09-01182-smb Doc 198 Filed 01/31/14 Entered 01/31/14 15:21 ... · Baker & Hostetler LLP 45...

Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan Email: [email protected] Lan Hoang Email: [email protected] Keith R. Murphy Email: [email protected] Brian W. Song Email: [email protected] Attorneys for Irving H. Picard, Trustee for the

Substantively Consolidated SIPA Liquidation of

Bernard L. Madoff Investment Securities LLC

and the estate of Bernard L. Madoff

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

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

SIPA LIQUIDATION Debtor.

(Substantively Consolidated)

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

Plaintiff, Adv. Pro. No. 09-1182 (SMB)

v.

J. EZRA MERKIN, GABRIEL CAPITAL, L.P., ARIEL FUND LTD., ASCOT PARTNERS, L.P., ASCOT FUND LTD., GABRIEL CAPITAL CORPORATION,

Defendants.

MEMORANDUM OF LAW IN OPPOSITION TO

DEFENDANT ASCOT FUND LIMITED’S MOTION TO DISMISS

THE THIRD AMENDED COMPLAINT AND TO SEVER

09-01182-smb Doc 198 Filed 01/31/14 Entered 01/31/14 15:21:55 Main Document Pg 1 of 49

TABLE OF CONTENTS

PRELIMINARY STATEMENT .....................................................................................................1

STATEMENT OF FACTS ..............................................................................................................3

A. The BLMIS Ponzi Scheme ..........................................................................3

B. J. Ezra Merkin ..............................................................................................4

C. GCC, Ariel, Gabriel, and Ascot ...................................................................4

D. Merkin and Former Ascot Fund ...................................................................5

E. The Merkin Funds’ Investments With BLMIS ............................................7

F. Merkin Enjoyed a Close Relationship With and Intimate Access To Madoff/BLMIS ............................................................................................7

G. Merkin Had Actual Knowledge Of or Willfully Blinded Himself to The Fraud .....................................................................................................8

H. Merkin Perpetuated the Madoff Fraud by Actively Concealing the Fraud and Investments With Madoff From Certain Investors Who Expressed Concerns About Madoff ...........................................................10

I. Subsequent Transfers to Former Ascot Fund.............................................11

ARGUMENT .................................................................................................................................11

I. STANDARD OF REVIEW – MOTIONS TO DISMISS UNDER RULE 12(B)(6)..................................................................................................................11

II. MERKIN’S KNOWLEDGE AND CONDUCT ARE DIRECTLY IMPUTED TO FORMER ASCOT FUND ...............................................................................13

III. BANKRUPTCY CODE § 546(e) DOES NOT PROTECT THE TRANSFERS AT ISSUE IN THIS ADVERSARY PROCEEDING ....................17

A. Former Ascot Fund’s Knowledge Precludes Its Reliance Upon the §546(e) Safe Harbor ...................................................................................17

B. Dismissal of the Trustee’s Avoidance Claims on the Basis of Section 546(e) Is Improper on a Motion to Dismiss ...............................................19

IV. THE TRUSTEE HAS ADEQUATELY PLEADED CLAIMS FOR RECOVERY OF SUBSEQUENT TRANSFERS AGAINST ASCOT FUND .....20


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A. The Trustee Has Pleaded That the Initial Transfers Are Avoidable ..........20

B. The Trustee Has Pleaded That the Subsequent Transfers Are Recoverable ................................................................................................21

C. The Trustee’s Claim to Recover Subsequent Transfers Is Timely ............22

D. It Is the Defendants’ Burden to Demonstrate the Affirmative Defense of Good Faith in Section 550(b)(1) ............................................................24

V. THE COMPLAINT PROPERLY PLEADS GROUNDS FOR DISALLOWANCE OR, ALTERNATIVELY, SUBORDINATION OF CLAIMS AGAINST THE BLMIS ESTATE ........................................................27

A. Count Eleven Seeks Disallowance of the Merkin Funds’ SIPA Claims as Invalid and Unenforceable Under SIPA and the Bankruptcy Code ......28

B. Equitable Disallowance of Any Claim of Former Ascot Fund Is Authorized and Warranted. ........................................................................28

C. Equitable Subordination of Any Claims of Former Ascot Fund is Warranted ...................................................................................................31

VI. THE TRUSTEE’S CLAIMS AGAINST FORMER ASCOT FUND ARE RELATED TO FACTS AND LEGAL ISSUES RAISED AGAINST THE OTHER DEFENDANTS, AND SEVERANCE IS NEITHER JUSTIFIED NOR EFFICIENT ..................................................................................................34

CONCLUSION ..............................................................................................................................38


TABLE OF AUTHORITIES

Page(s)

CASES

80 Nassau Assocs. v. Crossland Fed. Sav. Bank (In re 80 Nassau Assocs.), 169 B.R. 832 (Bankr. S.D.N.Y. 1994) ...............................................................................31, 32

ABF Capital Management v. Kidder Peabody & Co., Inc. (In re Granite Partners, L.P.),

210 B.R. 508 (Bankr. S.D.N.Y. 1997) .....................................................................................33

Adelphia Commc’ns Corp. v. Bank of Am, N.A. (In re Adelphia Commc’ns Corp.), 365 B.R. 24 (Bankr. S.D.N.Y. 2007) ...........................................................................29, 30, 32

Adelphia Recovery Trust v. Bank of Am., N.A., 390 B.R. 64 (S.D.N.Y. 2008) ...................................................................................................29

Allied E. States Maint. Corp. v. Miller (In re Lemco Gypsum, Inc.), 911 F.2d 1553 (11th Cir. 1990) ...............................................................................................31

Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp., 351 F. Supp. 2d 79 (S.D.N.Y. 2004) ............................................................................19, 25, 26

Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010) ......................................................................................18

Arbco Capital Mgmt., LLP v. Penson Fin. Servs. (In re Arbco Capital Mgmt., LLP), 498 B.R. 32 (Bankr. S.D.N.Y. 2013) ...........................................................................13, 18, 19

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...........................................................................................................11, 12

Bankr. Servs., Inc. v. Ernst & Young, Ernst & Young LLP (In re CBI Holding Co., Inc.), 529 F.3d 432 (2d Cir 2008) .....................................................16

BD ex rel. Jean Doe v. DeBuono, 193 F.R.D. 117 (S.D.N.Y. 2000) .............................................................................................36

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................11

Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir. 1977) ...................................................................................................31

In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity”), 654 F.3d 229 (2d Cir. 2011)...............................................................................................3, 4, 5


- ii -

Bostian v. Schapiro (In re Kansas City Journal-Post Co.), 144 F.2d 791 (8th Cir. 1944) ...................................................................................................31

Breeden v. L.I. Bridge Fund, LLC (In re Bennett Funding Grp., Inc.), 232 B.R. 565 (Bankr. N.D.N.Y. 1999) ....................................................................................24

Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782 (1985) ..............................................................................................................14

Century Glove, Inc. v. Iselin (In re Century Glove, Inc.), 151 B.R. 327 (Bankr. D. Del. 1993) ........................................................................................33

Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002).....................................................................................................12

Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC), 439 B.R. 284 (S.D.N.Y. 2010) .................................................................................................24

Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, 160 F.3d 982 (3d Cir. 1998).....................................................................................................29

Cobalt Multifamily Investors I, LLC v. Shapiro, No. 06 Civ.6468 (KMW) (MHD), 2009 WL 2058530 (S.D.N.Y. July 15, 2009) ...................16

CPY Co. v. Ameriscribe Corp. (In re Chas. P. Young Co.), 145 B.R. 131 (Bankr. S.D.N.Y.1992) ......................................................................................32

Cromer Fin. Ltd. v. Berger, No., 00 Civ.2284 (DLC), 2003 WL 21436164 (S.D.N.Y. June 23, 2003) ..............................18

Crown Cork & Seal Co., Inc. Master Ret. Trust v. Credit Suisse First Boston Corp., 288 F.R.D. 331 (S.D.N.Y. 2013) .............................................................................................36

Degirolamo v. Truck World, Inc. (In re Laurel Valley Oil Co.), 2009 WL 1758741 (Bankr. N.D. Ohio June 16, 2009) ............................................................20

Ernst & Young, Ernst & Young, LLP v. Bankr. Servs. (In re CBI Holding Co., Inc.), 311 B.R. 350 (S.D.N.Y. 2004), rev’d in part on other grounds, 529 F.3d 432 (2d Cir. 2008) ..................................................16

Fairchild Dornier GMBH v. The Official Comm. of Unsecured Creditors (The Plan

Monitoring Comm.) (In re Official Comm. of Unsecured Creditors for Dornier

Aviation (N. Am.), Inc.), 453 F.3d 225 (4th Cir. 2006) ...................................................................................................29

Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349 (S.D.N.Y. 2007) ......................................................................................18


- iii -

Global-Tech Appliances Inc. v. SEB S.A., 131 S. Ct. 2060 (2011) .............................................................................................................17

Gowan v. Novator Credit Mgmt. (In re Dreier LLP), 452 B.R. 467 (Bankr. S.D.N.Y. 2011) .....................................................................................34

Gowan v. Wachovia Bank, N.A. (In re Dreier LLP), 453 B.R. 499 (Bankr. S.D.N.Y. 2011) .....................................................................................25

Gowan v. Westford Asset Mgmt. LLC (In re Dreier LLP), 462 B.R. 474 (Bankr. S.D.N.Y. 2011) .....................................................................................13

Gredd v. Bear, Stearns Secs. Corp. (In re Manhattan Inv. Fund Ltd.), 310 B.R. 500 (Bankr. S.D.N.Y. 2002) .....................................................................................28

HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995).......................................................................................................29

IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs., Inc.), 408 F.3d 689 (11th Cir. 2005) .................................................................................................21

Indus. Enters. Of Am. Inc. v. Tabor Acad. (In re Pitt Penn Holding Co., Inc.), 2011 WL 4352373 (Bankr. D. Del. Sept. 16, 2011) ................................................................20

Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69 (2d Cir.1995)..........................................................................................................13

In re J.P. Jeanneret Assoc., Inc., 769 F.Supp.2d 340 (S.D.N.Y. 2011) ........................................................................................11

Katchen v. Landy, 382 U.S. 323 (1966) .................................................................................................................30

Kelleran v. Andriejevic, 825 F.2d 692 (2d Cir. 1987).....................................................................................................31

Kelly-Brown v. Winfrey, 717 F.3d 295 (2d Cir. 2013).....................................................................................................25

Kirchner v. Bennett (In re Refco Sec. Litig.), 759 F. Supp. 2d 301 (S.D.N.Y. 2010) ................................................................................18, 19

Kirschner v. Agoglia, 476 B.R. 75 (S.D.N.Y. 2012) ...................................................................................................30

Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) ..............................................................................................................15


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Kruse v. Sec. Investor Protection Corp. (In re Bernard L. Madoff Investment Securities LLC.), 708 F.3d 422 (2d Cir. 2013).....................................................................................................28

Mangiafico v. Blumenthal, 471 F.3d 391 (2d Cir. 2006).....................................................................................................13

Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), -- F.3d --, 2014 WL 103988 (2d Cir. Jan. 13, 2014) ................................................................24

Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822 (2d Cir. 1997).....................................................................................................16

Mirror Grp. Newspapers, PLC v. Maxwell Newspapers, Inc. (In re Maxwell Newspapers, Inc.), 164 B.R. 858 (Bankr. S.D.N.Y. 1994) .........................................................................14, 15, 16

Musso v. Ostashko, 468 F.3d 99 (2d Cir. 2006).......................................................................................................29

New Times Sec. Servs., Inc. v. Jacobs (In re New Times Sec. Servs., Inc.), 371 F.3d 68 (2d Cir. 2004).......................................................................................................17

New York v. Hendrickson Bros., Inc., 840 F.2d 1065 (2d Cir. 1988)...................................................................................................34

Nisselson v. Drew Indus. Inc. (In re White Metal Rolling & Stamping Corp.), 222 B.R. 417 (Bankr. S.D.N.Y. 1998) .....................................................................................12

O’Connell v. Arthur Andersen LLP (In re AlphaStar Insur. Group Ltd.), 383 B.R. 231 (Bankr. S.D.N.Y. 2008) .....................................................................................28

O’Connell v. Shallo (In re Die Fliedermaus LLC), 323 B.R. 101 (Bankr. S.D.N.Y. 2005) .....................................................................................32

Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147 (2d Cir. 2003).....................................................................................................25

Official Comm. of Unsecured Creditors v. Asea Brown Boveri, Inc. (In re Grand Eagle Cos., Inc.), 288 B.R. 484 (Bankr. N.D. Ohio 2003) ...................................................................................20

Official Unsecured Creditors Comm. v. U.S. Nat’l Bank of Oregon (In re Sufolla, Inc.), 2 F.3d 977 (9th Cir 1993) ........................................................................................................23

Oram v. SoulCycle, -- F. Supp. 2d --, 2013 WL 5797346 (S.D.N.Y. Oct. 28, 2013) ..............................................34


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In re OSG Sec. Litig., -- F. Supp. 2d --, 2013 WL 4885890 (S.D.N.Y. Sept. 10, 2013) .............................................25

Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438 (S.D.N.Y. 1994) .................................................................................................32

Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67 (2d Cir. 1998).......................................................................................................25

In re Parmalat Sec. Litig., 375 F.Supp. 2d 278 (S.D.N.Y. 2005) .......................................................................................17

Pepper v. Litton, 308 U.S. 295 (1939) ...........................................................................................................29, 34

Picard v. Bureau of Labor Ins., 480 B.R. 501 (Bankr. S.D.N.Y. 2012) .....................................................................................37

Picard v. Chais (In re Bernard L. Madoff Inv. Sec. LLC), 445 B.R. 206 (Bankr. S.D.N.Y. 2011) .........................................................................21, 33, 34

Picard v. Cohmad Secs. Corp. (In re Bernard L. Madoff Inv. Sec. LLC), 454 B.R. 317 (Bankr. S.D.N.Y. 2011) ...............................................................................12, 24

Picard v. Greiff, 476 B.R. 715 (S.D.N.Y. 2012) .................................................................................................17

Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011) ......................................................................................... passim

Picard v. Merkin, 440 B.R. 243 (Bankr. S.D.N.Y. 2010), leave to appeal denied, 2011 WL 3897970 (S.D.N.Y. Aug. 31, 2011) ........................... passim

Picard v. Peter Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 468 B.R. 620 (Bankr. S.D.N.Y. 2012) .....................................................................................24

Rosner v. Bank of China, 528 F. Supp. 2d 419 (S.D.N.Y. 2007) ......................................................................................19

Roth v. Jennings, 489 F.3d 499 (2d Cir. 2007).....................................................................................................11

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

(“Consol. Proceedings on 11 U.S.C. § 550(a)”), 501 B.R. 26 (S.D.N.Y. 2013) ........................................................................................... passim


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Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

(“Consol. Proceedings on Stern v. Marshall), 490 B.R. 46 (S.D.N.Y. 2013) ...................................................................................................30

Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122 (Bankr. S.D.N.Y. 2010) .................................................................................3, 27

Sec. Investor Prot. Corp. v. Stratton Oakmont, Inc., 234 B.R. 293 (Bankr. S.D.N.Y. 1999) ...............................................................................12, 21

Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs., Ltd.), 337 B.R. 791 (Bankr. S.D.N.Y 2005) ......................................................................................24

Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5 (Bankr. E.D.N.Y. 2007) .........................................................................................21

Silverman v. United Talmudical Acad. Torah Vyirah, Inc. (In re Allou Distribs, Inc.), 446 B.R. 32 (Bankr. E.D.N.Y. 2011) .......................................................................................19

Singh v. New York State Dept. of Taxation and Finance, 2011 WL 3273465 (W.D.N.Y. July 28, 2011).........................................................................37

In re South African Apartheid Litig., 617 F.Supp.2d 228 (S.D.N.Y. 2009) ........................................................................................17

Stern v. Marshall, 131 S. Ct. 2594 (2011) .......................................................................................................29, 30

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................................................................................13

Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93 (2d Cir. 2010).......................................................................................................18

U.S. v. Ferguson, 676 F.3d 260 (2d Cir. 2011).....................................................................................................18

U.S. v. Goffer, 721 F.3d 113 (2d Cir. 2013).....................................................................................................18

Wausau Bus. Ins. Co. v. Turner Constr. Co., No. 99 civ. 0682 (RWS), 2001 WL 963943 (S.D.N.Y. Aug. 23, 2001) ..................................34

Wedtech Corp v. King Main Hurdman (In re Wedtech Sec. Litig.), 138 B.R. 5 (S.D.N.Y. 1992) .....................................................................................................14


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Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721 (B.A.P. 9th Cir. 2008)........................................................................................23

STATUTES

11 U.S. C. § 101(31) ......................................................................................................................32

11 U.S.C. § 502(a) .........................................................................................................................27

11 U.S. C. § 502(b)(1) ...................................................................................................................27

11 U.S.C. § 510(b) .........................................................................................................................30

11 U.S.C. § 510(c) ...................................................................................................................29, 31

11 U.S.C. § 544 ..............................................................................................................1, 17, 22, 23

11 U.S.C. § 546(a) ...................................................................................................................22, 23

11 U.S.C. § 546(e) .........................................................................................................................17

11 U.S.C. § 547 ..............................................................................................................1, 17, 22, 23

11 U.S. C. § 548 ...................................................................................................................1, 17, 23

11 U.S.C. § 548(c) .........................................................................................................................24

11 U.S.C. § 550 ................................................................................................................................1

11 U.S.C. § 550(a) .......................................................................................................21, 22, 23, 37

11 U.S.C. § 550(b) ...................................................................................................................24, 37

11 U.S.C. § 550(f) ..........................................................................................................................24

11 U.S.C. § 551 ................................................................................................................................1

15 U.S.C. §§ 78aaa et seq. ...............................................................................................................1

RULES

Fed. R. Bankr. P. 7012 ...................................................................................................................11

Fed. R. Bankr. P. 7016 ...................................................................................................................37

Fed. R. Civ. P. 8 .................................................................................................................11, 21, 22

Fed. R. Civ. P. 9(b) ........................................................................................................................12

Fed. R. Civ. P. 10(c) ......................................................................................................................13


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Fed. R. Civ. P. 12(b)(6)............................................................................................................11, 25

Fed. R. Civ. P. 16 ...........................................................................................................................37

OTHER AUTHORITIES

5 Collier on Bankruptcy ¶ 550.02 (16th ed. 2012) ........................................................................22

3 N.Y.Jur.2d, Agency ¶ 268 (1980) ...............................................................................................14

H.R. Rep. No. 95-595 (1977) .........................................................................................................30

S. Rep. No. 989 (1978) ..................................................................................................................32


Irving H. Picard (the “Trustee”), as trustee for the substantively consolidated liquidation

of the business of Bernard L. Madoff Investment Securities LLC (“BLMIS”) under the Securities

Investor Protection Act (“SIPA”) 15 U.S.C. §§ 78aaa et seq., and the estate of Bernard L. Madoff

(“Madoff”), by and through his undersigned counsel, respectfully submits this Memorandum of

Law in Opposition to the Motion to Dismiss the Third Amended Complaint and to Sever filed by

Defendant Ascot Fund Ltd. (“Former Ascot Fund”).1

PRELIMINARY STATEMENT

In the Third Amended Complaint (the “Complaint”), the Trustee seeks to avoid and

recover preferential and fraudulent transfers made to or for the benefit of the Defendants,

including Former Ascot Fund, as initial and/or subsequent transferees under sections 544, 547,

548, 550, and 551 of the Bankruptcy Code. Former Ascot Fund moves to dismiss Count Nine of

the Complaint, arguing: (a) that the Trustee cannot pursue subsequent transfer claims against

Former Ascot Fund; (b) that Defendant Merkin’s conduct and knowledge cannot be imputed to

Former Ascot Fund; (c) that the Trustee has not adequately pleaded that Former Ascot Fund had

actual knowledge of or was willfully blind to fraud at BLMIS; and (d) that transfers to the

Former Ascot Fund were taken in good faith. Former Ascot Fund also seeks to dismiss Counts

Eleven through Thirteen,2 claiming that the Trustee is not entitled to assert, nor has he alleged

facts to sustain, counts for disallowance or subordination of Former Ascot Fund’s claims against

the BLMIS estate.

1 Motions to dismiss also have been filed by Defendants J. Ezra Merkin (“Merkin”) and Gabriel Capital Corporation (“GCC”), Gabriel Capital, L.P. (“Gabriel”) and Ariel Fund Ltd. (“Ariel”), and Ascot Partners, L.P. (“Ascot”), and all, collectively with Former Ascot Fund, referred to as “Defendants.” See ECF Nos. 160-162, 165-167, and 168-169. 2 Former Ascot Fund appears to mistakenly refer to Count Ten when seeking to dismiss the counts for disallowance and subordination of claims against the BLMIS estate. Count Ten, however, concerns general partner liability of Defendant Merkin as to Defendants Ascot and Gabriel. Counts Eleven, Twelve, and Thirteen seek, respectively, disallowance, equitable disallowance, and equitable subordination.


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On motions to dismiss the Trustee’s prior pleading in this matter, the Bankruptcy Court

(“Court”) considered and rejected several of the very same arguments now being advanced by

Former Ascot Fund, holding that:

The Trustee pleaded with sufficient particularity transfers sought to be avoided as actual fraudulent transfers;

The Trustee adequately pleaded claims to recover subsequent transfers; The issue of whether Merkin’s conduct could be imputed to the Merkin Funds3 could not

be decided on a motion to dismiss;

The actual fraudulent transfer claims could not be dismissed based on the affirmative defense of good faith; and

The Trustee has sufficiently pleaded a basis for disallowing claims against the estate. See Picard v. Merkin, 440 B.R. 243, 254-71, 273 (Bankr. S.D.N.Y. 2010), leave to appeal

denied, 2011 WL 3897970 (S.D.N.Y. Aug. 31, 2011).

The Complaint details further factual allegations to sustain the Trustee’s avoidance and

recovery claims against Former Ascot Fund and the other Defendants, and his right to disallow

or subordinate any claim asserted by the fund against the BLMIS estate, including:

At all relevant times, Merkin was the investment advisor to, was the sole decision-maker for, or was the agent of Former Ascot Fund;

Merkin discussed the possibility of fraud at BLMIS with others, even quipping that BLMIS could be a Ponzi scheme that would have to be renamed the Madoff scheme;

Merkin was warned that the consistency of BLMIS’s returns was impossible; Merkin was warned that BLMIS’s self-clearing of trades was an indicia of fraud; Merkin lied to certain of his investors about investments with BLMIS; Merkin did not disclose to certain of his investors that the Merkin Funds, including

Former Ascot Fund, either were invested with BLMIS or the extent to which they were invested;

3 Gabriel, Ariel, Ascot, as well as Former Ascot Fund, are hereinafter collectively referred herein as the “Merkin Funds.”


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The Defendants possessed and reviewed documents that evidenced impossibilities and indicia of fraud at BLMIS; and

The Defendants improperly transferred assets among and between the BLMIS accounts and the Morgan Stanley accounts of the Merkin Funds.

Even under a heightened pleading standard, the Trustee has adequately pleaded his avoidance

and recovery claims against initial and subsequent transferees, that the safe harbor of section

546(e) is inapplicable, that the Defendants lacked good faith, and that there are legal and

equitable grounds for disallowance and subordination of claims against the BLMIS estate.

For the reasons the Court has already considered on the prior motions to dismiss, and for

the reasons set forth below, Former Ascot Fund’s motion to dismiss the Complaint should be

denied.

STATEMENT OF FACTS

A. The BLMIS Ponzi Scheme

The background of the BLMIS liquidation proceeding has been discussed in prior

decisions by the Court, and the Trustee briefly references it here. See, e.g., Sec. Investor Prot.

Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R.

122, 125-32 (Bankr. S.D.N.Y. 2010); Merkin, 440 B.R. at 249-51. Madoff, through BLMIS,

represented to investors that BLMIS’s investment advisory business achieved its consistent

investment success by implementing the “split-strike conversion” (“SSC”) strategy. (Complaint4

(“Compl.”) ¶ 26). However, BLMIS never purchased the securities it claimed to have purchased

in connection with the SSC strategy. (Compl. ¶28). Madoff operated BLMIS’s investment

advisory business as a Ponzi scheme and was arrested by federal agents on December 11, 2008.

(Compl. ¶¶ 10, 32); see In re Bernard L. Madoff Inv. Sec. LLC (“Net Equity”), 654 F.3d 229,

4 See Declaration of Douglas R. Hirsch (“Hirsch Declaration”), Exh. A, Third Amended Complaint, Picard v. Merkin, Adv. Pro. No. 09-01182 (SMB) (Bankr. S.D.N.Y. Dec. 20, 2013), ECF No. 184.


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231-32 (2d Cir. 2011). On March 12, 2009, Madoff pleaded guilty to an eleven count criminal

information, acknowledging that he operated a Ponzi scheme. (Compl. ¶ 16).

B. J. Ezra Merkin

Merkin is a highly educated individual with extensive experience in the investment

management industry. (Compl. ¶ 40). In addition to his roles with the Defendants, Merkin

served as a Managing Partner for Gotham Capital L.P., an investment partnership, from 1985 to

1988. (Id.). He was associated with Halcyon Investments from 1982 to 1985. (Id.). He served

as chairman of the board of General Motors Acceptance Corporation from 2006 to 2009. (Id.).

He also served as the chairman of the investment committees of Yeshiva University and the UJA

Federation of New York and served on the investment committee of Carnegie Hall. (Compl. ¶

41).

C. GCC, Ariel, Gabriel, and Ascot

Merkin dominated and controlled GCC, Ariel, Gabriel, and Ascot. In 1988, Merkin

founded GCC as an investment adviser and investment management company and was, at all

relevant times, its sole shareholder, sole director, and sole decision-maker. (Compl. ¶¶ 42-43).

Merkin formed Gabriel in or around 1989 as a domestic fund for U.S. investors and was, at all

relevant times, the sole general partner and sole decision-maker for Gabriel. (Compl. ¶¶ 44-45).

Merkin formed Ariel in or around 1988 as a private investment fund for foreign investors and

others not subject to certain U.S. taxes and was, at all relevant times, Ariel’s sole decision-

maker. (Compl. ¶¶ 47-49). Merkin created Ascot in 1992 for the principal purpose of investing

with BLMIS and was, at all relevant times, the general partner and sole decision-maker of the

fund. (Compl. ¶¶ 50-52).


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D. Merkin and Former Ascot Fund

Merkin formed Former Ascot Fund in 1992 for the principal purpose of investing with

BLMIS. (Compl. ¶¶ 53-54). At all relevant times, Merkin, through GCC, was the investment

advisor to, the sole decision-maker for, and/or the agent of Former Ascot Fund, directing the

business of the fund from New York. (Id.). Former Ascot Fund invested substantially all of its

assets with BLMIS. (Compl. ¶¶ 66-67). Former Ascot Fund maintained BLMIS account

number 1FN005 from January 1992 through 2002 when it transferred the full balance of its

account to Ascot’s BLMIS account in early 2003. (Compl. ¶¶ 55, 64).

According to the Investment Advisory Agreement between Ariel Management Company

(which changed its name to Defendant GCC in 1998 (Compl. ¶ 42)) and Former Ascot Fund:

[The] Investment Advisor shall have full and absolute discretionary power (a) to supervise and direct the investment of the Assets, making and implementing all investment decisions (including, without limitation, the voting of any securities which are Assets), and full and absolute discretionary power over the Account, including, without limitation, full authority to sell assets.

See Hirsch Declaration, Exh. C. An agreement to modify the Investment Advisory Agreement

was entered into in February 1992, and executed by Defendant Merkin on behalf of Ariel

Management/GCC. (Id.). Thus, from 1992 through 2002, it is undisputed that Ariel

Management/GCC–controlled exclusively by Merkin–was Former Ascot Fund’s investment

advisor. (Compl. at ¶¶ 53-54)

In 2003, Ascot and Former Ascot Fund entered into a “master-feeder” relationship

whereby Former Ascot Fund invested all of its capital with Ascot as a limited partner. (Compl. ¶

55). Notwithstanding the contention that the Investment Advisory Agreement was terminated

(see Hirsch Declaration, Exh. H), Merkin continued to act as Former Ascot Fund’s agent and


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sole decision-maker, and funneled virtually all of Former Ascot Fund’s investment to BLMIS

through Ascot. (Compl. ¶¶ 54, 120).

In fact, Former Ascot Fund represented that Merkin was its exclusive agent with full

discretionary authority over investments with BLMIS. In January 2003, Former Ascot Fund

represented to its investors the fund’s relationship with, reliance on, and the broad scope of the

services and authority of Defendant Merkin:

The success of the Master Fund depends primarily upon the Managing Partner of the Master Fund. The death or incapacity of J. Ezra Merkin, the Managing Partner, would result in the

required redemption of all Participating Shares in issue at the redemption price upon such date as the Fund’s Board of Directors may in its discretion determine.

***

Holders of Participating Shares will take no part in the management, control or operation of the Fund and consequently, the Master Fund. Subscribers of Participating Shares must rely on the Managing Partner with respect to the management and

investment decisions of the Master Fund. The Master Fund’s

limited partnership agreement gives the Managing Partner broad

authority to expand the Master Fund’s activities within the areas

described herein and therein.

The Master Fund’s assets are invested by the Managing Partner, J. Ezra Merkin, who has full discretionary authority to invest the

assets of the Master Fund.

See Declaration of Lan Hoang dated January 31, 2014 (the “Hoang Declaration”), ¶ 2, Exh. A at

BS00020963, 970 (emphasis added).

Former Ascot Fund’s October 2006 Confidential Offering Memorandum further

confirmed Defendant Merkin’s authority to act on behalf of the fund:

The Fund will invest all of its assets in Ascot Partners, L.P. (the ‘Master Fund’).

***

J. Ezra Merkin will serve as the general partner of the Master Fund (the “General Partner”). The General Partner is responsible for


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the investment management of the Master Fund and has discretion

over the Master Fund’s investments.

***

All decisions with respect to the management of the capital of the

Master Fund are made exclusively by J. Ezra Merkin. Consequently, the Master Fund’s success depends to a great degree on the skill and experience of Mr. Merkin.

See id. at ¶ 3, Exh. B at GCC-P 0003785, 817 (emphasis added).

E. The Merkin Funds’ Investments With BLMIS

The Merkin Funds have a long history of investments with BLMIS and collectively were

one of the largest feeder funds, based upon deposits, into BLMIS. (Compl. ¶ 4). They

collectively withdrew at least $560 million from BLMIS prior to its collapse. (Id.). The Merkin

Funds benefitted from the reported consistency of Madoff’s returns. The Merkin Funds never

had a negative yearly return on their BLMIS investments. (Compl. ¶ 166). No other skilled fund

managers had a similar performance over the same time period. (Compl. ¶ 167).

F. Merkin Enjoyed a Close Relationship With and Intimate Access To Madoff/BLMIS

Merkin enjoyed unusually intimate access to Madoff because of their longstanding

business and social relationship dating back to the 1980s. (Compl. ¶¶ 82-90). Madoff described

Merkin as “a good friend” and “a very good client.” (Compl. ¶ 82). Merkin touted his close

personal relationship with Madoff to others, claiming, among other things, that Madoff attended

Merkin’s children’s bar and bat mitzvahs, that he was a trustee for Madoff’s children and had a

role in Madoff’s will, and that Madoff was the executor of Merkin’s father’s will. (Compl. ¶¶

84, 86, 89, 90). Additionally, Merkin and Madoff were jointly involved in philanthropies and sat

together on the board of trustees of Yeshiva University. (Compl. ¶ 85). Despite Madoff being

secretive and closed to investors, Merkin enjoyed exceptional access and would speak with


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Madoff regularly. (Compl. ¶¶ 86-87). Merkin’s access to Madoff provided him with

information evidencing that BLMIS was a fraud. (Compl. ¶¶ 91-109). In return, Merkin acted

as a gatekeeper for Madoff, and selectively chose which investors or prospective investors he

would allow to meet with Madoff. (Compl. ¶ 88).

G. Merkin Had Actual Knowledge Of or Willfully Blinded Himself to The Fraud

The Defendants, including Former Ascot Fund, were repeatedly warned that BLMIS was

a fraudulent operation—even a Ponzi scheme. For example, in the detailed notes of a meeting

between Merkin and representatives of an investor in Ascot (referred to as “Research Company

A”), Merkin openly admitted that Madoff appeared to be operating a Ponzi scheme and advised

Research Company A of the dangers of investing significant amounts for the long term with

BLMIS and to “[n]ever go long in a big way.” (Compl. ¶ 95). The notes from that meeting

attribute many direct quotations to Merkin and are rife with examples that Merkin had

knowledge that BLMIS was a fraud, including: (i) the lack of separation between BLMIS’s

market making and investment advisory businesses; (ii) BLMIS’s surprising lack of overnight

exposure; (iii) BLMIS’s practice of moving to U.S. Treasurys at quarter end; and (iv) that

BLMIS’s reported trades are outside the reported daily trade range. (Compl. ¶ 97). When

discussing market volume for stocks, Merkin acknowledged that the bigger concern was the

volume in options and resigned, “I have come to accept there are things that I don’t understand

[about Madoff],” which caused Research Company A to note that “Ezra did not have a good

explanation for how Madoff executes option trades in such size.” (Compl. ¶ 96). Research

Company A concluded: “Seems to be some probability even in Ezra’s mind that this could be a

fraud.” (Compl. ¶ 98) (emphasis added).


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In other meetings with investors, Merkin admitted his inability to adequately investigate

BLMIS’s legitimacy and his awareness that the options market lacked the volume necessary to

sustain BLMIS’s trading. (Compl. ¶¶ 99-101). Rather than explaining the consistency and

similarity of the returns in all BLMIS accounts, Merkin simply stated that “understanding

Madoff is like finding Pluto . . . you can’t really see it . . . you do it through inference, its effect

on other objects” (Compl. ¶ 100) and analogized Madoff to the Wizard of Oz. (Compl. ¶ 101).

The Complaint also specifically alleges that the information and documents in the

possession of Defendants identified numerous impossibilities and indicia of fraud about Madoff

and BLMIS. (Compl. ¶¶ 152-53). For example, Merkin and GCC received and reviewed trade

confirmations and monthly account statements from BLMIS for the Merkin Funds. (Compl. ¶

168). Thus, they knew of: BLMIS’s incredibly consistent positive returns, regardless of market

fluctuations (Compl. ¶¶159-67); the hundreds of transactions that occurred outside the daily price

range of reported trades (Compl. ¶¶ 168-74); the impossibilities regarding options volume

(Compl. ¶¶ 179-83); the prices on their trade confirmations and account statements reflected the

implausibility of Madoff’s ability to consistently get the best price (Compl. ¶¶ 184-87); their

paper confirmations contradicted Madoff’s claim that BLMIS purchased options on the OTC

market (Compl. ¶¶ 188-92); and at least 356 separate occasions where the Merkin Funds reported

a negative cash balance, and yet the Defendants did not have margin accounts (Compl. ¶¶ 193-

96).

Additionally, Merkin knew of numerous other indicators of fraud at BLMIS but willfully

failed to investigate them. For example, Merkin failed to obtain information regarding BLMIS’s

operations. (Compl. ¶¶ 154-58). When Merkin questioned Madoff regarding assets under

management, Madoff refused to answer. (Compl. ¶ 156). Merkin did not press Madoff for a


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response but instead stated: “I don’t really care, because I’ve made my peace with Bernie.”

(Id.). The amount of assets under management was important because Merkin knew that the

SSC strategy was not scalable. (Compl. ¶¶ 175-78).

Merkin also knew that Madoff had an unusual fee structure (Compl. ¶¶ 197- 202).

Instead of questioning why Madoff would willingly forgo hundreds of millions of dollars in fees,

Merkin accepted Madoff’s representation that he made approximately 1.5% on the accounts he

managed. (Compl. ¶ 201). When Madoff attempted to explain why he did not take a 20%

incentive fee, Merkin cut off Madoff’s response and, according to a transcript prepared by the

Defendants, replied “I know why you don’t do it. Because you’re Bernie. Because that’s not the

way the good Lord made you. If he made you a little differently, you would.” (Id.).

H. Merkin Perpetuated the Madoff Fraud by Actively Concealing the Fraud and Investments With Madoff From Certain Investors Who Expressed

Concerns About Madoff

Merkin misled certain investors as to Madoff’s role in the operation of the Merkin Funds,

and in fact sought to conceal from certain investors Madoff’s involvement in the Merkin Funds

and/or the amount of investment with BLMIS. (Compl. ¶ 109). For example, Merkin concealed

Gabriel’s investment with BLMIS from Josh Nash (“Nash”), a sophisticated money manager

who knew Merkin both socially and professionally for over twenty years. Nash invested in

Gabriel, both personally and through his family fund. Merkin never disclosed that Gabriel had

money managed by Madoff because Merkin knew that Nash had serious suspicions about

Madoff’s investment strategy. (Compl. ¶ 131).

In another example, Merkin misled Daniel Gottlieb (“Gottlieb”), the chief investment

officer of Glen Eagle Partners (“Glen Eagle”), into believing that Merkin personally managed the

assets of Ascot and Gabriel. (Compl. ¶ 135). Merkin actively concealed from Gottlieb his

reliance upon third-party managers, including Madoff. (Compl. ¶ 136). Merkin led Gottlieb to


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believe that Merkin ran an arbitrage strategy himself, with the “people who worked in his shop”

executing the trades. (Id.). In describing his strategy, Merkin used the first person plural

pronoun—“we were executing”—causing Gottlieb to believe that Merkin ran Ascot and Gabriel

from his office and that his staff executed trades at their terminals. (Id.).

I. Subsequent Transfers to Former Ascot Fund

Based on the Trustee’s investigation to the time of the filing of the Complaint, Former

Ascot Fund received subsequent transfers from the other Defendant Funds in the amount of at

least $82 million. (Compl. ¶ 81). This amount originates from direct initial transfers to Ascot

from BLMIS and a series of improper inter-account transfers by and between the Merkin Funds.

(Compl. ¶¶ 4, 73, 256-57, 268-291, Exhs. B and C). The manner in which funds were

transferred from BLMIS to the Merkin Funds and then subsequently transferred to one or more

of the Defendants, often times repeatedly, is reflected in Exhibit C to the Complaint.

ARGUMENT

I. STANDARD OF REVIEW – MOTIONS TO DISMISS UNDER RULE 12(B)(6)

When considering motions to dismiss under Rule 12(b)(6) of the Federal Rules of Civil

Procedure (“Rules”), applicable to an adversary proceeding under Federal Rules of Bankruptcy

Procedure 7012, the Court “must liberally construe all claims, accept all factual allegations in the

[C]omplaint as true, and draw all reasonable inferences” in the Trustee’s favor. In re J.P.

Jeanneret Assoc., Inc., 769 F.Supp.2d 340, 353 (S.D.N.Y. 2011) (citing Cargo Partner AG v

Albatrons, Inc., 352 F.3d 41, 44 (2d Cir. 2003); Roth v. Jennings, 489 F.3d 499, 510 (2d Cir.

2007)). To survive the motions to dismiss, the pleading must contain a “short and plain

statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The

allegations need only meet the “plausibility” standard, such that they “nudge[]” the claims

“across the line from conceivable to plausible.” Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009)


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(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible

where “the plaintiff pleads factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

Generally, complaints alleging fraud must also be pleaded under the heightened pleading

standard of Rule 9(b), which permits “[m]alice, intent, knowledge, and other conditions of a

person’s mind” to be pleaded generally. Merkin, 440 B.R. at 254 (quoting Fed. R. Civ. P.

9(b)). However, “this Court is mindful of the vastness and complexity of the Trustee’s

investigation of the Madoff Ponzi scheme, and the disadvantage the Trustee faces in pleading

fraud against multiple defendants.” Id. Courts have accorded a trustee “[g]reater liberality in the

pleading of fraud” because the trustee is a third party outsider to the fraudulent transaction who

must plead the fraud on secondhand knowledge. Id. (citing Sec. Investor Prot. Corp. v. Stratton

Oakmont, Inc., 234 B.R. 293, 310 (Bankr. S.D.N.Y. 1999)); Nisselson v. Drew Indus. Inc. (In re

White Metal Rolling & Stamping Corp.), 222 B.R. 417, 428 (Bankr. S.D.N.Y. 1998) (explaining

a bankruptcy trustee may plead scienter based upon information and belief because he rarely has

personal knowledge of the events preceding his appointment). Particularly, in a case such as this

one, where “‘the [T]rustee’s lack of personal knowledge is compounded with complicated issues

and transactions [that] extend over lengthy periods of time, the trustee's handicap increases,’ and

‘even greater latitude’ should be afforded” to his pleading. Picard v. Cohmad Secs. Corp. (In re

Bernard L. Madoff Inv. Sec. LLC), 454 B.R. 317, 329 (Bankr. S.D.N.Y. 2011) (quoting Stratton

Oakmont, 234 B.R. at 310).

In deciding a motion to dismiss, courts must consider the complaint in its entirety, and

particularly documents incorporated into the complaint by reference and matters of which a court

may take judicial notice. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002)


- 13 -

(citing Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir.1995));

Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006); Gowan v. Westford Asset Mgmt.

LLC (In re Dreier LLP), 462 B.R. 474, 483 (Bankr. S.D.N.Y. 2011) (citing Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)); see also Fed. R. Civ.P. 10(c).

The Complaint here provides more than recitals of the elements of the Trustee’s claims,

pleading specific factual allegations as to the fraud at BLMIS, Defendants’ misconduct, the

grounds upon which the Trustee seeks to avoid and recover fraudulent and preferential transfers

made to Defendants, information concerning the subsequent transfers to Former Ascot Fund and

the grounds upon which the Trustee seeks to disallow or subordinate any claims against the

BLMIS estate. Thus, dismissal of the Complaint at this juncture is inappropriate. See Arbco

Capital Mgmt., LLP v. Penson Fin. Servs. (In re Arbco Capital Mgmt., LLP), 498 B.R. 32, 44

(Bankr. S.D.N.Y. 2013); Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC

(“Consol. Proceedings on 11 U.S.C. § 546(e)”), No. 12 Misc. 00115, 2013 WL 1609154, *10

(S.D.N.Y. Apr. 15, 2013); Merkin, 440 B.R. 243, 254-71, 273.

II. MERKIN’S KNOWLEDGE AND CONDUCT ARE DIRECTLY IMPUTED TO FORMER ASCOT FUND

The Trustee clearly and concisely alleges that Merkin and GCC, at all relevant times,

were the investment advisor to, the sole decision-maker for, and/or the agent for Former Ascot

Fund. See, supra, Statement of Facts, Sections C and D. The Complaint also alleges that as an

agent of Former Ascot Fund, Merkin’s knowledge and actions should be imputed to the fund.

(Compl. at ¶¶ 305-310). Former Ascot Fund argues that the termination of its investment advisor

agreement with Ariel Management/GCC and Merkin in December 2002, and its subsequent

status as a limited partner in Ascot, precludes the Trustee from imputing Merkin’s conduct to the

fund. This argument is contrary to the law and disproven by facts alleged by the Trustee.


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Former Ascot Fund’s status as a limited partner of Ascot does not limit the Trustee’s

ability to impute Merkin’s knowledge and conduct to the fund. Imputation is not guided by the

potential liability of a party but rather based on the agency relationship between the parties. It is

axiomatic that “the acts and knowledge of an agent acting within the scope of his agency are

imputed to the principal.” Wedtech Corp v. King Main Hurdman (In re Wedtech Sec. Litig.), 138

B.R. 5, 8 (S.D.N.Y. 1992) (citing Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 784

(1985)); Mirror Grp. Newspapers, PLC v. Maxwell Newspapers, Inc. (In re Maxwell

Newspapers, Inc.), 164 B.R. 858, 866 (Bankr. S.D.N.Y. 1994) (citations omitted). Particularly

here, where the agent is the sole representative of the principal, the agent's knowledge will be

imputed to his principal. In re Maxwell Newspapers, Inc., 164 B.R. at 866 n.13 (citing 3

N.Y.Jur.2d, Agency ¶ 268 (1980)).

In addition, the Complaint and the documents referenced therein demonstrate the long-

standing and continuing agency relationship between Former Ascot Fund and Merkin, well after

the disputed termination of the relationship in December 2002. From 1992 through December

2002, Merkin served as the fund’s sole investment advisor under the Investment Advisory

Agreement. (Compl. ¶¶ 43, 51, 53-54). The termination of that agreement, however, did not end

Former Ascot Fund’s agency relationship with Merkin. As set forth in its offering documents

and other disclosures, directly referenced in the Complaint, Former Ascot Fund continued to

hold Merkin out as its agent after December 2002, vesting him with the exclusive right and

responsibility regarding the fund’s investment and “full discretionary authority to invest the

assets.” See Hoang Declaration, Exh. A at BS00020970. Former Ascot Fund further

acknowledged its complete reliance on Merkin for the fund’s investments, signifying that


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Merkin’s death or incapacity would result in a full redemption of the fund’s investment. See id.,

Exh. A at BS00020963 and Exh. B at GCC-P0003817.

Moreover, Merkin had knowledge of or was willfully blind to fraud at BLMIS prior to

December 2002. Ascot Fund maintained its own direct account with BLMIS for over a decade,

while Merkin, through GCC, acted as its investment advisor. (Compl. ¶¶ 55, 64). The Trustee

has alleged detailed facts prior to December 2002 that Merkin knew of the fraud at BLMIS

(Compl. ¶¶ 102-103, 105); consciously disregarded trading impossibilities and indicia of fraud at

BLMIS (Compl. ¶¶ 106, 107, 152-53,159-66, 175-222); and misrepresented, concealed, and/or

omitted the nature of or percentage of the Merkin Funds’ investments with BLMIS (Compl. ¶¶

120-123, 125, 126-30). Merkin’s knowledge and conduct prior to December 2002—and Former

Ascot Fund’s imputed knowledge thereof—is not erased because the Investment Advisory

Agreement terminated in December of 2002.

Former Ascot Fund’s reliance upon the “adverse interest exception” is also without merit.

(Memorandum in Support of Former Ascot Fund’s Motion to Dismiss (“Br.”) at 13). The “oft-

invoked adverse interest exception requires an agent to have ‘totally abandoned’ his principal’s

interest and be acting ‘entirely for his own or another’s purposes.’” Merkin, 440 B.R. at 260

(citing Kirschner v. KPMG LLP, 15 N.Y.3d 446, 468 (2010)). Here, the Complaint alleges that

Merkin’s interest was aligned with that of the Merkin Funds, and when one benefitted, so did the

other. While Madoff’s Ponzi scheme flourished, Former Ascot Fund received the benefit of

consistent positive annual returns that were unmatched in the industry. The adverse interest

exception is inapplicable where the principal retains the fruit or the benefits of the agent’s acts.

In re Maxwell Newspapers, Inc., 164 B.R. at 867.


- 16 -

The adverse interest exception is a narrow one, requiring a fact-intensive inquiry that

focuses on the motivations of the parties. See Bankr. Servs., Inc. v. Ernst & Young, Ernst &

Young LLP (In re CBI Holding Co., Inc.), 529 F.3d 432, 448 (2d Cir 2008); Cobalt Multifamily

Investors I, LLC v. Shapiro, No. 06 Civ.6468 (KMW) (MHD), 2009 WL 2058530, at *7

(S.D.N.Y. July 15, 2009). Particularly, it requires examination of the agent’s motivations,

conduct, dealings, and communications to the principal. See In re Maxwell Newspapers, Inc.,

164 B.R. at 867. As such, it is improper to determine whether the exception applies at the

motion to dismiss stage. See Merkin, 440 B.R. at 260; In re Maxwell Newspapers, Inc., 164 B.R.

at 867.

Finally, even if, contrary to all of the allegations in the Complaint, Merkin could be found

to have acted adversely to Former Ascot Fund’s interest, Merkin’s knowledge would nonetheless

be imputed to it. The sole-actor exception “‘imputes the agent’s knowledge to the principal

notwithstanding the agent’s self-dealing because the party that should have been informed was

the agent itself albeit in its capacity as principal.’” Mediators, Inc. v. Manney (In re Mediators,

Inc.), 105 F.3d 822, 827 (2d Cir. 1997). See also In re CBI Holding Co., Inc., 529 F.3d at 453

n.9 (citation omitted); Ernst & Young, Ernst & Young, LLP v. Bankr. Servs., (In re CBI Holding

Co., Inc.), 311 B.R. 350, 373 (S.D.N.Y. 2004), rev’d in part on other grounds, 529 F.3d 432 (2d

Cir. 2008). The Complaint alleges that Merkin is the sole decision-maker for Former Ascot

Fund, who managed or otherwise directed the business of the fund. (Compl. ¶ 54; see, supra,

Statement of Facts, Section D). As such, Former Ascot Fund cannot escape imputation of

Merkin’s knowledge of Madoff’s fraud.

Based on the foregoing, the Complaint clearly and expressly alleges that Merkin and

GCC, at all relevant times, was the investment advisor to, the sole decision-maker for, and/or the


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agent of Former Ascot Fund. Merkin’s knowledge should be imputed to Former Ascot Fund.

“At the motion to dismiss stage, where the Trustee has not had the opportunity to conduct

discovery concerning the relationship between the Moving Defendants, ‘the question is not

whether [the Trustee] has[s] proved the existence of an agency relationship, merely whether [he]

should have the chance to do so.’” Merkin, 440 B.R. at 260 (citing In re South African Apartheid

Litig., 617 F.Supp.2d 228, 273 (S.D.N.Y. 2009) (quoting In re Parmalat Sec. Litig., 375 F.Supp.

2d 278, 294 (S.D.N.Y. 2005)).

III. BANKRUPTCY CODE § 546(e) DOES NOT PROTECT THE TRANSFERS AT ISSUE IN THIS ADVERSARY PROCEEDING

A. Former Ascot Fund’s Knowledge Precludes Its Reliance Upon the §546(e) Safe Harbor

5

In evaluating the applicability of section 546(e), the District Court held that section

546(e)’s “safe harbor” would not apply where a defendant had “actual knowledge” of BLMIS’s

fraud. Consol. Proceedings on 11 U.S.C. § 546(e), 2013 WL 1609154, at *1. The District Court

provided various standards in defining when a finding of “actual knowledge” would be

appropriate, not limiting it only to proof that the Defendants had “actual knowledge that there

were no actual securities transactions being conducted.” (Br. at 9).

Actual knowledge is often demonstrated by willful blindness. See Consol. Proceedings

on 11 U.S.C. § 546(e)), 2013 WL 1609154, at *1, 4; Global-Tech Appliances Inc. v. SEB S.A.,

5 The Trustee disagrees with, and has appealed from, the District Court’s application of section 546(e) to the Madoff Ponzi scheme and the resulting dismissal of the Trustee’s avoidance claims based on Bankruptcy Code sections 547 (preferential transfer), 548(a)(1)(B) (constructive fraud), and 544(b)(1) (claims under “other applicable law,” including fraudulent conveyance claims under New York Debtor and Creditor law). See Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011) and Picard v. Greiff, 476 B.R. 715 (S.D.N.Y. 2012), made applicable herein by Consol. Proceedings on 11 U.S.C. § 546(e), 2013 WL 1609154 (S.D.N.Y. Apr. 15, 2013). Section 546(e) does not provide a safe harbor for investors where there are fictional securities or a fictional market. See New Times Sec. Servs., Inc. v. Jacobs (In re New Times Sec. Servs., Inc.), 371 F.3d 68, 88 (2d Cir. 2004). The Trustee’s appeal of Greiff is scheduled for oral argument before the Second Circuit Court of Appeals on March 5, 2014. See Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Inv. Sec. LLC), appeal docketed, No. 12-2557-bk(L) (2d Cir. June 21, 2012), ECF No. 288. The Trustee reserves the right to assert avoidance claims based on sections 544(b)(1), 547, and 548(a)(1)(B) of the Bankruptcy Code pending a final determination of the appeal.


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131 S. Ct. 2060, 2070-71 (2011) (“[A] willfully blind defendant is one who takes deliberate

actions to avoid confirming a high probability of wrongdoing and who can almost be said to have

actually known the critical facts.”) (citations omitted); Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d

93, 110 n.16 (2d Cir. 2010) (“The principle that willful blindness is tantamount to knowledge is

hardly novel.”); Cromer Fin. Ltd. v. Berger, No., 00 Civ.2284 (DLC), 2003 WL 21436164, at *9

(S.D.N.Y. June 23, 2003) (“[T]here is no reason to believe that New York law would not accept

willful blindness as a substitute for actual knowledge in connection with aiding and abetting

claims.”).

In other contexts, it can be demonstrated by conscious avoidance. Kirchner v. Bennett

(In re Refco Sec. Litig.), 759 F. Supp. 2d 301, 334 (S.D.N.Y. 2010) (“An aiding and abetting

claim requires that the defendant had knowledge of the underlying wrongful conduct,” and “[i]f

conscious avoidance is enough to satisfy a criminal charge of aiding and abetting, it should

certainly suffice for a civil claim.”); see also U.S. v. Goffer, 721 F.3d 113, 127 (2d Cir. 2013)

(“‘Red flags about the legitimacy of a transaction can be used to show both actual knowledge

and conscious avoidance.’”) (quoting U.S. v. Ferguson, 676 F.3d 260, 278 (2d Cir. 2011));

Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 442-43 (S.D.N.Y. 2010) (allegations of

conscious avoidance of knowledge of Madoff’s fraud satisfy knowledge requirement of

plaintiff’s aiding and abetting fraud claim); Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt.,

LLC, 479 F. Supp. 2d 349, 368 (S.D.N.Y. 2007) (“[C]onscious avoidance may satisfy the

knowledge prong of an aiding and abetting charge.”).

In In re Arbco, the court determined that willful blindness may substitute for actual

knowledge. 498 B.R. at 43. There, the defendant sought to dismiss the constructive fraudulent

transfer and preference claims based on section 546(e) brought against it by an arguably “bare-


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bones” style complaint, and the assertion that the trustee had not alleged actual knowledge. Id. at

39. The court, while noting the lack of extensive allegations of the defendant’s participation in

or actual knowledge of the fraud, held there were “sufficient allegations of ‘willful blindness’ or

‘conscious avoidance’ by the defendant to survive a motion to dismiss.” Id. at 44.

Proof of actual knowledge, willful blindness, and conscious avoidance may be proven

through circumstantial evidence—such as the closeness in the relationship between the defendant

and fraudster—or implied from a strong inference of fraudulent intent or motive. See

Consolidated Proceedings on 11 U.S.C. § 546(e), 2013 WL 1609154, at *5; Silverman v. United

Talmudical Acad. Torah Vyirah, Inc. (In re Allou Distribs, Inc.), 446 B.R. 32, 51-52 (Bankr.

E.D.N.Y. 2011), In re Refco Secs. Litig., 759 F. Supp. 2d at 335 (quoting Rosner v. Bank of

China, 528 F. Supp. 2d 419, 426 (S.D.N.Y. 2007)).

Here, the Trustee alleges the longstanding close business and social relationship between

Merkin and Madoff. See, supra, Statement of Facts, Section F. Coupled with this close

relationship, the Trustee, with specificity, alleges that the Defendants had actual knowledge of or

were willfully blind to fraud at BLMIS. See, supra, Statement of Facts, Sections G and H. The

foregoing allegations sufficiently plead actual knowledge, willful blindness, and conscious

avoidance.

B. Dismissal of the Trustee’s Avoidance Claims on the Basis of Section 546(e) Is Improper on a Motion to Dismiss

The assertion by Former Ascot Fund of an affirmative defense as grounds for dismissal is

premature, at best. The issue of whether a transfer was a settlement payment or made in

connection with a securities contract is a question of fact that cannot be resolved in a motion to

dismiss. See Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp., 351 F. Supp. 2d 79,

108 (S.D.N.Y. 2004). Moreover, it is well-settled that the burden of proof on affirmative defense


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section 546(e) falls squarely on the defendant, not the trustee. See Merkin, 440 B.R. at 266;

Indus. Enters. Of Am. Inc. v. Tabor Acad. (In re Pitt Penn Holding Co., Inc.), 2011 WL 4352373,

at *12 (Bankr. D. Del. Sept. 16, 2011); Degirolamo v. Truck World, Inc. (In re Laurel Valley Oil

Co.), 2009 WL 1758741, at *2-3 (Bankr. N.D. Ohio June 16, 2009); Official Comm. of

Unsecured Creditors v. Asea Brown Boveri, Inc. (In re Grand Eagle Cos., Inc.), 288 B.R. 484,

495 (Bankr. N.D. Ohio 2003). Where, as here, the Trustee has adequately pleaded actual

knowledge, willful blindness, and conscious disregard of fraud at BLMIS, a motion to dismiss

based on section 546(e) should be denied. See Consolidated Proceedings on 11 U.S.C. §

546(e)), 2013 WL 1609154 at *1.

IV. THE TRUSTEE HAS ADEQUATELY PLEADED CLAIMS FOR RECOVERY OF SUBSEQUENT TRANSFERS AGAINST ASCOT FUND

Former Ascot Fund contends that the allegations in Count Nine of the Complaint do not

support subsequent transfer claims against it, and that the affirmative defense of good faith

precludes the Trustee’s subsequent transfer claims. This contention is unsupported by law and

disputed by the facts alleged in the Complaint, and should not be decided on a motion to dismiss.

A. The Trustee Has Pleaded That the Initial Transfers Are Avoidable

Resting their argument upon the safe harbor of section 546(e) of the Code, Former Ascot

Fund argues that the Trustee’s claim to recover subsequent transfers should fail because the

Trustee cannot plead that the initial transfers are subject to avoidance. (Br. at 6-11). For all of

the reasons set forth in Point III above, the Trustee contends that the safe harbor of section

546(e) is not applicable where a defendant, as here, had actual knowledge of fraud at BLMIS.

Moreover, given the Trustee’s allegations of knowledge and willful blindness, avoidability is a

factual issue that should not be decided on a motion to dismiss. See, e.g., Sec. Investor Prot.


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Corp. v. Bernard L. Madoff Inv. Sec. LLC (“Consol. Proceedings on 11 U.S.C. § 550(a)”), 501

B.R. 26, 32-33 (S.D.N.Y. 2013).

B. The Trustee Has Pleaded That the Subsequent Transfers Are Recoverable

Subsections 550(a)(1) and (2) of the Bankruptcy Code allow the Trustee to recover

transfers made to “the initial transferee of such transfer or the entity for whose benefit such

transfer was made” or “any immediate or mediate transferee of such initial transferee.” 11

U.S.C. § 550(a)(1), (a)(2). The Court need only apply a Rule 8 analysis to determine “whether a

claim to recover fraudulent transfers from a subsequent transferee is adequately pled.” Merkin,

440 B.R. at 269; see also Fed. R. Civ. P. 8. In a recovery action under section 550(a), the

complaint need not contain individual and specific allegations of the subsequent transferee’s

conduct. Stratton Oakmont, 234 B.R. at 318. A trustee’s burden is simply to “demonstrate

‘sufficient facts to show, if proved, that the funds at issue originated with the debtor;’” dollar-

for-dollar tracing is not required. Picard v. Chais (In re Bernard L. Madoff Inv. Sec. LLC), 445

B.R. 206, 235 (Bankr. S.D.N.Y. 2011). Stated plainly, the Trustee must “identif[y] relevant

pathways” through which the funds flowed, IBT Int’l, Inc. v. Northern (In re Int’l Admin. Servs.,

Inc.), 408 F.3d 689, 709 (11th Cir. 2005), and need only plead the “necessary vital statistics—the

who, when, and how much” of the transfers to establish an entity as a subsequent transferee of

the funds. Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5, 32

(Bankr. E.D.N.Y. 2007); see also Stratton Oakmont, 234 B.R. at 318.

Former Ascot Fund claims that it is “impossible” for the Trustee to properly allege

$82,000,000 in subsequent transfers because there were $54,750,000 in alleged subsequent

transfers as of July 8, 2004, and only $17 million in initial transfers to Ascot as of that date

within the six-year period. (Br. at 5). However, Former Ascot Fund ignores other initial

transfers and subsequent transfers to Ascot. Namely, Ascot also received $28,840,000 in initial


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transfers from 1995 through 1998. (Compl. Ex. B). Additionally, Ascot received at least

$75,900,000 in subsequent transfers from Ariel, including $19,400,000 listed as a “Madoff Re-

Allocation” on July 8, 2004. (Compl. Ex. C-5). Ascot also received at least $146,948,211 in

subsequent transfers from Gabriel, including $20,600,000 listed as a “Madoff Re-Allocation” on

July 8, 2004. (Compl. Ex. C-6). It was these series of improper inter-account transfers that also

resulted in the subsequent transfers to Former Ascot Fund.

The Trustee has plainly and sufficiently pleaded a cause of action under section 550(a)

for the recovery of subsequent transfers against Former Ascot Fund. The Trustee has set forth in

his pleading that Former Ascot Fund received property of the estate and that the transfers at issue

are avoidable under one of the enumerated sections of the Bankruptcy Code, sections 544, 547,

and/or 548. See 11 U.S.C. § 550(a); 5 Collier on Bankruptcy ¶ 550.02 (16th ed. 2012). The

Complaint alleges, with specificity, that: (i) the initial transferees received transfers of property

from BLMIS (see Compl. ¶¶ 73-76 and Ex. B); (ii) those transfers are avoidable under one or

more sections of the Bankruptcy Code (see Compl. ¶¶ 316-21); and (iii) some or all of those

transfers were transferred, either directly or indirectly, to the subsequent transferees named

therein (see Compl. ¶¶ 75-81 and Ex. C). The Trustee’s allegations against Former Ascot Fund

sufficiently apprise the fund of which transactions are claimed to be fraudulent and why, when

they took place, how they were executed, and by whom, and therefore satisfies Rule 8. See

Merkin, 440 B.R. at 269-70 (allegations and exhibits setting forth details of dates, amounts,

transferor, and specific transferees satisfies Rule 8).

C. The Trustee’s Claim to Recover Subsequent Transfers Is Timely

Former Ascot Fund argues that the Trustee’s subsequent transfer claims are untimely

because he failed to seek to avoid the subsequent transfers within the two-year statute of

limitations set forth in section 546(a) of the Code. (See Br. at 21). The clear flaw in that


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argument lies with the fact that, under the Code, only initial transfers from the Debtor are

avoided—subsequent transfers are not avoided, only recovered. Consolidated Proceedings on

11 U.S.C. § 550(a), 501 B.R. at 30. Accordingly, the relevant statute of limitations governing

the Trustee’s claim set forth in section 550(f)6 has not yet even begun to run.

The argument that section 546(a)’s two-year statute of limitation governs the Trustee’s

count to recover subsequent transfers misinterprets the nature of avoidance and recovery and the

statutes of limitations applicable to each. (See Br. at 21). Recovery of transfers under the

Bankruptcy Code is a bifurcated process, as “[t]he concepts of avoidance and recovery are

separate and distinct.” Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 733

(B.A.P. 9th Cir. 2008) (citing Official Unsecured Creditors Comm. v. U.S. Nat’l Bank of Oregon

(In re Sufolla, Inc.), 2 F.3d 977, 982 (9th Cir 1993)); see also Consolidated Proceedings on 11

U.S.C. § 550(a), 501 B.R. at 30. First, the initial transfer from the debtor must be avoided or

shown to be avoidable. 11 U.S.C. §§ 544, 547, 548. Once avoidability of the initial transfer is

demonstrated, the Trustee may recover that avoidable transfer from the initial transferee or any

subsequent transferee in the chain. 11 U.S.C. § 550(a); Consolidated Proceedings on 11 U.S.C.

§ 550(a), 501 B.R. at 30.

The avoidance and recovery provisions are separate under the Bankruptcy Code, and

each has its own distinct statute of limitations. The statute governing the avoidance process

requires that avoidance actions be commenced within “2 years after the entry of the order for

relief.” 11 U.S.C. § 546(a)(1)(A). The Trustee timely brought his action to avoid the initial

transfers at issue here on May 7, 2009, less than a year after the order was entered on December

11, 2008. (Picard v. Merkin, Adv. Pro. No. 09-01182 (AMB) (Bankr. S.D.N.Y. May 7, 2009)

6 Section 550(f) states: “An action or proceeding under this section may not be commenced after the earlier of—(1) one year after the avoidance of the transfer on account of which recovery under this section is sought; or (2) the time the case is closed or dismissed.” 11 U.S.C. § 550(f).


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(“Adversary Proceeding”), ECF No. 1). The Trustee then has “one year after the avoidance of

the [initial] transfer” to seek recovery from initial or subsequent transferees. 11 U.S.C. § 550(f).

This adversary proceeding is still pending and the initial transfers have not yet been avoided,

therefore the statute of limitations on recovery has not yet commenced. See Picard v. Peter

Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 468 B.R. 620, 632 (Bankr. S.D.N.Y. 2012).

Thus, the Trustee’s claims to recover from the subsequent transferees are timely.

D. It Is the Defendants’ Burden to Demonstrate the Affirmative Defense of Good Faith in Section 550(b)(1)

Former Ascot Fund claims that the subsequent transfers at issue are “nothing more than

withdrawals by a limited partner” and therefore cannot be recovered. (Br. at 4). However, to

retain a transfer received from BLMIS under section 550(b)(1), Former Ascot Fund must

establish that it took the transfer “for value, . . . in good faith, and without knowledge of the

voidability of the transfer avoided.” 11 U.S.C. § 550(b). There is no presumption that Former

Ascot Fund acted in good faith. Section 550(b) (as well as section 548(c) as to initial transfers)

is an affirmative defense and, as such, it is Former Ascot Fund, not the Trustee, which must

prove that it received the transfers in good faith. See, e.g., Christian Bros. High Sch. Endowment

v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC), 439 B.R. 284, 308 (S.D.N.Y. 2010);

Katz, 462 B.R. at 454; Merkin, 440 B.R. at 256 (citation omitted); Cohmad Secs. Corp., 454 B.R.

at 341; Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs., Ltd.), 337 B.R. 791, 805

(Bankr. S.D.N.Y 2005) (citing Breeden v. L.I. Bridge Fund, LLC (In re Bennett Funding Grp.,

Inc.), 232 B.R. 565, 573 (Bankr. N.D.N.Y. 1999)). To establish a “good faith” defense, Former

Ascot Fund must show that it did not know of the fraud or was not “willfully blind” to the high

probability of fraud at BLMIS. See Katz, 462 B.R. at 455. But see Marshall v. Picard (In re

Bernard L. Madoff Inv. Sec. LLC), -- F.3d --, 2014 WL 103988, at *6 n.11 (2d Cir. Jan. 13, 2014)


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(“inquiry notice” standard for good faith affirmative defense in fraudulent transfer actions);

Gowan v. Wachovia Bank, N.A. (In re Dreier LLP), 453 B.R. 499, 513 (Bankr. S.D.N.Y. 2011)

(good faith inquiry “asks whether transferee had information that put it on inquiry notice”).

An affirmative defense, however, may only be raised on a Rule 12(b)(6) motion if the

predicate establishing the defense is apparent on the face of the complaint. See In re OSG Sec.

Litig.), -- F. Supp. 2d --, 2013 WL 4885890, at *7 (S.D.N.Y. Sept. 10, 2013) (citing Pani v.

Empire Blue Cross Blue Shield, 152 F.3d 67, 75 (2d Cir. 1998)); Official Comm. of Unsecured

Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003).

Where, as here, the affirmative defense of good faith “requires consideration of facts outside of

the complaint,” it is “inappropriate to resolve on a motion to dismiss.” See Kelly-Brown v.

Winfrey, 717 F.3d 295, 308 (2d Cir. 2013). The issue of good faith and knowledge of the

voidability of a transfer are fact questions better left for the jury, and should not be decided on a

motion to dismiss. See Am. Tissue, Inc. 351 F. Supp. 2d at 107 (“[K]nowledge and good faith (or

lack of it) at the time of the allegedly voidable transfers is a question of fact for the jury.”).

Beyond the foregoing, Former Ascot Fund’s motion to dismiss must be denied here

where the facts alleged by the Trustee negate the affirmative defense of good faith. The Trustee

has alleged that Former Ascot Fund had actual knowledge of fraud at BLMIS, by pleading

among other things that:

“Defendants knew that the securities trading BLMIS purported to engage in on their behalf was impossible, the purported results of those trading activities were fictional, and the IA Business was predicated on a fraud” (Id. at ¶ 91);

“Merkin . . . conceded that BLMIS might be a Ponzi scheme in a 2003 meeting between Merkin and Research Company A” (Id. at ¶ 94);

Merkin specifically “acknowledged that Madoff’s conduct and BLMIS’s results were consistent with a Ponzi scheme” (Id. at ¶ 93);


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“Documents in Merkin’s own designated ‘Madoff’ folder . . . demonstrate that Merkin well knew that BLMIS could not have been legitimately engaged in the trading activity it reported” (Id. at ¶ 106); and

“Despite Merkin’s knowledge that Madoff was running a Ponzi scheme, that BLMIS was a fraud, and that Madoff could not have achieved his incredible returns, Merkin never pressed Madoff for an explanation but instead participated in Madoff’s fraud by continuing to invest money with BLMIS” (Id. at ¶ 108).

Moreover, the Trustee not only alleged that Merkin “knew that the securities trading

BLMIS purported to engage in . . . was predicated on a fraud,” but alleged that Merkin

affirmatively discouraged investors “from asking too many questions,” and suggested that they

“rather simply . . . accept BLMIS’s purported results.” (Id. at ¶ 92), And, when confronted with

evidence that BLMIS was a fraud, Merkin did not deny it or attempt to explain, but instead,

Merkin “openly admitted that BLMIS’s results were impossible and defied any legitimate

explanation.” (Id. at ¶ 92). These allegations demonstrate a lack of good faith, not the existence

of it.

Against these allegations, Former Ascot Fund’s assertion that the Complaint “contains no

allegations that Former Ascot Fund had actual knowledge of Madoff’s fraud” is simply

untenable. (See Br. at 10).

09-01182-smb Doc 198 Filed 01/31/14 Entered 01/31/14 15:21 ... · Baker & Hostetler LLP 45...

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