fraudulent transfers: ponzi scheme litigation in...

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Fraudulent Transfers: Ponzi Scheme Clawback Litigation in BankruptcyStrategies for Bringing or Defending Trustee Clawback Claims

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JUNE 28, 2011

Today’s faculty features:

Corey R. Weber, Partner, Ezra Brutzkus Gubner, Woodland Hills, Calif.

Mark S. Kaufman, Partner, McKenna Long & Aldridge, Atlanta

Anthony L. Paccione, Partner, Katten Muchin Rosenman, New York

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Fraudulent Transfers: Ponzi Scheme Fraudulent Transfers: Ponzi Scheme Clawback Litigation in BankruptcyClawback Litigation in BankruptcyClawback Litigation in BankruptcyClawback Litigation in Bankruptcy

Strategies for Bringing or DefendingStrategies for Bringing or DefendingStrategies for Bringing or Defending Strategies for Bringing or Defending Trustee Clawback ClaimsTrustee Clawback Claims

Sponsored by the Legal Webinar Group of Strafford Sponsored by the Legal Webinar Group of Strafford PublicationsPublications

Mark S. Kaufman, Partner, McKenna Long & Aldridge LLPMark S. Kaufman, Partner, McKenna Long & Aldridge LLP

Anthony L. Paccione, Chair NY Litigation Department, Katten Anthony L. Paccione, Chair NY Litigation Department, Katten Muchin Rosenman LLPMuchin Rosenman LLP

Corey Weber, Partner, Ezra Brutzkus Gubner LLPCorey Weber, Partner, Ezra Brutzkus Gubner LLP5

IntroductionIntroduction

“When the financial tide goes“When the financial tide goesWhen the financial tide goes When the financial tide goes out is when you will see who out is when you will see who

is swimming naked”is swimming naked”is swimming nakedis swimming naked

6

Threshold QuestionsThreshold Questions

What is a “Ponzi Scheme? When does it begin? g SIPC Protected? Type of Receiver to Be Appointed Type of Receiver to Be Appointed

7

Today’s TopicsToday s Topics

Clawbacks – From the Trustee’s perspectiveP i F i Cl b k b d Prima Facie Clawback case based on Fraudulent Conveyance

Clawbacks from a Transferee’s Perspective Clawbacks from a Transferee s Perspective “Mere Conduit” and Other Specific

Clawback Defenses Trustee claims vs. Secondary Actors:

Claims and Defenses

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TRUSTEE’S CLAWBACK CLAIMSCLAIMS

• PreferencePreference– Section 547claims

• Fraudulent Transfer– Section 548 and 550 claims– Section 544 and UFTA state law claims

9

PREFERENCE CLAIMSPREFERENCE CLAIMS

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PREFERENCE CLAIMSPREFERENCE CLAIMS• Transfers in Ponzi schemes are moreTransfers in Ponzi schemes are more

vulnerable to attack as fraudulent transfers– In re Grafton Partners, L.P., 321 B.R. 527, , , ,

532 FN 5 (9th Cir. BAP 2005)

• However, transfers in Ponzi cases can still be recovered as preferences– In re United Energy Corp, 102 B.R. 757 (9th

Cir. BAP 1989)

11

Defenses to Preference ClaimsDefenses to Preference Claims

• Same defenses as to a normal preferenceSame defenses as to a normal preference claim

• But, no ordinary course defense– Henderson v. Buchanan, 985 F.2d 1021,

1025 (9th Cir. 1993)– In re Bullion Reserve Co. of North America,

836 F.2d 1214, 1219 (9th Cir. 1988)

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FRAUDULENT TRANSFER CLAIMS

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Actual Intent ClaimsActual Intent Claims• Guilty plea in criminal case for the Ponzi scheme y p

principal can conclusively establish actual intent– Johnson v. Neilson (In re Slatkin), 525 F.3d 805, 814

(9th Cir 2008)(9th Cir. 2008)– Bear Stearns Securities Corp. v. Helen Gredd,

Chapter 11 Trustee (In re Manhattan Investment Fund ) (S )Ltd.), 397 B.R. 1, 12 (S.D. N.Y. 2007).

• If there is no guilty plea, the Trustee will need to establish actual intent

14

Ponzi Scheme PresumptionPonzi Scheme Presumption

• If the Bankruptcy Court concludes that theIf the Bankruptcy Court concludes that the Debtor operated as a Ponzi scheme, actual intent to hinder delay or defraudactual intent to hinder, delay or defraud creditors will be established

Donell v Kowell 533 F 3d 762 770 (9th Cir– Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008)

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Constructive FraudConstructive Fraud

• If there is a plea agreement constructiveIf there is a plea agreement, constructive fraud claims will have the same outcome as actual intent claimsas actual intent claims

If th i l t th• If there is no plea agreement, the insolvency tests provide an alternate way t li bilitto prove liability

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Fraudulent Transfer Claims U d S F d l LUnder State vs. Federal Law

• 2 year pre-bankruptcy petition reach-back under y p p y pSection 548

• There is normally a longer reach back under• There is normally a longer reach-back under state law– In California, the reach back period is up to 7 years

(C l Ci il C d S ti 3439 t )(Cal. Civil Code Section 3439, et seq.)

• Statute of limitationsStatute of limitations– Trustee has 2 years to file a complaint post-

bankruptcy

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Fictitious ProfitsFictitious Profits

• General rule is that the Trustee’s recoveryGeneral rule is that the Trustee s recovery is limited to recovery of fictitious profits from net winnersfrom net winners

Withd l I t t Fi titi• Withdrawals - Investments = Fictitious Profits in most circuits– Donell v. Kowell, 533 F.3d 762, 770 (9th Cir.

2008)

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FICTITIOUS PROFITS IN THE MADOFF CASEMADOFF CASE

• “Equality is achieved in this case by employing the q y y p y gTrustee's method, which looks solely to deposits and withdrawals that in reality occurred. To the extent possible, principal will rightly be returned to Net Losers p p p g yrather than unjustly rewarded to Net Winners under the guise of profits. In this way, the Net Investment Method brings the greatest number of investors closest to their g gpositions prior to Madoff's scheme in an effort to make them whole.”

In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 142 (Bankr. S.D.N.Y. 2010)

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Potential for the Trustee to Recover More thanto Recover More than

Fictitious Profits

• The Trustee can recover the total transfers from the Debtor to the defendant (fictitiousfrom the Debtor to the defendant (fictitious profits + return of principal) if he establishes his prima facie case and theestablishes his prima facie case and the defendant does not establish his defenses

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MAKING THE CASE FOR FRAUDULENT CONVEYANCE

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A. Defenses to the Prima Facie Case

Once the Trustee or DIP has established a prima facie case for a fraudulent conveyance by satisfying the y y y gcriteria to demonstrate either actual or constructive fraud committed by the Transferor, the transferee may be able to defeat its liability as a recipient of a fraudulent conveyance by raising one or more defensesdefenses.

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B. Statutory Framework

1. 11 U.S.C. § 548(c) provides a defense to the “initial” transferee if it both received the transfer from the fraudulent transferor in good faith and for value. In re Bayou Group, LLC, 439 B.R. 284, 308 (S.D.N.Y. 2010) (“ ”)(“Bayou IV”).

2. State law essentially provides these same defenses to fraudulent conveyance claims pursued under 11 U S Cfraudulent conveyance claims pursued under 11 U.S.C. § 544.

3 The burden of proof in respect to the transferee’s3. The burden of proof in respect to the transferee s defenses under § 548 and correlative state law is on the defendant transferee. In re Bennett Funding Corp., Inc., 232 B.R. 565, 573 (Bankr. S.D.N.Y. 1999).

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B. Statutory Framework (cont.)

4. 11 U.S.C. § 550(b) provides further insulation against liability for a fraudulent conveyance to an g y y“immediate” or “mediate” transferee of the initial transferee if that subsequent transferee can establish that it received the transfer:

• In good faith;

• For value; and

• “without knowledge of the voidability of the transfer avoided.”

24

B. Statutory Framework (cont.)

5. Observations about 550(b) defenses:

(a) the focus of “good faith” and “for value” defenses for(a) the focus of good faith and for value defenses for an immediate or mediate transferee relate to the transfer between the initial transferee and the

f fdefendant subsequent transferee.

(b) the “without knowledge of the voidability” element, however is directed to whether the immediate orhowever, is directed to whether the immediate or mediate transferee defendant knew about the voidability of the initial transfer — i.e. does the second transferee have awareness that the initialtransfer was either not in good faith or not for value or was lacking in both respectsor was lacking in both respects.

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C. Good Faith

1. Not Likely To Be Decided On Summary Judgment:

Defending one’s good faith of course is specific toDefending one s good faith, of course, is specific to each avoidance action, so a trustee bringing claims to avoid transfers must be prepared to address the p punique facts of what each recipient of a fraudulent conveyance knew or of which it was on inquiry notice. Because these are fact specific issues and involve the state of knowledge or awareness of the specific recipient it will be a rare case wherespecific recipient, it will be a rare case where summary judgment to either party on this element of the defense is likely or appropriate.of the defense is likely or appropriate.

26

C. Good Faith (cont.)2. Objective Good Faith; Against Whom Inquiry Notice is to

be Measured:Wh th f f t th t ld if t bli h dWhere the awareness of facts that would, if established, prove lack of good faith are in dispute, as is true in the vast majority of cases, courts have grappled with whether the defendant’s good faith should be decidedwhether the defendant’s good faith should be decided on a subjective test where the court attempts to adduce the actual mindset of the particular transferee who receives the transfer or on an objective test where thereceives the transfer, or on an objective test where the court or jury decides whether a typical investor with the same acumen and sophistication of the actual defendant would have been put on inquiry notice thatdefendant would have been put on inquiry notice that the transaction lacks good faith. Most courts have employed the objective test. In re Agric. Research & Tech Corp 916 F 2d 528 535‐36 (9th Cir 1990)Tech. Corp., 916 F.2d 528, 535 36 (9th Cir. 1990).

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C. Good Faith (cont.)

3. Frequently, courts place a “specific focus on the class or category of the transferee” and therefore g ywhether a transferee is on inquiry notice is informed by “the standards, norms, practices, sophistication and experience generally possessed by participants in the transferee’s industry or class.” Bayou IV 439 B R at 313Bayou IV, 439 B.R. at 313.

4. What a person with defendant’s experience and sophistication should have been on inquiry noticesophistication should have been on inquiry notice to ascertain is itself almost always a fact issue for the trier of fact. Bayou IV, 439 B.R. at 320‐327.the trier of fact. ayou IV, 439 .R. at 3 0 3 7.

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5. The defendant may still be able to successfully defend its good faith, even if it was under a duty of inquiry, if g y q yit can show that, as most courts formulate the test, it would not have been able to ascertain relevant facts b t th d bt if it h d d blabout the debtor even if it had made reasonably diligent inquiry. In re Agric. Research & Tech. Grp., 916 F.2d at 536. This, too, is a factual issue to be916 F.2d at 536. This, too, is a factual issue to be decided case by case. Other courts have imposed a higher standard and require the defendant to have actually made diligent inquiry where it is found to be on inquiry notice. See e.g. In re Manhattan Inv. Fund III 397 B R 1 22‐24 (S D NY 2007)III, 397 B.R. 1, 22 24 (S.D.N.Y. 2007).

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6. Lack of Good Faith Is Premised On Knowledge or Inquiry Notice of Debtor’s Fraud or Insolvency:q y y

There are two types of information, if possessed by the defendant, that courts have held to manifest lack ,of good faith: knowledge of a fraud or knowledge of the debtor’s insolvency. Bayou IV rejects the notion that inquiry notice awareness of other issues regarding the transferor’s operations that do not meaningfully bear on the debtor’s insolvency or itsmeaningfully bear on the debtor s insolvency or its fraudulent practices do not give rise to a basis to challenge the defendant’s good faith.challenge the defendant s good faith.

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7. Frequently present in Ponzi cases is the situation where the trustee argues that the transferee is put g pon notice of the likely fraudulent nature of the debtor because the purported returns to the transferee are substantially beyond typical market returns for similar investments. But arguing lack of good faith based on this proposition has itsof good faith based on this proposition has its limits.

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8. Red Flags

In determining whether the transferee should be onIn determining whether the transferee should be on inquiry notice of a debtor’s fraudulent activities or insolvency, potential “red flags” identified by courts y, p g yhave included:

a. statements by the debtor concerning its improprieties and fraudulent conduct, seeArmstrong v. Collins, No. 01 Civ. 2437 (PAC), 02 Ci 2796 (PAC) 02 Ci 3620 (PAC) 2010 WLCiv. 2796 (PAC), 02 Civ. 3620 (PAC), 2010 WL 1141158, at *27‐28 (S.D.N.Y. Mar. 24, 2010)

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b. actual knowledge of the debtor’s financial problems, seeIn re Grove‐Merritt, 406 B.R. 778, 810 (Bankr. S.D. Ohio 2009)

c. knowledge of a tax lien filed against the debtor, see In re ( )Armstrong, 259 B.R. 338, 344 (Bankr. E.D. Ark. 2001)

d. knowledge of an impending bankruptcy, see In re McLaren 236 B R 882 902 (Bankr D N D 1999)McLaren, 236 B.R. 882, 902 (Bankr. D.N.D. 1999)

e. knowledge of the debtor’s commingling of funds, acceptance of escrow checks in its personal account,acceptance of escrow checks in its personal account, and previous bounced checks, see Cannon v. J.C. Bradford & Co., 230 B.R. 546, 593‐94 (Bankr. W.D. Tenn.

)1999)

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f. promises of investment returns of 468% coupled with the debtor’s use of post‐dated checks to pinvestors, and checks returned to investors with insufficient funds, see Jobin, 84 F.3d at 1338‐39

g. knowledge that the transfer received as “grossly in excess of the value” the transferee had provided, In re Agric. Res. & Tech. Grp., 916 F.2d at 539

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D. For Value

1. 11 U.S.C. § 548(d)(2) defines value as “property, or satisfaction or securing of a present or antecedent g pdebt of the debtor . . .”

2. “Property” means a reasonably equivalent exchange p y y q gof consideration.

3. In the vast number of Ponzi scheme cases, defendants can establish “value” by arguing that the principal they recovered from the Ponzi debtor was i i f i f d d b b hin satisfaction of an antecedent debt because the nature of the initial investment In the Ponzi scheme gave rise to a claimgave rise to a claim.

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D. For Value

4. Thus, attempts to argue in Stanford, that the unequal distribution of the Ponzi debtor’s assets qcreates an unjust enrichment of certain creditors relative to others warranting disgorgement by those who received more than others, creditors of a Ponzi scheme whose initial investment with the debtor gave rise to a claim against the debtor are entitledgave rise to a claim against the debtor are entitled to recover up to the amount of principal they invested if they acted in “good faith”invested if they acted in good faith .

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D. For Value (cont.)

5. False Profits: The cases are uniform, however, in concluding that incremental amounts recovered by the transferee over the face amount invested are bj t t di t I “fi titisubject to disgorgement. In essence, “fictitious

profits” received by creditors can be disgorged because courts conclude that since the debtor’sbecause courts conclude that since the debtor s operations were fraudulent, the defendant lacks the basis to maintain that it actually was entitled to any profits; thus amounts paid as such cannot be “for value.” Merrill v. Abbott (In re Independent Clearing H C ) 77 B R 843 (D U h 1987) ( b )House Co.), 77 B.R. 843 (D.Utah 1987) (en banc)

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6. Contrasting Debt with Equity Investments: But what if the investment with the Ponzi entity does ynot give rise to a claim against the debtor, but instead is made as an equity infusion giving rise to an “interest in” the debtor, such as a limited partnership interest or limited liability membership. Many hedge funds and private equity funds are soMany hedge funds and private equity funds are so structured.

If the investment is made as equity how can theIf the investment is made as equity, how can the defendant establish “for value” based on satisfying an “antecedent debt”? an antecedent debt ?

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a. Go back to the definition of “property” under §a o bac o e de o o p ope y u de §548(d)(2) and ask whether when one tenders back its limited liability interest to the debtor, is it giving

“ bl i l ” h hi h i iproperty “reasonably equivalent” to that which it is receiving? Limited partnership or membership shares or units in a Ponzi scheme are usually of deshares or units in a Ponzi scheme are usually of de minimis value when the transfer of funds to the defendant occurs. If the estate were to have been actually valued at the time the defendant received the distributions from the Ponzi operator, its shares would likely have been close to worthlesswould likely have been close to worthless.

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b. The fair equivalence of the value of money paidb. The fair equivalence of the value of money paid to the Ponzi debtor in exchange for shares in the debtor when the investment in the debtor initially occurred is not relevant. Fair equivalence is to be determined when the

t f th t d d h Hpayment for the retendered shares occurs. How then can any receiving investor prevail on a “for value” defense when it receives all its principalvalue defense when it receives all its principal back in exchange for tendering essentially worthless equity interests?q y

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c. So how have the courts handled the “interest in” Ponzi cases as distinct from the “claims against” gPonzi cases.

•Almost all the reported cases have involved pclaims, not interests.

• Courts starting with Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924), cert. denied, 266 U.S. 631, 45 S. Ct. 197, 69 L. Ed. 478 (1925), established the

i h di ib i d i hnotion that distributions made to investors who lent money (i.e. creating a claim) also gave rise to a tort “claim” for fraud and rescissionto a tort claim for fraud and rescission.

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d. Only one reported Ponzi case, In re AFI Holding, Inc., 525 F. 3d 700 (9th Cir. 2008), has found that , ( ),the result in equity investment cases should be the same as when the investment was initially made in a manner giving rise to a claim and that case has very limited analysis.

e. Supporting distinction in treatment of claims vs. interests is: In re Terry Mfg. Co., Inc., 2007 WL 274319 (Bankr M D Ala 2007)274319 (Bankr. M.D. Ala. 2007).

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f. Currently pending in the Eleventh Circuit is William F. Perkins, Trustee For International Management Associates, LLC., Appellant v. Haines, et al. Appellees,Case No. 10‐10683‐BB which raises first impression issues about whether limited partnership interestsissues about whether limited partnership interests should be treated like claims insofar as seeking to disgorge principal investments in Ponzi schemes g g p pfrom recovering investors:

• The Bankruptcy Court’s ruling, 2009 WL 6506657 (Bankr. N.D. Ga. December 1, 2009)

• Interlocutory appeal granted

ll b f d d• Fully briefed, awaiting decision

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•Appellant argues that state law requires equality of treatment of similarly situated q y yequity.

•Acknowledging that defrauded investors have a g gfraud claim, Appellant challenges that payments received by investors were in respect to the settlement of fraud claims.

•Notion that defendant can assert, “for value” b d i f i f i f d l i fli ibased on satisfaction of its fraud claim flies in the face of 548(c)’s “good faith” requirement.

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• Look at § 510(b), which is intended to preclude defrauded investors from bettering their grecoveries relative to those of other similarly situated investors by converting their interests into fraud based claims.

• SEC filed amicus curiae in support of bankruptcy court‘s ruling.

• E‐mail me if interested in the pleadings; outcome.

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SPECIFIC DEFENSESSPECIFIC DEFENSES

“Mere Conduit” Defense Why its a Hot Topic

Poses A Strategic Quandary for Many g y yInstitutions

46

Who is an initial or mediate transferee under Sec 448:transferee under Sec. 448: Mere Conduit Type Defenses

“I iti l” “M di t ” T f d i i b d d fi iti “Initial” or “Mediate” Transferees –decision based definitions:

Judge Easterbrook’s seminal discussion in Bonded Fin. Services, 838 F.2d at 894-- recipient can be found to be an “initial transferee” within the meaning of the statute only ifinitial transferee within the meaning of the statute only if transferred funds are received into the transferee’s unfettered “discretion and control,” such that the funds may be spent on, for instance, “lottery tickets or uranium stocks.”stocks.

Judge Lifland’s decision in Bear Sterns Securities Corp. v. Gredd (“Gredd II”), 397 B.R. 1, 14 (S.D.N.Y. 2007) (a) is a “mere conduit,” acting as “an uninterested agent betweenmere conduit, acting as an uninterested agent between the transferor and another entity, or if it (b) lacks “dominion and control” over the funds.

47

Mere Conduit Defenses…Mere Conduit Defenses

D i i d A l C l i Wid l Ad d Dominion and Actual Control test is Widely Adopted:

Bonded Financial Services, Inc. v.European American Bank remains the starting point 838 F 2d 890 893 (7th Cir 1998): aremains the starting point. 838 F.2d 890, 893 (7th Cir. 1998): a transferee must be capable of using funds “for its own purposes” to have transferee liability.

I Fi l 130 F 3d t 59 (2d Ci 1997) d ti B d d In re Finley, 130 F.3d at 59 (2d Cir. 1997) adopting Bonded Financial Test

Andreini & Co v Pony Express Delivery Servs (In re Pony Andreini & Co. v.Pony Express Delivery Servs. (In re Pony Express Delivery Servs.), 440 F.3d 1296, 1303 (11th Cir. 2006) (requiring “unrestricted legal control” over funds)

48

Mere Conduit Defenses…Mere Conduit Defenses

But one very fact-specific case from Judge Lifland in NY rejected a mere conduit defense suggesting right to control is the test and exercise of that control is not necessary Bear Stearns Securities Corp v Gredd (Innecessary. Bear, Stearns Securities Corp. v. Gredd (In re Manhattan Inv. Fund III), 397 B.R. 1, 4-6 (S.D.N.Y. 2007).

Manhattan Investment’s reasoning has been rejected Manhattan Investment s reasoning has been rejected by other Courts: See, e.g., Grayson Consulting, Inc. v. Wachovia Securities LLC (In re Derivium Capital LLC), 437 B.R. 798, 808-09 (Bankr. D. S.C. 2010)

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SPECIFIC DEFENSES Section 546(e)

Section 546(e): "the trustee may not avoid . . . a transfer made by or to (or for the benefit of) a . . .stockbroker . . . [or] financial institution . . . in

ti ith iti t t " 11 U S Cconnection with a securities contract." 11 U.S.C. §546(e). A "stockbroker" is a "person-(A) with respect to

hi h th i t d (B) th t iwhich there is a customer . . . and (B) that is engaged in the business of effecting transactions in securities." 11 U.S.C. § 101(53A).A "securities contract " in turn is defined at length A "securities contract," in turn, is defined at length in sections 741(7)(A)(i)-(xi) of the Code as, inter alia, "a contract for the purchase, sale, or loan of a security " 11 U S C § 741(7)(A)(i)-(xi)security. 11 U.S.C. § 741(7)(A)(i)-(xi).

50

Section 546(e) TransactionsSection 546(e) Transactions

Section 546(e) was intended to promote stability and instill investor confidence in the commodities and securities markets. See H. Rep. No. 97-420, at 1 (1982) reprinted in 1982 U S C C A N 583 583(1982), reprinted in 1982 U.S.C.C.A.N 583, 583 (stating the purpose of 546(e), as amended, is to protect "the stability of the market").

Recent Cases: In re: MacMenamin’s Grill Ltd., Geltzer v. Mooney, Adv Pro. No. 09-8266 (Bkcy SDNY April 21, 2011)(RDD) SDNY; In re BMIS, Picard v. Merkin,21, 2011)(RDD) SDNY; In re BMIS, Picard v. Merkin, 2010 WL 4643102 (Bkcy SDNY Nov. 17, 2010).

51

Litigation LandscapeLitigation LandscapeSecondary Actor ClaimsSecondary Actor Claims SECONDARYSECONDARY--ACTOR CLAIMSACTOR CLAIMS Search For Search For Deep PocketsDeep Pockets Lawyer Driven Class And Derivative Lawyer Driven Class And Derivative

Actions in USActions in US Claims more prevalent when no feeder Claims more prevalent when no feeder

fund can be found (e.g., direct investor fund can be found (e.g., direct investor claims)claims)claims)claims)

Liquidator Driven ClaimsLiquidator Driven ClaimsJP M / UBSJP M / UBS JP Morgan/ UBS etcJP Morgan/ UBS etc

52

Trustee Claims vs. Trustee Claims vs. Secondary ActorsSecondary Actors

Categories of DefendantsCategories of Defendants Banks and Investment BanksBanks and Investment Banks Investment Managers and Investment AdvisorsInvestment Managers and Investment Advisors Accounting FirmsAccounting Firms Pension TrusteesPension Trustees Private/Charitable Foundation TrusteesPrivate/Charitable Foundation Trustees

SEC ItselfSEC Itself SEC ItselfSEC Itself

53

SecondarySecondary Actor ClaimsActor ClaimsSecondarySecondary--Actor ClaimsActor Claims

Claims include Claims include •• Aiding and abetting fraud, blue Aiding and abetting fraud, blue g g ,g g ,

sky securities fraud, CFTCsky securities fraud, CFTC•• Breach of fiduciary dutyBreach of fiduciary dutyBreach of fiduciary dutyBreach of fiduciary duty•• NegligenceNegligence

RICORICO•• RICORICO

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Where should claims be brought--District Court vs. Bankruptcy Court?

Other Choice of Forum and Choice of Law Issues when Off-shore Investment Vehicles are Involved

55

Withdrawal of the ReferenceWithdrawal of the Reference

Motion to Withdraw: motions to withdraw cases from Bankruptcy court into Federal district courtdistrict court

Viable where Trustee pleads common law claims, e.g., claims for unjust enrichment,

idi d b tti f d taiding and abetting fraud, etc. At least three references have been

withdrawn by two Judges in BLMIS case, y g ,other motions are pending or we expect them to be filed.

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Grounds for WithdrawalGrounds for Withdrawal

Mandatory Withdrawal: Permissive WithdrawalMandatory Withdrawal: Where movant shows that,

absent withdrawal, b k t j d ld b

Permissive Withdrawal Generally in the court’s

discretion.bankruptcy judge would be obliged “to engage in significant interpretation,

d t i las opposed to simple application, of federal laws apart from the b k ”bankruptcy statutes.”

57

Withdrawal DecisonsWithdrawal Decisons

At least three references have been withdrawn by two Judges in BLMIS case, other motions are pending or we expectother motions are pending or we expect them to be filed.

Picard v. JP Morgan Chase, et al., No. 11 Ci 913 (CM) O d D t d M 23 2011Civ. 913 (CM) Order Dated May 23, 2011,

Picard v. HSBC Bank PLC et al., No. 11 Civ. 763 (JSR) Order dated June 6, 2011,( ) , ,

Picard v. Alpha Prime Fund Ltd.,11 Civ. 836 (JSR), Order dated Mar. 25, 2011

58

To Date, Specific Grounds for Withdrawing Whether Trustee has standing to bring common law

claims.

Whether the Trustee’s action is a “covered class action” that is preempted by SLUSA.

Judge Rakoff has also withdrawn the reference in the Sonja Kohn/ Bank Medici action based on that case’s unique allegations under the civil RICO statute. His written opinion however has not yet issuedwritten opinion, however, has not yet issued.

59


DefensesDefenses SCIENTER, loss causationSCIENTER, loss causation “RED FLAG” litigation“RED FLAG” litigation

•• South Cherry Street,South Cherry Street, LLC v. Hennessee Group LLC, et al.LLC v. Hennessee Group LLC, et al., 2009 , 2009 WL 2032133 (2d Cir. July 14, 2009).WL 2032133 (2d Cir. July 14, 2009).

Exculpation clauses in offering docsExculpation clauses in offering docs OFFSHORE FUNDSOFFSHORE FUNDS Jurisdiction and FNCJurisdiction and FNC Choice of law issues!!Choice of law issues!! Choice of law issues!!Choice of law issues!!

60

Recent CasesRecent Cases

INVESTMENT MANAGER: In re Beacon Associates Litig., 745 F. Supp. 2d 386 (S.D.N.Y. 2010), reconsideration denied (Dec. 7, 2010)

INVESTMENT ADVISOR: Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299 (S D N Y 2010) I O ti l299 (S.D.N.Y. 2010); In re Optimal U.S. Litig., 10 CIV. 4095 SAS, 2011 WL 1676067 (S D N Y May 2 2011)WL 1676067 (S.D.N.Y. May 2, 2011)

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Recent CasesRecent Cases

ACCOUNTANTS & ADMINISTRATORS: Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010)

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RECENT CASESRECENT CASES

CUSTODIAN BANK: MLSMK Inv. Co. v. JP Morgan Chase & Co., 737 F. Supp. 2d 137 (S.D.N.Y. 2010), aff'd in part, 10-3040-CV, 2011 WL 2176152 (2d Ci J 6 2011)(2d Cir. June 6, 2011)

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Thank YouThank You Mark S. Kaufman, Partner, McKenna Long & Mark S. Kaufman, Partner, McKenna Long &

AldridgeAldridge LLPLLPAldridge Aldridge [email protected]

Anthony L. Anthony L. PaccionePaccione, Chair NY Litigation , Chair NY Litigation Department, Department, KattenKatten MuchinMuchin RosenmanRosenman LLPLLPp ,p ,[email protected]@kattenlaw.com212.940.8502212.940.8502

Corey Weber, Partner, Ezra Corey Weber, Partner, Ezra BrutzkusBrutzkusGubnerGubner LLPLLPcweber@ebgcweber@ebg law comlaw comcweber@[email protected]

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fraudulent transfers: ponzi scheme litigation in...

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