Madoff Trustee vs Enrica Cotellessa-Pitz

Baker & Hostetler LLP45 Rockefeller PlazaNew York, NY 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201 David J. SheehanKeith R. MurphyGeraldine E. Ponto

Attorneys for Irving H. Picard, Esq., Trusteefor the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLCand Bernard L. Madoff

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORKSECURITIES INVESTOR PROTECTIONCORPORATION,

Plaintiff-Applicant,

v.

BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Defendant.

Adv. Pro. No. 08-01789 (BRL)

SIPA LIQUIDATION

(Substantively Consolidated)

In re:

BERNARD L. MADOFF,

Debtor.

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

Plaintiff,

v.

ENRICA COTELLESSA-PITZ and THOMAS PITZ,

Defendants.

Adv. Pro. No. 10-_______ (BRL)

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COMPLAINT

Irving H. Picard (the “Trustee”), as trustee for the liquidation of the business of Bernard

L. Madoff Investment Securities LLC (“BLMIS”), under the Securities Investor Protection Act,

15 U.S.C. §§ 78aaa, et seq. (“SIPA”),1 and the substantively consolidated estate of Bernard L.

Madoff individually (“Madoff”), by and through his undersigned counsel, for his Complaint,

states as follows:

INTRODUCTION

1. This adversary proceeding arises from the massive Ponzi scheme perpetrated by

Madoff. Over the course of the scheme, there were more than 8,000 client accounts at BLMIS.

In early December 2008, BLMIS generated client account statements for its approximately 4,900

open client accounts at BLMIS. When added together, these statements purportedly show that

clients of BLMIS had approximately $65 billion held in accounts with BLMIS. In reality,

BLMIS had assets on hand worth a small fraction of that amount. On March 12, 2009, Madoff

admitted to the fraudulent scheme and pled guilty to 11 felony counts, and was sentenced on

June 29, 2009 to 150 years in prison. The within Defendants Enrica Cotellessa-Pitz and Thomas

Pitz (“Defendants”) received avoidable transfers from BLMIS.

2. Defendant Enrica Cotellessa-Pitz (“Pitz”) was BLMIS’ Controller and a

certified securities professional with a sound understanding of practices, policies and recording

requirements inherent in the securities industry. Pitz played a key role in disguising the

fraudulent Ponzi scheme from investors and investigators. BLMIS was composed of three

separate business units. On one floor of BLMIS’ offices were the proprietary trading and market

making businesses, together known as “House 5.” On the 17th floor was the investment

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advisory arm of BLMIS (the “IA Business”), from which the Ponzi scheme was conducted. The

IA Business operated by depositing customer money into a bank account at JPMorgan Chase &

Co., Account #xxxxxxxxxxx1703 (the “BLMIS Bank Account”) and fabricating fictional

securities transactions to create the appearance that customer deposits were used to purchase

securities. On its face, House 5 appeared to be an autonomous, legitimate and successful

enterprise. In fact, House 5 was a failing business, and operated to hide the true nature of the IA

Business from investors and investigators. BLMIS ensured that House 5 would continue as a

shield for its misconduct by: (i) funneling large amounts of money to House 5 from the IA

Business, often through a complicated international maze of transactions; (ii) conspiring with

external auditors to provide false audit reports; and (iii) selectively complying with certain

regulatory requirements of various securities agencies in order to avoid raising suspicion.

3. Pitz had a number of roles, many of which exposed her to irrefutable evidence

of fraud at BLMIS. As Controller, Pitz was responsible for closing the company’s books each

month and preparing monthly and quarterly FOCUS Reports and annual audited financial

statements, which were then filed with both the Securities and Exchange Commission (“SEC”)

and the Financial Industry Regulatory Authority (“FINRA”). Pitz also served as the primary

liaison between BLMIS and both the SEC and its external auditor, Friehling & Horowitz,

although this entailed little more than delivering to them incomplete financial data. Notably, Pitz

was also the supervisor of BLMIS’ Anti-Money Laundering Program.

4. As Controller, Pitz processed and recorded as revenue a number of payments

from the IA Business to House 5 (collectively, the “IA to House 5 Transfers”). From fiscal year

2002 to 2008, Pitz processed transfers of more than $600 million, constituting approximately

1 For convenience, future reference to SIPA will not include “15 U.S.C.”

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two-thirds of House 5’s revenue for that time period.2 Without these funds, House 5 would have

been operating at a loss of tens of millions of dollars each year. These funds came from the IA

Business via the BLMIS Bank Account and were transferred to House 5 either directly or from

various intermediary sources. Initially, these funds were provided to House 5 directly through

checks from the BLMIS Bank Account to an account at Bank of New York account xxxxxxx621

(the “House 5 Operating Account”). Later, the funds were wired from the BLMIS Bank Account

to Madoff’s own domestic brokerage accounts or to an account at Barclays Bank in London held

by Madoff Securities International Ltd. (“MSIL”), a London based entity substantially owned by

Madoff and his family. In these situations, funds were then subsequently wired from either the

brokerage account or MSIL to the House 5 Operating Account.

5. Pitz knew that the IA to House 5 Transfers were fraudulent. If nothing else, the

fact that these transfers constituted approximately two-thirds of the total revenue for House 5 and

came directly or indirectly from the BLMIS Bank Account should have caught her attention.

Further, the varying medium of the transfers was suspicious, especially because transfers from

MSIL only began to occur at the same time as an investigation by the SEC in 2005, during which

time Pitz was a contact for SEC investigators. It is implausible that Pitz, an experienced and

credentialed industry professional, would not question the source, size, legitimacy, purpose and

change in recording methods of the IA to House 5 Transfers.

6. Pitz’s role helped to disguise the source of the IA to House 5 Transfers. When

recording the IA to House 5 Transfers, Pitz would refer to direct payments as “Walter’s Int” and

indirect payments as “$ from Frank,” referring to Walter Tiletnick (“Tiletnick”) and Frank

DiPascali (“DiPascali”), two employees who Pitz knew worked in the IA Business. Pitz,

2 Evidence supports that this practice existed prior to 2002, however for purposes of this Complaint, fiscal year 2002 to 2008 has been presented.

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however, would record these transfers in BLMIS’ books and her FOCUS Reports quite

differently. From fiscal year 2002 to 2006, Pitz recorded these transfers as “trading revenue” for

House 5 along with proprietary trading revenue. Although the FOCUS Report template included

a line item to record commissions revenue, Pitz continued to record the IA to House 5 Transfers

as trading revenue. This practice continued until BLMIS registered as an investment advisor at

which time (September 2006) Pitz began recording the IA to House 5 Transfers on the FOCUS

Reports as commissions revenue. Prior to September 2006, Pitz blindly followed the directions

of DiPascali by recording the IA House 5 Transfers in the trading subledger as revenue by

manually attributing each payment to a list of securities that BLMIS purportedly earned

commission on. Pitz also knew that, following an investigation by the SEC during 2005, the IA

to House 5 Transfers were then attributed to one “dummy” symbol that did not represent any

actual security. Pitz was a certified securities professional who had an understanding of

reporting requirements. She knew that drastic changes in the method of recording such large

payments would be highly unusual, especially around the time of an SEC investigation. At the

very least, she knew or should have known that incoming funds should not be recorded as

manual adjustments in the trading subledger when they were purported to be related to

commission revenue.

7. The FOCUS Reports prepared by Pitz contained no mention of assets held by

the IA Business, including the BLMIS Bank Account, despite her knowledge that it was, at least

originally, the direct source of two-thirds of House 5’s revenue. Moreover, Pitz knew of and

recorded payments from the IA Business to House 5 on multiple occasions.

8. Pitz had close ties to the IA Business. She had been romantically involved with

DiPascali for two years early in her career and she remains close friends with Annette Bongiorno

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(“Bongiorno”), an IA Business Account Manager. Pitz also had significant professional ties to

the IA Business. In 2005 and 2006, Pitz helped to avert a liquidity crisis in the IA Business

caused by IA customers requesting redemptions that exceeded the balance of the BLMIS Bank

Account. To avoid the exposure of the IA Business as a Ponzi scheme by defaulting on these

redemptions, $262 million of IA customer redemptions were made through the House 5

Operating Account. These redemptions were recorded as purchases of government obligation

investments by House 5. Pitz knew that no securities were purchased, however, because she

should have known that the payees were not entities that would sell government obligation

securities (e.g., Treasury Bills). Pitz also reconciled investments to clearing agencies on a

periodic basis, and these investments would not have reconciled externally. In addition, Pitz

worked with JPMorgan Chase & Co. to secure loans inappropriately using bonds owned by an

IA customer as collateral. When it came time to file the FOCUS Report, however, neither the

loans nor the bonds held as collateral were included. Pitz, a certified securities professional,

knew she was covering up a fraudulent scheme.

9. Pitz was also responsible for providing Bongiorno with calculations so that

Bongiorno could correctly fabricate account statements in case a fictionally held security in an

IA Account underwent a dividend, split or spinoff. Because Pitz had access to Depository Trust

& Clearing Corporation (“DTCC”) data, she could accurately calculate the effect of a corporate

action on a given security. She would provide this information to the IA Business to create false

IA Account statements for customers. As the holder of a Series 27 license, Pitz knew that

typically, in a case of a split or spin-off, the transfer agent will have shareholder records

indicating who holds a certain security, and will then deliver to the customer’s broker (in this

case BLMIS) the relevant shares and/or fractional cash payment. Because no such deliveries

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were being made to BLMIS, Pitz knew or should have known something was unusual or

illegitimate about the way the IA Business manually calculated and reviewed the result of any

corporate action.

10. Pitz profited handsomely from the Ponzi scheme. She was paid at least

$3,255,588 in compensation for her role in the fraud, including at least $467,316 in 2008 alone.

She and her husband, Thomas Pitz, also possessed two IA accounts, from which they withdrew

at least $489,059.

11. As further proof of her complicity, in the days just prior to the collapse of

BLMIS, on December 11, 2008, Pitz, along with a number of other high-level employees, was

scheduled to receive a final check, withdrawing the last remaining value in her account. No

check is believed to have been issued, however, due to the sudden collapse of BLMIS.

NATURE OF PROCEEDING

12. This adversary proceeding is brought pursuant to §§ 78fff(b), 78fff-1(a) and

78fff-2(c)(3) of SIPA, sections 105(a), 542, 544, 548(a), 550(a) and 551 of title 11 of the United

States Code (the “Bankruptcy Code”), the New York Fraudulent Conveyance Act (New York

Debtor & Creditor Law §270 et seq. (McKinney 2001) (“DCL”)) and other applicable law, for

among other things, turnover and accounting, avoidance of fraudulent conveyances, and

disallowance of claims in connection with certain transfers of property by BLMIS to or for the

benefit of Defendants.

13. Defendants were beneficiaries of this Ponzi scheme. Prior to the Filing Date,

BLMIS made payments or other transfers directly or indirectly to or for the benefit of

Defendants totaling the amount of at least $3,744,647. Through this action, the Trustee seeks to

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set aside such transfers and preserve and recover the property for the benefit of BLMIS’

defrauded customers.

JURISDICTION AND VENUE

14. This is an adversary proceeding commenced before the same Court before

which the main underlying SIPA proceeding, No. 08-01789 (BRL) (the “SIPA Proceeding”,) is

pending. The SIPA Proceeding was originally brought in the United States District Court for the

Southern District of New York as Securities Exchange Commission v. Bernard L. Madoff

Investment Securities LLC et al., No. 08 CV 10791 (the “District Court Proceeding”) and has

been referred to this Court. This Court has jurisdiction over this adversary proceeding under 28

U.S.C. § 1334(b) and §§ 78eee(b)(2)(A), (b)(4) of SIPA.

15. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (H) and

(O).

16. Venue in this district is proper under 28 U.S.C. § 1409.

DEFENDANTS

17. Upon information and belief, Enrica Cotellessa-Pitz maintains her residence in

Ozone Park, New York, 11417. Pitz has been employed in the BLMIS since 1978.

18. Upon information and belief, Thomas Pitz maintains his residence in Ozone

Park, New York, 11417. Thomas Pitz is the husband of Enrica Cotellessa-Pitz.

BACKGROUND, THE TRUSTEE AND STANDING

19. On December 11, 2008 (the “Filing Date”),3 Madoff was arrested by federal agents

for violation of the criminal securities laws, including, inter alia, securities fraud, investment

3 Section 78lll(7)(B) of SIPA states that the filing date is “the date on which an application for a protective decree is filed under 78eee(a)(3),” except where the debtor is the subject of a proceeding pending before a United States court “in which a receiver, trustee, or liquidator for such debtor has been appointed and such proceeding was commenced before the date on which such application was filed, the term ‘filing date’ means the date on which such proceeding

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adviser fraud, and mail and wire fraud. Contemporaneously, the SEC filed a complaint in the

District Court which commenced the District Court Proceeding against Madoff and BLMIS. The

District Court Proceeding remains pending in the District Court. The SEC complaint alleged that

Madoff and BLMIS engaged in fraud through the investment advisor activities of BLMIS.

20. On December 12, 2008, The Honorable Louis L. Stanton of the District Court

entered an order appointing Lee S. Richards, Esq. as receiver for the assets of BLMIS.

21. On December 15, 2008, pursuant to § 78eee(a)(4)(A) of SIPA, the SEC consented

to a combination of its own action with an application of the Securities Investor Protection

Corporation (“SIPC”). Thereafter, pursuant to § 78eee(a)(4)(B) of SIPA, SIPC filed an application

in the District Court alleging, inter alia, that BLMIS was not able to meet its obligations to

securities customers as they came due and, accordingly, its customers needed the protections

afforded by SIPA.

22. Also on December 15, 2008, Judge Stanton granted the SIPC application and

entered an order pursuant to SIPA (the “Protective Decree”), which, in pertinent part:

a. appointed the Trustee for the liquidation of the business of BLMIS pursuant

to §78eee(b)(3) of SIPA;

b. appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to §

78eee(b)(3) of SIPA; and

c. removed the case to this Bankruptcy Court pursuant to §78eee(b)(4) of

SIPA.

By this Protective Decree, the Receiver was removed as Receiver for BLMIS.

was commenced.” § 78lll(7)(B). Thus, even though the application for a protective decree was filed on December 15, 2008, the Filing Date in this action is December 11, 2008.

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23. By orders dated December 23, 2008 and February 4, 2009, respectively, the

Bankruptcy Court approved the Trustee’s bond and found that the Trustee was a disinterested

person. Accordingly, the Trustee is duly qualified to serve and act on behalf of the estate of

BLMIS.

24. At a Plea Hearing on March 12, 2009 in the case captioned United States v. Madoff,

Case No. 09-CR-213(DC), Madoff pled guilty to an eleven-count criminal information filed

against him by the United States Attorneys’ Office for the Southern District of New York. At the

Plea Hearing, Madoff admitted that he “operated a Ponzi scheme through the investment advisory

side of [BLMIS].” See Plea Allocution of Bernard L. Madoff at 23, United States v. Madoff, No.

09-CR-213 (DC) (S.D.N.Y. March 12, 2009) (Docket No. 50). Additionally, Madoff asserted

“[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed criminal.” Id. Madoff

was sentenced on June 29, 2009 to 150 years in prison.

25. On August 11, 2009, a former BLMIS employee, DiPascali, pled guilty to

participating and conspiring to perpetuate the Ponzi scheme. At a Plea Hearing on August 11,

2009 in the case entitled United States v. DiPascali, Case No. 09-CR-764 (RJS), DiPascali pled

guilty to a ten-count criminal information. Among other things, DiPascali admitted that the

fictitious scheme had begun at BLMIS since at least the 1980s. See Plea Allocution of Frank

DiPascali at 46, United States v. DiPascali, No. 09-CR-764 (RJS) (S.D.N.Y. August 11, 2009)

(Docket No. 11).

26. As the Trustee appointed under SIPA, the Trustee has the job of recovering and

paying out customer property to BLMIS’ customers, assessing claims, and liquidating any other

assets of the firm for the benefit of the estate and its creditors. The Trustee is in the process of

marshalling BLMIS’ assets, and the liquidation of BLMIS’ assets is well underway. However,

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such assets will not be sufficient to reimburse the customers of BLMIS for the billions of dollars

that they invested with BLMIS over the years. Consequently, the Trustee must use his authority

under SIPA and the Bankruptcy Code to pursue recovery from, among others: (i) those persons

who helped Madoff perpetrate his Ponzi scheme; (ii) those persons who were paid to knowingly

help Madoff perpetrate his Ponzi scheme; and (iii) BLMIS customers who received preferences

and/or payouts of fictitious profits to the detriment of other defrauded customers whose money

was consumed by the Ponzi scheme. Absent this or other recovery actions, the Trustee will be

unable to satisfy the claims described in subparagraphs (A) through (D) of SIPA section 78fff-

2(c)(1). Absent this or other recovery actions, the Trustee will be unable to satisfy the claims

described in subparagraphs (A) through (D) of SIPA section 78fff-2(c)(1).

27. Pursuant to section 78fff-1(a), the Trustee has the general powers of a bankruptcy

trustee in a case under the Bankruptcy Code in addition to the powers granted by SIPA pursuant to

section 78fff-1(b). Chapters 1, 3, 5 and subchapters I and II of chapter 7 of the Bankruptcy Code

are applicable to this case.

28. Pursuant to section 78fff(b) and 78lll(7)(B) of SIPA, the Filing Date is deemed

to be the date of the filing of the petition within the meanings of section 548 of the Bankruptcy

Code and the date of the commencement of the case within the meaning of section 544 of the

Bankruptcy Code.

29. The Trustee has standing to bring these claims pursuant to section 78fff-1 of SIPA

and the Bankruptcy Code, including sections 323(b) and 704(a)(1), because, among other reasons:

a. Defendants received “customer property” as defined in § 78lll(4);

b. BLMIS incurred losses as a result of the claims set forth herein;

c. BLMIS’ customers were injured as a result of the conduct detailed herein;

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d. SIPC cannot by statute advance funds to the Trustee to fully reimburse all

customers for all of their losses;

e. the Trustee will not be able to fully satisfy all claims;

f. the Trustee, as bailee of customer property, can sue on behalf of customer

bailors;

g. the Trustee is the assignee of claims paid, and to be paid, to customers of

BLMIS who have filed claims in the liquidation proceeding (such claim-filing customers,

collectively, “Accountholders”). As of the date hereof, the Trustee has received multiple express

unconditional assignments of the applicable Accountholders’ causes of action, which actions

could have been asserted against Defendants. As assignee, the Trustee stands in the shoes of

persons who have suffered injury in fact and a distinct and palpable loss for which the Trustee is

entitled to reimbursement in the form of monetary damages. The Trustee brings this action on

behalf of, among others, those defrauded customers of BLMIS who invested more money in

BLMIS than they withdrew; and

h. SIPC is the subrogee of claims paid, and to be paid, to customers of

BLMIS who have filed claims in the liquidation proceeding. SIPC has expressly conferred upon

the Trustee enforcement of its rights of subrogation with respect to payments it has made and is

making to customers of BLMIS from SIPC funds.

THE FRAUDULENT PONZI SCHEME

30. Founded in 1959, BLMIS began operations as a sole proprietorship of Madoff and

later, effective January 2001, it became a New York limited liability company wholly owned by

Madoff. From 1987 to 2008, BLMIS operated from its principal place of business at 885 Third

Avenue, New York, New York. Madoff, as founder, chairman, and chief executive officer, ran

BLMIS together with several family members and a number of additional employees. BLMIS was

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registered with the SEC as a securities broker-dealer under Section 15(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78o(b). By that registration, BLMIS is a member of SIPC.

BLMIS had three business units: the IA Business, market making and proprietary trading.

31. For certain accounts in the IA Business, BLMIS purported to participate in a capital

appreciation/depreciation strategy, depending on whether the customer sought to generate gains or

losses. For example, the strategy was executed by either purporting to purchase small groups of

securities transactions near lows and then purporting to sell those same securities near highs, or by

purporting to short-sell securities near highs and then purporting to repurchase those securities near

lows.

32. For other accounts, Madoff described the IA Business’ investment strategy as a

“split-strike conversion” strategy. Madoff promised these clients that their funds would be

invested in a basket of common stocks within the S&P 100 Index, which is a collection of the 100

largest U.S. publicly traded companies. The basket of stocks would be intended to mimic the

movement of the S&P 100 Index. Madoff asserted that he would carefully time purchases and

sales to maximize value, but this meant that the clients’ funds would intermittently be out of the

market, at which times they would purportedly be invested in U.S. issued securities and money

market funds. The second part of the split-strike conversion strategy was the hedge of such

purchases with option contracts. Madoff purported to purchase and sell S&P 100 Index option

contracts that closely corresponded with the stocks in the basket, thereby controlling the downside

risk of price changes in the basket of stocks.

33. Although clients of the IA Business received monthly or quarterly statements

purportedly showing the securities that were held in – or had been traded through – their accounts,

as well as the growth of and profit from those accounts over time, the trades reported on these

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statements were a complete fabrication. The security purchases and sales depicted in the account

statements virtually never occurred and the profits reported were entirely fictitious. At his Plea

Hearing, Madoff admitted that he never in fact purchased any of the securities he claimed to have

purchased for customer accounts. See Madoff Plea Allocution, at 25. Indeed, based on the

Trustee’s investigation to date and with the exception of isolated individual trades for certain

clients other than the Defendants, there is no record of BLMIS having cleared any purchase or sale

of securities on behalf of the IA Business at the DTCC, the clearing house for such transactions, or

any other trading platform on which BLMIS could have reasonably traded securities.

34. Prior to his arrest, Madoff assured clients and regulators that he conducted all

trades on the over-the-counter market after hours. To bolster that lie, Madoff periodically wired

tens of millions of dollars to BLMIS’s affiliate, MSIL. There are no records that MSIL ever

used the wired funds to purchase securities for the accounts of the IA Business clients. In fact,

MSIL wired hundreds of millions of dollars back to House 5, where they were then recorded as

revenue related to purported trading in Europe.4

35. Additionally, based on the Trustee’s investigation to date, there is no evidence that

BLMIS ever purchased or sold any of the options that Madoff claimed on customer statements to

have purchased.

36. For all periods relevant hereto, the IA Business was operated as a Ponzi scheme and

Madoff and his co-conspirators concealed the ongoing fraud in an effort to hinder, delay or defraud

other current and prospective customers of BLMIS from discovering the fraud. The money

4 BLMIS began wiring funds to MSIL in June 2005 for purposes of having an element of those funds returned and recorded as revenues by BLMIS. MSIL would record incoming funds as the sale of Treasury Bills and the outgoing funds as the purchase of Treasury Bills. There is no evidence that the Treasury Bills were ever purchased or sold. Prior to June 2005, funds were moved from the BLMIS Bank Account to the House 5 Operating Account either directly via checks or indirectly via wires from the BLMIS Bank Account to domestic brokerage accounts maintained by Bernard Madoff which then wired funds into the House 5 Operating Account. This practice of

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received from investors was not set aside to buy securities as purported, but instead was primarily

used to make the distributions to – or payments on behalf of – other investors. The money sent to

BLMIS for investment, in short, was simply used to keep the operation going and to enrich

Madoff, his associates and others, including Pitz, until such time as the requests for redemptions in

December 2008 overwhelmed the flow of new investments and caused the inevitable collapse of

the Ponzi scheme.

37. The payments to investors constituted an intentional misrepresentation of fact

regarding the underlying accounts and were an integral and essential part of the fraud. The

payments were necessary to validate the false account statements, and were made to avoid

detection of the fraud, to retain existing investors and to lure other investors into the Ponzi scheme.

38. During the scheme, certain investors requested and received distributions of the

“profits” listed for their accounts which were nothing more than fictitious profits. Other investors,

from time to time, redeemed or closed their accounts, or removed portions of the purportedly

available funds, and were paid consistently with the statements they had been receiving. Some of

those investors later re-invested part or all of those withdrawn payments with BLMIS.

39. When payments were made to or on behalf of these investors, including

Defendants, the falsified monthly statements of accounts reported that the accounts of such

investors included substantial gains. In reality, BLMIS had not invested the investors’ principal as

reflected in customer statements. In an attempt to conceal the ongoing fraud and thereby hinder,

delay or defraud other current and prospective investors, BLMIS paid to or on behalf of certain

investors, such as Defendants, the inflated amounts reflected in the falsified financial statements,

including principal and/or fictitious profits.

moving funds from the IA Business to House 5 dates back to at least 1999 (evidence prior to 1999 is limited due to the lack of banking records prior to 1999).

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40. BLMIS used the funds deposited from new investments to continue operations and

pay redemption proceeds to or on behalf of other investors and to make other transfers. Due to the

siphoning and diversion of new investments to fund redemptions requested by other investors,

BLMIS did not have the funds to pay investors on account of their new investments. BLMIS was

able to stay afloat only by using the principal invested by some clients to pay other investors or

their designees.

41. In an effort to hinder, delay or defraud authorities from detecting the fraud,

BLMIS did not register as an Investment Advisor until August 2006.

42. In or about January 2008, BLMIS filed with the SEC an amended Uniform

Application for Investment Adviser Registration. The application represented, inter alia, that

BLMIS had 23 customer accounts and assets under management of approximately $17.1 billion.

In fact, in January 2008, BLMIS had approximately 4,900 active client accounts with a purported

value of approximately $65 billion under management.

43. Not only did Madoff seek to evade regulators, Madoff also had false audit reports

“prepared” by Friehling & Horowitz, a three-person accounting firm in Rockland County, New

York. Of the two accountants at the firm, one was semi-retired and living in Florida for many

years prior to the Filing Date.

44. At all times relevant hereto, the liabilities of BLMIS were billions of dollars greater

than the assets of BLMIS. At all relevant times, BLMIS was insolvent in that (i) its assets were

worth less than the value of its liabilities; (ii) it could not meet its obligations as they came due;

and (iii) at the time of the transfers, BLMIS was left with insufficient capital.

45. Pitz played a key role in the fraudulent scheme. She knew: (i) the IA Business

was predicated on fraud; (ii) Defendants were benefitting from fraudulent transactions in their

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accounts; and (iii) their purported account activity was inconsistent with legitimate trading

activity and credible returns.

Pitz’s Involvement in the Fraudulent Scheme

Fraudulent Recording of Money Funneled from the IA Business to House 5

46. Pitz was a long-time employee at BLMIS, serving from 1978 until the collapse of

the firm in December 2008. In the late 1990’s Pitz became BLMIS’ Controller. As Controller,

Pitz was responsible for closing the company’s books each month and preparing monthly FINRA

FOCUS reports. Among her qualifications were a degree in economics and a subsequent FINRA

Series 27 certification. The Series 27 certification necessarily requires candidates to pass an

exam concerning financial responsibility rules and recordkeeping requirements.

47. Pitz’s primary role at BLMIS was to maintain the façade of legitimacy over the

Ponzi scheme. To do so, Pitz recorded as revenue for House 5 more that $600 million of funds

that had been stolen from innocent customers of the IA Business from at least fiscal year 2002 to

fiscal year 2008. This served to artificially inflate revenues and net income of the House 5

businesses. Funds transferred from the IA Business accounted for approximately two thirds of

House 5 revenue. Without these funds, House 5 would have been operating at a considerable

loss each year.

48. Certain IA Business funds were provided to House 5 directly through checks from

the BLMIS Bank Account. Other IA Business funds were provided indirectly. The indirect

funds were wired from the BLMIS Bank Account to domestic brokerage accounts maintained by

Madoff and, beginning in June 2005, from the BLMIS Bank Account to a Barclays account held

by MSIL. From there, bank wires were issued from the domestic brokerage accounts or MSIL to

the House 5 Operating Account. The process of diverting the IA Business funds via MSIL

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started at the same time as an SEC examination when examiners learned that most of the House

5 revenues were derived from the IA business and not the market making business.

49. Pitz knew the source of the IA to House 5 Transfers. Pitz kept track of the IA to

House 5 Transfers on stationery note pads and referred to the direct payments as “Walter’s Int”

and the indirect payments as “$ from Frank,” referring to Tiletnick and DiPascali, respectively,

two BLMIS employees who Pitz knew worked in the IA Business. Even when Pitz was

instructed by Madoff or DiPascali not to record the payments for a period during 2005, she

continued to keep track of amounts that were available to record, with notes that indicate that the

amounts were either “Not Taken” or “Not Taken In.” Further, as a securities professional, Pitz

should have inquired as to why the recording and sourcing of the IA to House 5 Transfers were

changing so significantly, but failed to do so. The very fact that the funds began arriving from

overseas just when the SEC was investigating BLMIS indicates that Pitz knew or should have

known these indirect transactions were designed to evade investigators and prevent third parties

from discovering that no securities were being purchased with funds deposited by customers of

the IA Business.

50. Pitz recorded the IA to House 5 Transfers as revenue in the books and records of

BLMIS. Initially, the IA to House 5 Transfers were recorded as trading revenue, with detail of

this activity reflected in the trading subledger.5 Beginning in September 2006, the IA to House 5

Transfers were recorded as commissions revenue. Like the means of transferring these funds,

the means of recording these funds, even within the trading subledger, varied as time passed.

5 The trading subledger is a report in the BLMIS computer system which provides the monthly and year-to-date profit and loss for each BLMIS account.

-19-

51. Unlike other accounts that related to a specific trader, the trading subledger

included certain numbered accounts (the “0-9 Accounts”) were not related to a specific trader.6

The 0-9 Accounts were also unique insofar as these accounts were a only accessible by BLMIS

managers, one of whom was Pitz. It is within these 0-9 Accounts that the IA to House 5

Transfers were recorded until BLMIS registered as an investment advisor in August 2006.

Initially, the IA to House 5 Transfers were recorded within a 0-9 Account entitled “Firm

Spreads.” Beginning in January 2004, the amounts were recorded to a 0-9 Account called

“RP/EQ,” which stood for “Riskless Principal/ Equivalents.” Prior to the IA to House 5

Transfers going through MSIL, the payments into RP/EQ were manually allocated and assigned

to a list of securities that BLMIS purportedly earned commissions on. After the amounts began

coming in from MSIL, however, the transfers were assigned to one dummy stock symbol called

“COMEQ.” At all relevant times, Pitz was aware of the purported “trading” going on in the 0-9

Accounts.

52. The FOCUS Reports prepared by Pitz were fraudulent. Pursuant to SEC Rule

17a-5, all broker dealers are required to file FOCUS Reports on either a monthly or quarterly

basis. The FOCUS Report serves as the final product of a broker dealer’s financial activities

over a period of time. The FOCUS Report provides the reader with a balance sheet, an income

statement since the last report was filed, a statement of changes in ownership equity, and a

computation of the broker dealer’s net capital, along with other required disclosures. To create

these reports, Pitz was given management access to all data for the market making and

proprietary trading businesses. She was one of only a few people to have this access. The

FOCUS Reports Pitz filed did not reflect most of the customer account activity for the IA

Business including the custody of customer cash held in the BLMIS Bank Account. They did,

6 A few of the 0-9 Accounts were aligned with specific names including Andrew and Mark Madoff.

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however, reflect the IA to House 5 Transfers that were recorded as either trading or commission

revenue. Pitz, as Controller and an experienced and credentialed industry professional, knew of

the source, size, and purpose of the IA to House 5 Transfers that she initiated, tracked and

recorded. In addition, Pitz knew or should have known the significance of these funds to the

liquidity and profitability of House 5.

The IA Liquidity Crisis

53. From approximately October 2005 through June 2006, the IA Business

experienced a liquidity crisis which was averted with the help of Pitz. The liquidity crisis

threatened to reveal the Ponzi scheme due to insufficient funds in the BLMIS Bank Account to

fulfill IA Business customer redemptions. The IA Business only had aggregate cash and short-

term investments at the end of October 2005 of approximately $85 million, which was

significantly lower than the billions reflected on IA account statements. Pitz helped BLMIS

take a number of actions to avert this crisis.

54. Because the BLMIS Bank Account lacked sufficient funds for IA Business

customer redemptions, $262 million of IA Business customer redemptions were made through

the House 5 Operating Account and were inappropriately recorded by Pitz as purchases of

investments. The redemptions were primarily funded using excess funds available in the

investment and operating bank accounts of House 5.7 This represented the only time (based

upon available banking records) that IA Business customer redemptions were paid directly from

7 The excess funds were partially attributable to funds provided previously from the IA to House 5 Transfers, which provided cushion in the House 5 bank accounts.

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House 5. Pitz should have been aware of these redemption payments because they were falsely

recorded in the House 5 trading subledger and general ledger as purchases of investments.8

55. Pitz knew or should have known that these transactions were fraudulent because

she reconciled the House 5 investments to third party clearinghouses on a periodic basis. Aside

from the fact that the “investments” resulted in zero return, Pitz would have been aware of the

inappropriate nature of these redemptions.

56. Further, the sum of all of House 5’s net investments as of December 31, 2005 was

$118 million. These $262 million in “investments” more than doubled the net investments on

BLMIS’ books. By June 2006, the IA cash and short-term investment balances had increased due

to additional IA customer investments. With the liquidity crisis averted, the IA Business repaid

House 5 by issuing two wire transfers that totaled just under $262 million. After the repayment,

net investments were reduced to $184 million. This drastic shift in equity would have alerted a

securities professional to inquire as to the nature of the increase. Any such inquiry would have

uncovered the recording of the IA customer redemptions as the fraudulent purchase of

investments.

57. Pitz also helped avert the liquidity crises by fraudulently failing to record loans.

Between November 2005 and January 2006, the IA Business received a total of $154 million of

Federal Home Loan Bank (“FHLB”) securities that were transferred to the IA Business by an IA

client. These securities were used by BLMIS as collateral to secure loans of $145 million from

JPMorgan Chase & Co. ($95 million during November 2005 and $50 million during January

2006) (the "JPMC Loans").

8 Specifically, these investments were falsely recorded as Federal Home Loans Bank securities and Treasury bills. The accounting for the entries on the books of House 5 was a debit to the Investments/Trading account and a credit to cash.

-22-

58. Because BLMIS was one legal and accounting entity, the collateral and loan

activity of the IA Business should have appeared on the FOCUS Reports. Notwithstanding the

rules, as of December 31, 2005, the FOCUS Report that Pitz improperly prepared and BLMIS

filed failed to report the $95 million of bank debt or the FHLB securities that were used as

collateral.

59. Pitz, by accounting for the draw-downs of an existing Bank of New York

(“BONY”) line of credit and having full knowledge of the amount due on the JPMC Loans,

should have been aware that the line of credit was being manipulated to a balance such that it

would hide the existence of the JPMC Loans. As of March 31, 2006, the FOCUS Report filed by

BLMIS included $145 million of bank debt. This debt, however, was separate and apart from

the JPMC Loans; the $145 million amount reported on the FOCUS Report related to the separate

line of credit with the BONY. As of March 31, 2006, BLMIS’ opening general ledger balance

for the BONY line of credit totaled $35.5 million. On March 31, however, BLMIS borrowed an

additional $109.5 million, to arrive at a loan balance of $145 million. This additional loan

appears to have been an attempt to conceal the true liabilities of BLMIS, as both BONY and

JPMorgan Chase & Co. would likely not inquire further in light of the $145 million in bank debt

on the FOCUS Report.

60. Pitz was intimately involved in the processing of the loans with JPMorgan Chase

& Co. representatives. As such, Pitz knew that IA assets were being used to collateralize loans,

neither of which appeared on the BLMIS financial statements.

Pitz’s Role In Audits and Investigations

-23-

61. Pitz was the primary contact for BLMIS’ external auditor, Friehling & Horowitz.

Pitz’s role during the “audits” was to supply David Friehling with BLMIS’s financial

information.

62. David Friehling would be in the office approximately one day a month and for

approximately two weeks at the end of each year. Pitz possessed most of Friehling’s work

product, including audit documents, and when he would arrive, she would provide him with

FOCUS Reports, the general ledger, the prior year’s audit reports, as well as blank templates on

which to create the current year’s reports. Friehling would fill in the templates, and give them to

Pitz to type.

63. Pitz knew or should have known that Friehling & Horowitz were not truly

auditing BLMIS. Aside from possessing an understanding of the term “audit,” Pitz, as the

controller, would have been aware of the amount of payments being sent to Friehling &

Horowitz for their services, the amount of which starkly contradicted the amount of effort

expended by the firm. Also, Pitz was aware that David Friehling had an IA account with BLMIS

— a clear conflict of interest. These facts were enough to alert any licensed securities

professional that the audits were fraudulent.

64. Pitz was given other “watch dog” roles at BLMIS. During SEC investigations,

Pitz was responsible for providing information to investigating officers, and was also appointed

as supervisor of BLMIS’ Anti-Money Laundering Program. The very fact that Pitz was selected

for these roles demonstrates her importance to the underlying fraud. It defies credulity to believe

that Madoff would ask a disinterested and honest certified securities professional with unfettered

access to records to cooperate with the SEC and to investigate potential money laundering within

BLMIS.

-24-

Other Indicia of Fraud

65. Pitz engaged in other practices that varied greatly from industry practices and

norms. For instance, Pitz’s exposure to and participation in the activities of the IA Business

involved a significant departure from the ordinary process of reconciling dividends, stock splits

and spinoffs. Typically, in a such a transaction, the transfer agent will have records indicating

who holds a certain security, and will then deliver to the customer’s broker the relevant shares

and/or fractional cash payment. The broker will then deposit the shares and cash into the

customer’s account. In contrast, Pitz would manually make corrections to these calculations on

behalf of the IA Business to help Bongiorno correctly fabricate fictional account statements for

IA customers. As one example, the April 2008 account statement of an IA client contained a

spinoff of 917 shares on April 4, as indicated on the Dividend & Stock Split Announcement

page. It also contained an adjustment, on April 29, for two additional shares, and additional

cash-in-lieu due. Bongiorno’s handwritten notes indicate that Pitz approved the share

calculations and suggest Pitz manually calculated the appropriate number of shares that should

have been deposited had the stock actually been held in the account.

66. As the holder of a Series 27 license, Pitz has knowledge of how dividends, splits

and spinoffs are booked into customer accounts and thus knew or should have known something

was unusual or illegitimate about errors in IA accounts, as well as the way the IA Business was

required to manually calculate the results of corporate actions.

67. Pitz would often sign checks for IA customers that were drawn from the BLMIS

Bank Account. Despite her knowledge of the existence of this bank account, she apparently

never questioned why this account (as well as other assets and liabilities of the IA Business) was

not recorded in the books of House 5 or on BLMIS’ FOCUS Reports.

-25-

68. Pitz had close personal relationships with several employees of the IA Business.

Pitz was in a romantic relationship with Frank DiPascali for two years around the time of her

first employment with BLMIS. Pitz also maintains a close personal friendship with Bongiorno,

the manager of several IA Accounts, including those held by Pitz.

Pitz’s Personal Enrichment from the Ponzi Scheme

69. Defendants received a significant amount of ill-gotten gains from IA accounts

they owned or controlled.

70. Over the life of their accounts, Defendants withdrew $489,059 of customer

property from their BLMIS accounts. Defendants knew they were profiting from fraud because

Pitz played a central role in its commission. Even absent Pitz’s role, Defendants knew or should

have known they were profiting from fraud because of the implausibly consistent and high rates

of return that their accounts supposedly achieved.

71. In the case of Pitz’s BLMIS Account No. 1P0067, the purported annual rates of

return were consistently high over several years. In 1998, the account had a rate of return of

more than 110%, whereas the S&P 100 had a return of approximately 31% in that same year.

That same account, had rates of return over 8.9% in every year from 2001 to 2008, despite the

S&P 100 experiencing rates of return that ranged from negative 37% to positive 24%. Pitz’s

rates of return were neither credible nor consistent with legitimate trading activity, and alone

should have caused any reasonable investor, much less a certified professional, to inquire further.

72. Defendants knew that they were reaping the benefits of manipulated purported

returns and false documents based on the origin of their accounts and the apparent fictitious or

backdating trading activity, as well as other fraudulent activity. As such, all funds withdrawn

from any of Defendants’ IA Accounts were the profits of Pitz’s participation in the fraud, and

-26-

Defendants should not be credited with funds they knowingly invested in a criminal Ponzi

scheme. The following are only a few of the numerous indicia of fraud regarding Defendants’

IA Accounts:

a. Defendants opened their original IA Account only after Madoff extended a

personal invitation, during which Madoff promised a 20%-24% annual rate of return.

Defendants’ Account No 1P0029 was originally held in the name of “Bernard L. Madoff

Special 11.” Madoff maintained “Special” accounts from which to pay amounts to

people from the BLMIS Bank Account as favors or pursuant to unrelated obligations.

b. Defendants’ accounts were managed by a personal friend. If Pitz sought

withdrawals or information with regard to her IA accounts, she would speak to

Bongiorno. On one occasion, when Pitz questioned Bongiorno regarding losses in her

account, Bongiorno informed her that any losses would be “made up in profits.”

c. The September 2002 customer statement for Defendants’ account, 1P0067,

contains backdated short sales of 6,500 shares of Electronic Data Systems Corp.

(“EDS”). The share prices and trade dates associated with the short sales ($57.60 and

$55.20) suggest the sales were backdated to April 1 and May 20, 2002 (with April 4 and

May 23, 2002 settlement dates). These backdated short sales appear to correspond to

stock prices that are near the monthly highs for April and May.9 Subsequent decreases in

share value result in approximately $280,000 of unrealized gains being added to the

account as of September 30, 2002. This transaction was suspicious because Defendants’

account typically invested in a long-term buy-and-hold strategy and did not typically

contain short sales of this sort. Finally, BLMIS records do not indicate that original

9 The pattern of timing trades to stock prices that are near a monthly high or low is often displayed in Pitz’s account across many other periods, suggesting that trades were recorded in her account with the benefit of hindsight.

-27-

customer statements were ever created for 1-P0067 from April through August 2002. As

Pitz was not provided customer statements for the account over that five month period,

she would have recognized that her account contained illegitimate trading activity.

d. In April 2003, Defendants’ account reflected purchases and sales of 38,000

shares of HCA Inc. (“HCA”). The shares were purportedly bought on April 1 (settlement

date April 4) and sold on April 16 (settlement date April 22), generating an

approximately $459,000 capital loss – approximately a quarter of her net equity at the

time. In Bongiorno’s role as an Account Manager, she used a report known as the

"Buying Power Report" in order to track the net equity balance of the accounts she

managed against their expected net equity. This report for April, 2003 reflects the equity

and market value of account 1-P0067 as if these HCA trades had not been executed,

along with Bongiorno’s handwritten note “Too high.” This suggests that the purchase

and sale of HCA was recorded with the benefit of hindsight on or after April 30, 2003,

with the intent of bringing down the account’s balance. Defendants would have noticed

that these transactions destroyed nearly a quarter of her account’s value, which should

have led her to question why they deviated from her normal long-term investing strategy

by buying and selling shares within the same month to realize such a massive loss.

e. In October 2008, under two months before the collapse of BLMIS, Pitz’s

account 1P0067 purchased and sold 25 contracts of S&P 100 Index put options. The

contracts were purportedly bought on October 9 (settlement date October 10) and sold on

October 28 (settlement date October 29), generating a $103,750 capital gain. Pitz would

have noticed the significant gain generated by this trade over the span of three weeks was

unusual, as her account did not normally trade options.

-28-

f. Defendants’ accounts frequently traded on margin, to leverage the capital in

the account to increase its potential returns in the market. As a Series 27 certified

professional, Pitz would have been aware of margin maintenance requirements under

Federal Reserve Board Regulation T (“Reg T”), and margin maintenance requirements

mandated by FINRA (or its predecessor). Margin maintenance mandates that the equity

in the account cannot drop below 25% (margin balance can be no more than 75%) of the

market value of securities in the account. Reg T also specifies that a minimum of 50%

equity is required on all new stocks purchased in a margin account. In practice, brokerage

firms routinely issue margin calls to investors when the equity in the account falls below

25% (margin balance exceeds 75%) of the market value of securities. The calls must be

satisfied immediately through the deposit of additional cash or securities, or the brokers

will sell the investors’ stock to satisfy the shortfall. This practice was not applied to

Defendants’ accounts. For example, Pitz’s account had less than 25% minimum equity,

as required by FINRA (or its predecessor) and was therefore margined over 75% at

September 30, 2000. In addition, there were a number of months where Pitz’s account

was over 50% on margin, but purchased additional securities entirely on margin, without

depositing additional capital, in violation of the initial margin restrictions. As a

sophisticated investor, licensed trader and controller for the House 5 business, Pitz knew

or should have known that her accounts were subject to the minimum equity and initial

margin restrictions and been aware of when her accounts were in violation of these

restrictions.

-29-

Pitz’s Exorbitant Salary

73. While employed at BLMIS, Pitz was paid at least $3,255,588 in return for her

active participation in the fraudulent scheme. Her combined salary and bonus for 2008 was at

least $467,316. Pitz was given a large raise in 2007, approximately doubling her salary. This

raise followed an SEC investigation, during which Pitz would likely have been a primary contact

for investigators.

74. Upon information and belief, every duty or task performed by Pitz was in

furtherance of the fraud.

75. Pitz knew or should have known that she was not entitled to receive a salary or

compensation for a job that entirely consisted of committing and/or disguising the fraudulent

Ponzi scheme. This money belonged to the customers of BLMIS. Pitz exercised unauthorized

control over this money with the knowledge that she was not entitled to receive it, as she

provided no corresponding legal benefit or legitimate value to BLMIS in return.

THE TRANSFERS

76. According to BLMIS’ records, Defendants maintained two accounts (Nos.

1P0029 and 1P0067) with BLMIS set forth on Exhibit A (collectively, the “Accounts”). Actions

on the Accounts were to be performed in New York, New York through securities trading

activities that would take place in New York, New York. The Account was held in New York,

New York, and Defendants sent funds to BLMIS and/or to the BLMIS Bank Account in New

York, New York for application to the Account and the conducting of trading activities, and/or

received inter-account transfers from other BLMIS IA Accounts.

77. Prior to the Filing Date, BLMIS made payments or other transfers (collectively,

the “Transfers”) directly or indirectly to or for the benefit of Defendants totaling at least

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$3,744,647. Under the circumstances set forth above, the Defendants knew of the fraud at

BLMIS, that BLMIS was insolvent, and/or that the transfers were made for a fraudulent purpose,

or at the very least, Defendants were on inquiry notice of the same. Of the Transfers, (a) at least

$489,059 was in the form of withdrawals from BLMIS accounts in the name of, or for the benefit

of, Defendants and (b) at least $3,255,588 was in the form of salary and/or bonus payments made

by BLMIS to Pitz in return for her active participation in and administration of the fraudulent

scheme. The Transfers that were directly or indirectly made to the Defendants in the form of

withdrawals from BLMIS accounts include, but are not limited to, the Transfers listed on Exhibit

B.

78. Upon information and belief, certain Transfers were dispensed from Defendants'

IA Accounts at the direction of, and for the benefit of, Defendants to third parties in the

aggregate amount of at least $62,059.49.

79. The Transfers are avoidable and recoverable under sections 544, 548, 550(a)

and 551 of the Bankruptcy Code, applicable provisions of SIPA, particularly SIPA section 78fff-

2(c)(3), and applicable provisions of N.Y. CPLR 203(g) and 213(8) (McKinney 2001) and DCL

sections 273-279 (McKinney 2001).

80. Of the Transfers, BLMIS made payments to Defendants of at least $2,130,318

during the six years prior to the Filing Date (the “Six Year Transfers”), which are avoidable and

recoverable under sections 544, 548, 550(a) and 551 of the Bankruptcy Code, applicable

provisions of SIPA, particularly § 78fff-2(c)(3), and applicable provisions of DCL sections 273 –

279. Of these Six Year Transfers, at least $332,059 was in the form of withdrawals from BLMIS

accounts and at least $1,798,259 was in the form of salary and/or bonus payments made by

-31-

BLMIS to Pitz in return for her active participation in and administration of the fraudulent

scheme.

81. Of the Six Year Transfers, BLMIS made payments to Defendants of at least

$1,097,051 during the two years prior to the Filing Date (the “Two Year Transfers”), which are

avoidable and recoverable under sections 548, 550(a) and 551 of the Bankruptcy Code and

applicable provisions of SIPA, particularly SIPA section 78fff-2(c)(3). Of these Two Year

Transfers, (a) $162,059 was in the form of withdrawals from BLMIS accounts and $934,992 was

in the form of salary and/or bonus payments made by BLMIS to Pitz in return for her active

participation in and administration of the fraudulent scheme.

82. To the extent that any of the recovery counts may be inconsistent with each

other, they are to be treated as being pled in the alternative.

83. The Trustee’s investigation is ongoing and the Trustee reserves the right to (i)

supplement the information regarding the Transfers and (ii) seek recovery of such additional

transfers.

CUSTOMER CLAIMS

84. On or about, February 23, 2009, Defendants filed customer claims with the

Trustee which the Trustee has designated as Claims # 012398 and # 012399 (together, the

“Customer Claims”).

85. On or about March 3, 2010, the Trustee issued a Notice of Trustee’s

Determination of the Customer Claims (the “Determination”). A copy of the Determination is

attached hereto as Exhibit C.

86. Pitz did not file an objection to the Determination with the Court.

-32-

COUNT ONE - ACTUAL FRAUD UNDER FEDERAL LAW FRAUDULENT TRANSFER – 11 U.S.C. §§ 548(a)(1)(A), 550 AND 551

87. To the extent applicable, the Trustee incorporates by reference the allegations

contained in the previous paragraphs of this Complaint as if fully rewritten herein.

88. Each of the Two Year Transfers was made on or within two years before the

filing date of BLMIS’ case.

89. Each of the Two Year Transfers constituted a transfer of an interest of BLMIS

in property within the meaning of sections 101(54) and 548(a) of the Bankruptcy Code and

pursuant to section 78fff-2(c)(3) of SIPA.

90. Each of the Two Year Transfers was made by BLMIS with the actual intent to

hinder, delay, or defraud some or all of BLMIS’ then existing or future creditors.

91. Each of the Two Year Transfers constituted a fraudulent transfer avoidable by

the Trustee pursuant to section 548(a)(1)(A) of the Bankruptcy Code and recoverable from the

Defendants pursuant to section 550(a) of the Bankruptcy Code and section 78fff-(2)(c)(3) of

SIPA.

92. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a), and 551

of the Bankruptcy Code, the Trustee is entitled to a judgment against Defendants: (a) avoiding

and preserving the Two Year Transfers, (b) directing that the Two Year Transfers be set aside,

and (c) recovering the Two Year Transfers, or the value thereof, from the Defendants for the

benefit of the estate of BLMIS.

COUNT TWO - CONSTRUCTIVE FRAUD UNDER FEDERAL LAW FRAUDULENT TRANSFER – 11 U.S.C. §§ 548(a)(1)(B), 550 AND 551



-33-

94. Each of the Two Year Transfers was made on or within two years before the

Filing Date.

95. Each of the Two Year Transfers constitutes a transfer of an interest of BLMIS

in property within the meaning of sections 101(54) and 548(a) of the Bankruptcy Code and

pursuant to § 78fff-2(c)(3).

96. BLMIS received less than a reasonably equivalent value in exchange for each of

the Two Year Transfers.

97. At the time of each of the Two Year Transfers, BLMIS was insolvent, or

became insolvent as a result of the Two Year Transfers in question.

98. At the time of each of the Two Year Transfers, BLMIS was engaged in a

business or a transaction, or was about to engage in a business or a transaction, for which any

property remaining with BLMIS was an unreasonably small amount of capital.

99. At the time of each of the Two Year Transfers, BLMIS intended to incur, or

believed that it would incur, debts that would be beyond BLMIS’ ability to pay as such debts

matured.

100. Each of the Two Year Transfers constituted fraudulent transfers avoidable by

the Trustee pursuant to section 548(a)(1)(B) of the Bankruptcy Code and recoverable from the

Defendants pursuant to section 550(a) and section 78fff-(2)(c)(3) of SIPA.

101. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a), and 551

of the Bankruptcy Code, the Trustee is entitled to a judgment against Defendants: (a) avoiding

and preserving the Two Year Transfers, (b) directing that the Two Year Transfers be set aside,

and (c) recovering the Two Year Transfers, or the value thereof, from the Defendants for the

benefit of the estate of BLMIS.

-34-

COUNT THREE - ACTUAL FRAUD UNDER NEW YORK LAW FRAUDULENT TRANSFER – NEW YORK DEBTOR AND CREDITOR LAW

§§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551



103. At all times relevant to the Six Year Transfers, there have been one or more

creditors who have held and still hold matured or unmatured unsecured claims against BLMIS

that are allowable under section 502 of the Bankruptcy Code or that are not allowable only under

section 502(e) of the Bankruptcy Code.

104. Each of the Six Year Transfers constituted a conveyance by BLMIS as defined

under DCL section 270.

105. Each of the Six Year Transfers was made by BLMIS with the actual intent to

hinder, delay, or defraud the creditors of BLMIS. BLMIS made the Six Year Transfers to or for

the benefit of the Defendants in furtherance of a fraudulent investment scheme.

106. Each of the Six Year Transfers was received by Defendants with actual intent to

hinder, delay or defraud creditors of BLMIS and/or future creditors of BLMIS at the time of the

Transfers.

107. As a result of the foregoing, pursuant to DCL sections 276, 276-a, 278 and/or

279, sections 544(b), 550(a), and 551 of the Bankruptcy Code, and section 78fff-2(c)(3) of SIPA,

the Trustee is entitled to a judgment against Defendants: (a) avoiding and preserving the Six

Year Transfers, (b) directing that the Six Year Transfers be set aside; (c) recovering the Six Year

Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS, and

(d) recovering attorneys’ fees from the Defendants.

-35-

COUNT FOUR - CONSTRUCTIVE FRAUD UNDER NEW YORK LAW FRAUDULENT TRANSFER --NEW YORK DEBTOR AND CREDITOR LAW

§§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551


contained in the previous paragraphs of the Complaint as if fully rewritten herein.

109. At all times relevant to the Six Year Transfers, there was and is at least one or

more creditors who held and hold matured or unmatured unsecured claims against BLMIS that

were and are allowable under section 502 of the Bankruptcy Code or that were and are not

allowable only under section 502(e) of the Bankruptcy Code.



111. BLMIS did not receive fair consideration for the Six Year Transfers.

112. BLMIS was insolvent at the time it made each of the Six Year Transfers or, in

the alternative, BLMIS became insolvent as a result of each of the Six Year Transfers.

113. As a result of the foregoing, pursuant to DCL sections 273, 278 and/or 279,

sections 544(b), 550(a), and 551 of the Bankruptcy Code, and section 78fff-2(c)(3) of SIPA, the

Trustee is entitled to a judgment against Defendants: (a) avoiding and preserving the Six Year

Transfers, (b) directing that the Six Year Transfers be set aside; and (c) recovering the Six Year

Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS.

COUNT FIVE - CONSTRUCTIVE FRAUD UNDER NEW YORK LAWFRAUDULENT TRANSFER—NEW YORK DEBTOR AND CREDITOR LAW

§§274, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551





-36-






118. At the time BLMIS made each of the Six Year Transfers, BLMIS was engaged

or was about to engage in a business or transaction for which the property remaining in its hands

after each of the Six Year Transfers was an unreasonably small amount of capital.






COUNT SIX - CONSTRUCTIVE FRAUD UNDER NEW YORK LAW FRAUDULENT TRANSFER-NEW YORK DEBTOR AND CREDITOR LAW

§§ 275, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a) AND 551










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124. At the time BLMIS made each of the Six Year Transfers, BLMIS had incurred,

was intending to incur, or believed that it would incur debts beyond its ability to pay them as the

debts matured.






COUNT SEVEN – RECOVERY OF ALL FRAUDULENT TRANSFERS – NEW YORK CIVIL PRACTICE LAW AND RULES 203(g), 213(8) AND NEW YORK DEBTOR AND

CREDITOR LAW §§ 276, 276-a, 278 AND/OR 279, 11 U.S.C. §§ 544, 550(a) AND 551



127. At all times relevant to the Transfers, the fraudulent scheme perpetrated by

BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS.

128. At all times relevant to the Transfers, there have been one or more creditors who

have held and still hold matured or unmatured unsecured claims against BLMIS that are

allowable under section 502 of the Bankruptcy Code or that are not allowable only under section

502(e) of the Bankruptcy Code.

129. Each of the Transfers prior to the six years before the Filing Date constituted a

conveyance by BLMIS as defined under DCL section 270.

130. Each of the Transfers was made by BLMIS with the actual intent to hinder,

delay, or defraud the creditors of BLMIS. BLMIS made the Transfers to or for the benefit of the

Defendants in furtherance of a fraudulent investment scheme.

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131. Each of the Six Year Transfers was received by Defendants with actual intent to

hinder, delay or defraud creditors of BLMIS and/or future creditors of BLMIS at the time of the

Transfers.

132. As a result of the foregoing, pursuant to NY CPLR 203(g), 213(8), DCL

sections 276, 276-a, 278 and/or 279, sections 544(b), 550(a), and 551 of the Bankruptcy Code,

and SIPA section 78fff-2(c)(3), the Trustee is entitled to a judgment against Defendants: (a)

avoiding and preserving the Transfers, (b) directing that the Transfers be set aside; (c) recovering

the Transfers, or the value thereof, from the Defendants for the benefit of the estate of BLMIS,

and (d) recovering attorneys’ fees from the Defendant.

COUNT EIGHT – CONVERSION



134. BLMIS had a possessory right and interest to its assets, including its customers’

investment funds.

135. Defendants converted the investment funds of BLMIS customers when they

received money originating from BLMIS and its customers, to which Defendants knew they had

no right and were not authorized to take. These actions deprived BLMIS and its creditors of the

use of this money.

136. As a direct and proximate result of this conduct, BLMIS and its creditors have

not had the use of the money converted by Defendants.

137. By reason of the above, the Trustee, on behalf of BLMIS and its creditors, is

entitled to an award of compensatory damages, in an amount to be determined at trial.

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COUNT NINE – UNJUST ENRICHMENT



139. Defendants benefited from the receipt of money from BLMIS in the form of

payments and other transfers which were the property of BLMIS and its customers, and for

which Defendants did not adequately compensate BLMIS or provide value or fair consideration.

140. This enrichment was at the expense of BLMIS, and ultimately at the expense of

BLMIS’ other customers.

141. Equity and good conscience require full restitution of the monies received by

Defendants from BLMIS.

142. By reason of the above, the Trustee, pursuant to Section 544 of the Bankruptcy

Code and other applicable law, on behalf of BLMIS and its creditors, is entitled to restitution for

the benefits Defendants improperly received, in an amount to be determined at trial.

COUNT TEN – TURNOVER AND ACCOUNTING – 11 U.S.C. § 542



144. The Trustee has commenced this and other adversary proceedings to avoid and

preserve for the benefit of the estate the Transfers, and to recover such Transfers for the benefit

of the estate pursuant to applicable provisions of the Bankruptcy Code, New York Debtor and

Creditor Law, and SIPA.

145. All of the Transfers are deemed to be customer property pursuant to SIPA §§

78fff-2(c)(3) and 78lll(4), and constitute property of the estate to be recovered and administered

by the Trustee pursuant to sections 541 and 542 of the Bankruptcy Code and SIPA §78fff-2(c)(3)

and § 78lll(4).

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146. The Defendants are not lawful custodians of the Transfers.

147. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code

and SIPA § 78fff-2(c)(3), the Trustee is entitled to the immediate payment and turnover from the

Defendants of all such customer property and an accounting of all of the customer property, or

its value, transferred at any time, directly or indirectly, to the Defendants.

WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favor

of the Trustee and against the Defendants as follows:

i. On the First Claim for Relief, pursuant to sections 548(a)(1)(A), 550(a) and 551

of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a) avoiding and preserving the Two

Year Transfers, (b) directing that the Two Year Transfers be set aside, and (c) recovering the

Two Year Transfers, or the value thereof, from the Defendants for the benefit of the estate of

BLMIS;

ii. On Second Claim for Relief, pursuant to sections 548(a)(1)(B), 550(a) and 551 of

the Bankruptcy Code: (a) avoiding and preserving the Two Year Transfers, (b) directing that the

Two Year Transfers be set aside, and (c) recovering the Two Year Transfers, or the value

thereof, from the Defendants for the benefit of the estate of BLMIS;

iii. On the Third Claim for Relief, pursuant to DCL sections 276, 276-a, 278 and/or

279, sections 544(b), 550(a) and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA:

(a) avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be

set aside, (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for the

benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from the Defendants;

iv. On the Fourth Claim for Relief, pursuant to DCL sections 273, 278 and/or 279,

sections 544(b), 550 and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

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avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be set

aside, and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for

the benefit of the estate of BLMIS;

v. On the Fifth Claim for Relief, pursuant to DCL sections 274, 278 and/or 279,

sections 544(b), 550, and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

avoiding and preserving the Six Year Transfers, (b) directing the Six Year Transfers be set aside,

and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for the

benefit of the estate of BLMIS;

vi. On the Sixth Claim for Relief, pursuant to DCL sections 275, 278 and/or 279,

sections 544(b), 550, and 551 of the Bankruptcy Code and section 78fff-2(c)(3) of SIPA: (a)

avoiding and preserving the Six Year Transfers, (b) directing that the Six Year Transfers be set

aside, and (c) recovering the Six Year Transfers, or the value thereof, from the Defendants for

the benefit of the estate of BLMIS;

vii. On the Seventh Claim for Relief, pursuant to NY CPLR 203(g) and 213(8), DCL

sections 276, 276-a, 278 and/or 279, sections 544(b), 550(a), and 551 of the Bankruptcy Code

and section 78fff-2(c)(3) of SIPA: (a) avoiding and preserving the Transfers, (b) directing that

the Transfers be set aside, (c) recovering the Transfers, or the value thereof, from the Defendants

for the benefit of the estate of BLMIS, and (d) recovering attorneys’ fees from the Defendants.

viii. On the Eighth Claim for Relief for the conversion of BLMIS assets, for

compensatory damages in amounts to be determined at trial;

ix. On the Ninth Claim for Relief for unjust enrichment, for restitution in an amount

to be determined at trial;

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x. On the Tenth Claim for Relief, pursuant to sections 542, 550(a) and 551 of the

Bankruptcy Code and section 78fff-2(c)(3) of SIPA, a judgment that: (a) that the property that

was the subject of the Transfers be immediately delivered and turned over to the Trustee, and (b)

for an accounting by the Defendants of the property that was the subject of the Transfers or the

value of such property;

xi. On all Claims for Relief, pursuant to federal common law and N.Y. CPLR 5001

and 5004, awarding the Trustee prejudgment interest from the date on which the Transfers were

received;

xii. On all Claims for Relief, establishment of a constructive trust over the proceeds of

the transfers in favor of the Trustee for the benefit of BLMIS’ estate;

xiii. On all Claims for Relief, assignment of Defendants’ income tax refunds or

overpayments from the United States, state and local governments which are paid to or credited

on behalf of the Defendants which relate to the operation of the Ponzi scheme, including, but not

limited to, the filing of a return under the Internal Revenue Service “safe harbor,” amended

returns, and otherwise;

xiv. Awarding the Trustee all applicable interest, costs, and disbursements of this

action; and

xv. Granting Plaintiff such other, further, and different relief as the Court deems just,

proper, and equitable.

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Date: New York, New YorkNovember 11, 2010

s/ David J. Sheehan s/ Keith R. Murphy s/ Geraldine E. PontoBAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, New York 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201David J. Sheehan Email: [email protected] R. MurphyEmail: [email protected] E. PontoEmail: [email protected]

—and—

BAKER & HOSTETLER LLP3200 PNC Center1900 East Ninth StreetCleveland, Ohio 44114-3485Terry M. Brennan (Ohio Bar No. 0065568)[email protected] L. White (Ohio Bar No. 0079956)[email protected] Telephone: 216.621.0200Facsimile: 216.696.0740

Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff

Madoff Trustee vs Enrica Cotellessa-Pitz

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