; (ix) any option to enter into any agreement or transaction referred to in this subparagraph; (x) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix), together with all supplements to any such master agreement, without regard to whether the master agreement provides for an agreement or transaction that is not a securities contract under this subparagraph, except that such master agreement shall be considered to be a securities contract under this subparagraph only with respect to each agreement or transaction under such master agreement that is referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix); or (xi) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker, securities clearing agency, financial institution, or financial participant in connection with any agreement or transaction referred to in this subparagraph, but not to exceed the damages in connection with any such agreement or transaction, measured in

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accordance with section 562; and (B) does not include any purchase, sale, or repurchase obligation under a participation in a commercial mortgage loan; (8) “settlement payment” means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade; and (9) “SIPC” means Securities Investor Protection Corporation.