Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. (In re Madoff)

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff-Applicant, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: BERNARD L. MADOFF, Debtor.

IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. UBS AG, UBS (Luxembourg) SA, et al., Defendants.

No. 08-01789 (CGM)

Adv. Pro. No. 10-04285 (CGM)

United States Bankruptcy Court, S.D. New York

December 27, 2022

NOT FOR PUBLICATION

SIPA LIQUIDATION (Substantively Consolidated)

GIBSON, DUNN & CRUTCHER LLP ATTORNEYS FOR THE UBS DEFENDANTS BY: MARSHALL R. KING, ESQ.

BAKER HOSTETLER LLP Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L Madoff Investment Securities LLC and the Chapter 7 Estate of Bernard L. Madoff By: Michelle Usitalo, Esq.

MEMORANDUM DECISION DENYING THE UBS DEFENDANTS' MOTION TO DISMISS

CECELIA G. MORRIS UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is Defendants', UBS AG, UBS Europe SE (f/k/a UBS (Luxembourg) S.A.) ("UBS Lux" or "UBS SA"), UBS Fund Services (Luxembourg) S.A ("UBSFSL"), and UBS Third Party Management Company S.A. ("UBSTPM") (collectively, "UBS" or the "UBS Defendants"), motion to dismiss the complaint of Irving Picard, the trustee ("Trustee") for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") seeking to recover subsequent transfers allegedly consisting of BLMIS customer property. (Mot. Dismiss, ECF No. 285). The UBS Defendants seek dismissal for lack of personal jurisdiction; for failure to plead actual intent to defraud on the part of BLMIS; and for failure to allege that they received BLMIS customer property, and they assert the affirmative defenses of the "safe harbor" and "good faith." For the reasons set forth herein, the motion to dismiss is denied in its entirety.

Jurisdiction

This is an adversary proceeding commenced in this Court, in which the main underlying SIPA proceeding, Adv. Pro. No. 08-01789 (CGM) (the "SIPA Proceeding"), is pending. The SIPA Proceeding was originally brought in the United States District Court for the Southern District of New York (the "District Court") as Securities Exchange Commission v. Bernard L. Madoff Investment Securities LLC et al., No. 08-CV-10791, and has been referred to this Court.

This Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e)(1), and 15 U.S.C. § 78eee(b)(2)(A) and (b)(4).

This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (F), (H) and (O). This Court has subject matter jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 1334(b) and 157(a), the District Court's Standing Order of Reference, dated July 10, 1984, and the Amended Standing Order of Reference, dated January 31, 2012. In addition, the District Court removed the SIPA liquidation to this Court pursuant to SIPA § 78eee(b)(4), (see Order, Civ. 08- 01789 (Bankr. S.D.N.Y. Dec. 15, 2008) ("Main Case"), at ¶ IX (ECF No. 1)), and this Court has jurisdiction under the latter provision. Personal jurisdiction has been contested by three of the Defendants and will be addressed infra.

Background

The Court assumes familiarity with the background of the BLMIS Ponzi scheme operated by Bernard L. Madoff ("Madoff") and its SIPA proceeding. See Picard v. Citibank, N.A. (In re BLMIS), 12 F.4th 171, 178-83 (2d Cir. 2021), cert. denied sub nom. Citibank, N.A. v. Picard, 142 S.Ct. 1209, 212 L.Ed.2d 217 (2022).

This adversary proceeding was filed on November 23, 2010. (Compl., ECF^[1] No. 1). The Trustee filed an amended complaint on February 28, 2022 ("Complaint"). (Am. Compl., ECF No. 274). Via the Complaint, the Trustee is seeking to recover transfers of customer property allegedly made by BLMIS to Luxalpha SICAV ("Luxalpha") and Groupement Financier (collectively, the "Feeder Funds"), and then subsequently transferred to the UBS Defendants.

UBS AG is a Swiss public company with registered principal offices in Switzerland. (Am. Compl. ¶ 63). It is the parent company of the global UBS bank. (Id.). UBS SA is a "Societas Europaea" incorporated in Germany. (Id. ¶ 64). UBS SA merged with and was absorbed into UBS Europe SE. (Id.). UBSFSL is a Luxembourg limited liability company incorporated as a société anonyme. (Id. ¶ 65). UBSTPM is a Luxembourg limited liability company incorporated as a société anonyme. (Id. ¶ 66). UBS SA, UBSFSL, and UBSTPM are all wholly owned subsidiaries of UBS AG. (Id. ¶¶ 64-66).

The UBS Defendants are alleged to have deep involvement with Madoff and BLMIS. (Am. Compl. ¶ 69). And to have worked with the Access Defendants^[2] to create and grow Luxalpha's and Groupement Financier's investments in BLMIS. (Id. ¶ 315). The UBS Defendants, along with the Access Defendants, are alleged to have dominated and controlled the Feeder Funds, which they operated as a single enterprise. (Id. ¶ 316).

Luxalpha and Groupement Financier were investment vehicles that fed into BLMIS. (Am. Compl. ¶ 16). It is alleged that the Feeder Funds were created to invest in BLMIS with full knowledge of BLMIS' fraud. (Id. ¶ 6) ("Defendants knew BLMIS was operating a fraud."); (id. ¶¶ 233, 352, 397). The knowledge of BLMIS's fraud ultimately stems from a close friendship between Madoff and Littaye that dates back to 1985. (Id. ¶¶ 1, 109). Littaye and Thierry Magon de la Villehuchet ("Villehuchet") started an investment firm called Access International Advisors ("Access"). (Id. ¶ 2). Access is comprised of a series of investment companies, including Access International Advisors, Inc., Access LLC, Access Ltd., AIA (Lux), and AP (Lux). (Id.). The Feeder Funds were established by Access as two of several BLMIS feeder funds. (Id. ¶¶ 2, 110).

Prior to establishing the Feeder Funds, Littaye and Villehuchet had established several other BLMIS feeder funds through Access. (Id. ¶ 109). One of those funds was called Oreades SICAV ("Oreades"). (Id. ¶ 3). In order to operate as an "Undertakings for Collective Investments in Transferable Securities" ("UCITS") under Luxembourg law (id.¶ 98), a fund needed to have "a promoter, or sponsor, playing a key role in the creation, launch, and management/administration of the fund." (Id. ¶ 166). The sponsor was required to be experienced and financially sound, and "would be liable to third parties for damages in the event faults, omissions, or deficiencies were committed in the management or administration of the fund." (Id. ¶ 166). Oreades opened BLMIS accounts in November 1997 and continued to operate as a BLMIS feeder fund until March of 2004, when its sponsor, BNP Paribas, determined that the relationship between Oreades and BLMIS was too risky to continue. (Id. ¶ 112-13).

BNP Paribas advised Access about several concerns that it had about BLMIS. (Id. ¶ 121). These included BLMIS' refusal to disclose its role as Oreades' asset manger to Luxembourg regulator, the Commission de Surveillance du Secteur Financier ("CSSF"); BLMIS' simultaneous roles as Oreades' custodian, broker-dealer, and investment adviser; the inexistence of a segregated Oreades's account at BLMIS; BLMIS' use of asynchronous faxed and mailed statements to deliver trading activity; and BLMIS' deliberate choice to evade United States and Luxembourg regulations and the scrutiny that accompanies such regulation. (Id. ¶ 113-22). BNP Paribas did not want to be liable to Oreades's investors. (Id. ¶ 122). Shortly after raising these concerns, Oreades was shut down and its BLMIS accounts closed. (Id. ¶ 121). BNP Paribas' exit from BLMIS investments was not the first time Access became aware of BLMIS' way of doing business. (Id. ¶ 278) ("In 2000 Access instructed that Madoff should not appear in any official document. In a 2004 document, Littaye wrote, '[w]e underline the confidentiality of the product, and insist on the fact that [Madoff's] name must never be published.'") (cleaned up). In order to continue operating as a BLMIS feeder fund, BNP Paribas needed to be replaced as the fund's sponsor. (Id. ¶ 123).

Luxalpha

One week after Oreades' BLMIS accounts were closed, in March 2004, Luxalpha opened BLMIS accounts with UBS SA as its sponsor, despite Access and UBS SA allegedly having knowledge of BNP Paribas' concerns regarding BLMIS and other "warnings of fraud." (Am. Compl. ¶¶ 125 130, 159). Internally at Access, the closing of Oreades and opening of Luxalpha was referred to as a "name change" and a "switch." (Id. ¶ 129). Luxalpha was initially funded with withdrawals from Oreades. (Id. ¶ 128). "At least eleven of Oreades's investors withdrew approximately $330 million from Oreades and promptly reinvested those sums in Luxalpha." (Id. ¶ 128). During the transition from Oreades to Luxalpha, a UBS AG employee "expressed deep reservations" about BLMIS. (Id.¶ 131) ("We normally have to give 'NO' as the answer in cases like Madoff.") (cleaned up). Despite this, UBS decided that the income it could generate through BLMIS outweighed the risk of fraud. (Id. ¶¶ 132-33).

BLMIS' fee structure was not customary in the industry and was structured in order to entice hedge fund managers and entities like Access and UBS to invest in BLMIS. Instead of charging the customary investment advisory fee of "1% to 2% of assets under management plus a performance fee of 10% to 20% of profits earned by the investment," BLMIS charged "$1 per option contract and $0.04 per equity share traded." (Id. ¶ 274). This left "hundreds of millions, if not billions, of dollars on the table" that could be collected by hedge funds as management fees. (Id.) The Trustee has alleged that the generation of such fees was one of the primary purposes that the Access Defendants and the UBS Defendants operated the Feeder Funds. (Id. ¶ 91) ("AIA Ltd. is escribed in Access's...