Fraudulent Transfers: Ponzi Scheme Clawback Litigation in Bankruptcy - - PowerPoint PPT Presentation

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Fraudulent Transfers: Ponzi Scheme Clawback Litigation in Bankruptcy

Strategies for Bringing or Defending Trustee Clawback Claims

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, AUGUS T 17, 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 Y

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

Sponsored by the Legal Webinar Group of Strafford Sponsored by the Legal Webinar Group of Strafford Publications Publications Mark S. Kaufman, Partner, McKenna Long & Aldridge LLP Mark 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 LLP Muchin Rosenman LLP Corey Weber, Partner, Ezra Brutzkus Gubner LLP Corey Weber, Partner, Ezra Brutzkus Gubner LLP

5

Introduction Introduction

“When the financial tide goes “When the financial tide goes When the financial tide goes When the financial tide goes

• ut is when you will see who
• ut is when you will see who

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

6

Threshold Questions Threshold 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 Topics Today s Topics

 Clawbacks – From the Trustee’s

perspective P 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

8

TRUSTEE’S CLAWBACK CLAIMS CLAIMS

• Preference

Preference

– Section 547claims

• Fraudulent Transfer

– Section 548 and 550 claims – Section 544 and UFTA state law claims

9

PREFERENCE CLAIMS PREFERENCE CLAIMS

10

PREFERENCE CLAIMS PREFERENCE CLAIMS

• Transfers in Ponzi schemes are more

Transfers 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 Claims Defenses to Preference Claims

• Same defenses as to a normal preference

Same 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)

12

FRAUDULENT TRANSFER CLAIMS

13

Actual Intent Claims Actual 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 Presumption Ponzi Scheme Presumption

• If the Bankruptcy Court concludes that the

If the Bankruptcy Court concludes that the Debtor operated as a Ponzi scheme, actual intent to hinder delay or defraud actual 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)

15

Constructive Fraud Constructive Fraud

• If there is a plea agreement constructive

If there is a plea agreement, constructive fraud claims will have the same outcome as actual intent claims as actual intent claims If th i l t th

• If there is no plea agreement, the

insolvency tests provide an alternate way t li bilit to prove liability

16

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

• 2 year pre-bankruptcy petition reach-back under

y p p y p Section 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 limitations

Statute of limitations

– Trustee has 2 years to file a complaint post- bankruptcy

17

Fictitious Profits Fictitious Profits

• General rule is that the Trustee’s recovery

General rule is that the Trustee s recovery is limited to recovery of fictitious profits from net winners from 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)

18

FICTITIOUS PROFITS IN THE MADOFF CASE MADOFF CASE

• “Equality is achieved in this case by employing the

q y y p y g Trustee'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 y rather 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 g positions 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)

19

Potential for the Trustee to Recover More than to Recover More than Fictitious Profits

• The Trustee can recover the total transfers

from the Debtor to the defendant (fictitious from the Debtor to the defendant (fictitious profits + return of principal) if he establishes his prima facie case and the establishes his prima facie case and the defendant does not establish his defenses

20

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 g criteria 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 defenses defenses.

21

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 C fraudulent conveyance claims pursued under 11 U.S.C. § 544. 3 The burden of proof in respect to the transferee’s

• 3. 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).

22

B. Statutory Framework (cont.)

• 4. 11 U.S.C. § 550(b) provides further insulation

against liability for a fraudulent conveyance to against liability for a fraudulent conveyance to an “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.”

23

B. Statutory Framework (cont.)

• 5. Observations about 550(b) defenses:

(a) the focus of “good faith” and “for value” ( ) g defenses for an immediate or mediate transferee relate to the transfer between the initial transferee and the defendant subsequent initial transferee and the defendant subsequent transferee. (b) the “without knowledge of the voidability” l t h i di t d t h th th element, however, is directed to whether the immediate or mediate transferee defendant knew about the voidability of the initial transfer y — i.e. does the second transferee have awareness that the initial transfer was either not in good faith or not for value or was lacking in in good faith or not for value or was lacking in both respects.

24

C. Good Faith

• 1. Not Likely To Be Decided On Summary Judgment:

Defending one’s good faith of course is specific to Defending 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 p unique 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 where specific recipient, it will be a rare case where summary judgment to either party on this element

• f the defense is likely or appropriate.
• f the defense is likely or appropriate.

25

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 Where 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 grappled with whether 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 particular transferee who receives the transfer, or

• n an objective test where the court or jury decides

whether a typical investor with the same acumen and sophistication of the actual defendant would and sophistication of the actual defendant would have been put on inquiry notice that the transaction lacks good faith. Most courts have employed the

• bjective test

In re Agric Research & Tech Corp

• bjective test. In re Agric. Research & Tech. Corp.,

916 F.2d 528, 535-36 (9th Cir. 1990).

26

C. Good Faith (cont.)

• 3. Frequently, courts place a “specific focus on the

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

• 4. What a person with defendant’s experience and

sophistication should have been on inquiry sophistication 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 y 320-327.

27

C. Good Faith (cont.)

• 5. The defendant may still be able to successfully

defend its good faith, even if it was under a duty g , y

• f inquiry, if it can show that, as most courts

formulate the test, it would not have been able to t i l t f t b t th d bt if ascertain relevant facts about the debtor even if it had made reasonably diligent inquiry. In re

• Agric. Research & Tech. Grp., 916 F.2d at 536.
• Agric. Research & Tech. Grp., 916 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 be on inquiry notice. See e.g. In re Manhattan

• Inv. Fund III, 397 B.R. 1, 22-24 (S.D.N.Y. 2007).

28

C. Good Faith (cont.)

• 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 ,

• f 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 its meaningfully 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.

29

C. Good Faith (cont.)

• 7. Frequently present in Ponzi cases is the

situation where the trustee argues that the situation where the trustee argues that the transferee is put on 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 similar investments. But arguing lack of good faith based on this proposition has its limits.

30

C. Good Faith (cont.)

• 8. Red Flags

In determining whether the transferee should be In determining whether the transferee should be

• n inquiry notice of a debtor’s fraudulent

activities or insolvency, potential “red flags” y, p g identified by courts have included:

• a. statements by the debtor concerning its

improprieties and fraudulent conduct, see Armstrong v. Collins, No. 01 Civ. 2437 (PAC), 02 Ci 2796 (PAC) 02 Ci 3620 (PAC) 02 Civ. 2796 (PAC), 02 Civ. 3620 (PAC), 2010 WL 1141158, at *27-28 (S.D.N.Y. Mar. 24 2010) 24, 2010)

31

C. Good Faith (cont.)

• b. actual knowledge of the debtor’s financial

problems, see In re Grove-Merritt, 406 B.R. 778, p 810 (Bankr. S.D. Ohio 2009)

• c. knowledge of a tax lien filed against the debtor, see

2 9 338 3 ( In re Armstrong, 259 B.R. 338, 344 (Bankr. E.D.

• Ark. 2001)

d knowledge of an impending bankruptcy see In re

• d. knowledge of an impending bankruptcy, see In re

McLaren, 236 B.R. 882, 902 (Bankr. D.N.D. 1999)

• e. knowledge of the debtor’s commingling of funds,
• e. knowledge of the debtor s commingling of funds,

acceptance of escrow checks in its personal account, and previous bounced checks, see C J C B df d & C 230 B R 546 593 Cannon v. J.C. Bradford & Co., 230 B.R. 546, 593- 94 (Bankr. W.D. Tenn. 1999)

32

C. Good Faith (cont.)

• f. promises of investment returns of 468%

coupled with the debtor’s use of post-dated coupled with the debtor s use of post dated checks to investors, 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

• Tech. Grp., 916 F.2d at 539

33

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 p debt of the debtor . . .”

• 2. “Property” means a reasonably equivalent exchange

p y y q g

• f 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 h in satisfaction of an antecedent debt because the nature of the initial investment In the Ponzi scheme gave rise to a claim gave rise to a claim.

34

D. For Value

• 4. Thus, attempts to argue in Stanford, that the

unequal distribution of the Ponzi debtor’s assets q creates 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 entitled gave 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 .

35

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 titi subject to disgorgement. In essence, “fictitious profits” received by creditors can be disgorged because courts conclude that since the debtor’s because courts conclude that since the debtor s

• perations 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)

36

D. For Value (cont.)

• 6. Contrasting Debt with Equity Investments: But

what if the investment with the Ponzi entity what if the investment with the Ponzi entity does not 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

• membership. Many hedge funds and private

equity funds are so structured. If the investment is made as equity how can the If the investment is made as equity, how can the defendant establish “for value” based on satisfying an “antecedent debt”? satisfying an antecedent debt ?

37

D. For Value (cont.)

• a. Go back to the definition of “property” under §

a

• bac
• e de
• 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 i property “reasonably equivalent” to that which it is receiving? Limited partnership or membership shares or units in a Ponzi scheme are usually of de shares 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 worthless would likely have been close to worthless.

38

D. For Value (cont.)

• b. The fair equivalence of the value of money paid
• b. 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 H payment for the retendered shares occurs. How then can any receiving investor prevail on a “for value” defense when it receives all its principal value defense when it receives all its principal back in exchange for tendering essentially worthless equity interests? q y

39

D. For Value (cont.)

• c. So how have the courts handled the “interest in”

Ponzi cases as distinct from the “claims against” g Ponzi cases.

• Almost all the reported cases have involved

p claims, 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 h notion that distributions made to investors who lent money (i.e. creating a claim) also gave rise to a tort “claim” for fraud and rescission to a tort claim for fraud and rescission.

40

D. For Value (cont.)

• 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).

41

D. For Value (cont.)

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

• The Bankruptcy Court’s ruling, 2009 WL

6506657 (B k N D G D b 1 2009) 6506657 (Bankr. N.D. Ga. December 1, 2009)

• Interlocutory appeal granted
• Fully briefed awaiting decision
• Fully briefed, awaiting decision

42

D. For Value (cont.)

• Appellant argues that state law requires

equality of treatment of similarly situated q y y equity.

• Acknowledging that defrauded investors have a

g g fraud 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 i based on satisfaction of its fraud claim flies in the face of 548(c)’s “good faith” requirement.

43

D. For Value (cont.)

• Look at § 510(b), which is intended to preclude

defrauded investors from bettering their g recoveries 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;
• utcome.

44

SPECIFIC DEFENSES SPECIFIC DEFENSES

 “Mere Conduit” Defense  Why its a Hot Topic  Poses A Strategic Quandary for Many

g y y Institutions

45

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 if initial 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 between mere conduit, acting as an uninterested agent between the transferor and another entity, or if it (b) lacks “dominion and control” over the funds.

46

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): a remains 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)

47

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 (In

• necessary. 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)

48

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 C connection 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 i which 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).

49

Section 546(e) Transactions Section 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).

50

Litigation Landscape Litigation Landscape Secondary Actor Claims Secondary Actor Claims

 SECONDARY

SECONDARY-

• ACTOR CLAIMS

ACTOR CLAIMS

 Search For

Search For Deep Pockets Deep Pockets

 Lawyer Driven Class And Derivative

Lawyer Driven Class And Derivative Actions in US Actions 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 Claims

Liquidator Driven Claims

JP M / UBS JP M / UBS

 JP Morgan/ UBS etc

JP Morgan/ UBS etc

51

Trustee Claims vs. Trustee Claims vs. Secondary Actors Secondary Actors

 Categories of Defendants

Categories of Defendants

 Banks and Investment Banks

Banks and Investment Banks

 Investment Managers and Investment Advisors

Investment Managers and Investment Advisors

 Accounting Firms

Accounting Firms

 Pension Trustees

Pension Trustees

 Private/Charitable Foundation Trustees

Private/Charitable Foundation Trustees SEC Itself SEC Itself

 SEC Itself

SEC Itself

52

Secondary Secondary Actor Claims Actor Claims Secondary Secondary-Actor Claims Actor Claims

Claims include

Claims include

• Aiding and abetting fraud, blue

Aiding and abetting fraud, blue g g , g g , sky securities fraud, CFTC sky securities fraud, CFTC

• Breach of fiduciary duty

Breach of fiduciary duty Breach of fiduciary duty Breach of fiduciary duty

• Negligence

Negligence RICO RICO

• RICO

RICO

53

Secondary Secondary Actor Claims Actor Claims Secondary Secondary-Actor Claims Actor Claims

 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

54

Withdrawal of the Reference Withdrawal of the Reference

 Motion to Withdraw: motions to withdraw

cases from Bankruptcy court into Federal district court district court

 Viable where Trustee pleads common law

claims, e.g., claims for unjust enrichment, idi d b tti f d t aiding and abetting fraud, etc.

 At least three references have been

withdrawn by two Judges in BLMIS case, y g ,

• ther motions are pending or we expect

them to be filed.

55

Grounds for Withdrawal Grounds for Withdrawal

Mandatory Withdrawal: Permissive Withdrawal Mandatory 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

• bliged “to engage in

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

56

Withdrawal Decisons Withdrawal Decisons

 At least three references have been

withdrawn by two Judges in BLMIS case,

• ther motions are pending or we expect
• ther 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 2011

• Civ. 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

57

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 issued written opinion, however, has not yet issued.

58

Secondary Secondary Actor Claims Actor Claims Secondary Secondary-Actor Claims Actor Claims

 Defenses

Defenses

 SCIENTER, loss causation

SCIENTER, 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 docs

Exculpation clauses in offering docs

 OFFSHORE FUNDS

OFFSHORE FUNDS

 Jurisdiction and FNC

Jurisdiction and FNC

 Choice of law issues!!

Choice of law issues!!

 Choice of law issues!!

Choice of law issues!!

59

Recent Cases Recent 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 l 299 (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)

60

Recent Cases Recent Cases

 ACCOUNTANTS &

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

61

RECENT CASES RECENT 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)

62

Thank You Thank You

 Mark S. Kaufman, Partner, McKenna Long &

Mark S. Kaufman, Partner, McKenna Long & Aldridge LLP Aldridge LLP Aldridge LLP Aldridge LLP mkaufman@mckennalong.com 404.527.4120

 Anthony L.

Anthony L. Paccione Paccione, Chair NY Litigation , Chair NY Litigation Department, Department, Katten Katten Muchin Muchin Rosenman Rosenman LLP LLP p , p , anthony.paccione@kattenlaw.com anthony.paccione@kattenlaw.com 212.940.8502 212.940.8502

 Corey Weber, Partner, Ezra

Corey Weber, Partner, Ezra Brutzkus Brutzkus Gubner Gubner LLP LLP cweber@ebg cweber@ebg law com law com cweber@ebg cweber@ebg-law.com law.com 818 818-

• 827

827-

• 9122

9122

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