Picard Down To His Final Out in the Bottom of the Ninth

NOTE: this was written by MetsToday loyal reader and legal consultant Robert Tandy, Esq. It is an overview of what is happening with the Irving Picard case vs. Sterling Equities. Mr. Tandy will keep us posted on developments in the case with periodic updates. -Joe

On February 23, 2012, the ten individual partners of Sterling Equities (the “Sterling Defendants”), their family members, trusts, foundations, and affiliated business entities will move for summary judgment dismissing the Trustee’s remaining causes of action against the Sterling Defendants.

By way of background, the procedural history of the case can be summarized as follows:

• On December 11, 2008, the world learned, Bernie Madoff, the once prominent financial advisor, former NASDAQ chairman and vice-chairman of the NASD, was engaged in a Ponzi scheme for decades. Over that period, Madoff deceived thousands of investors and other financial and/or regulatory institutions, including the Securities and Exchange Commission (“SEC”). Each defendant was an individual customer of Bernard L. Madoff Investment Securities LLC (“Madoff”). The Sterling Defendants assert they, too, were deceived and were nothing more than victims of Madoff’s scheme.

• After Madoff’s arrest, his company was placed into liquidation under the Securities Investor Protection Act (“SIPA”) and Irving H. Picard was appointed Trustee. As part of his duties as Trustee, Picard invoked Bankruptcy Rule 2004 and required the Sterling Defendants to produce documents responsive to the Trustees’ document demands – – an estimated 700,000 pages of documents – – and, in addition, the Sterling Defendants contend the Trustee took unlimited deposition testimony of the Sterling Partners who were principally involved with Madoff. The Sterling Defendants have consistently maintained nothing in the vast discovery record demonstrated that any Defendant was suspicious of and/or had knowledge of Madoff’s Ponzi scheme or other fraud.

• As a result of the discovery produced, Picard initiated a one billion dollar avoidance action against the Sterling Defendants. On March 18, 2011, the Trustee filed an Amended Complaint.

• On September 28, 2011, Judge Jed S. Rakoff dismissed all Counts of the Amended Complaint except Counts 1 and 11. The Trustee may attempt to recover the net profits under Count 1 of the Amended Complaint by proving the Sterling Defendants did not provide value for the monies received. However, the Court ruled that the Trustee may only recover the return of the Sterling Defendants’ principal by proving that the individual defendants willfully blinded themselves to Madoff’s securities fraud. Judge Rakoff also held that the Trustee may subordinate the Sterling Defendants’ own claims against Madoff only if it can establish the same standard needed to recover under Count 1 of the Amended Complaint, i.e., that the individual defendants willfully blinded themselves to Madoff’s securities fraud. Specifically, the Court reasoned, in part, that “[a] securities investor has no inherent duty to inquire about his stockbroker, and SIPA creates no such duty.” Moreover, the Court concluded that the Trustee may be able to avoid transfers of “net profits” during the two years prior to bankruptcy “simply by showing that the [D]efendants failed to provide value for those transfers,” but that, as to “principal,” the Trustee can prevail “only by showing an absence of good faith on [D]efendants’ part based on their willful blindness.”

• The Trustee sought interlocutory appeal of the Dismissal Decision, which was denied on January 17, 2012. In denying the appeal, the Court reaffirmed the initial holding that “the Trustee could not recover on a theory of negligence, and that the [D]efendants could therefore establish that they had received the transfers from Madoff Securities in ‘good faith’ …. by showing that they did not know of, or willfully blind themselves to, Madoff Securities’ fraud.”

The Sterling Defendants moved for summary judgment dismissing the case against them in its entirety. Papers submitted by the Sterling Defendants reveal their Motion for Summary Judgment is based in part on the following grounds:

• None of the Sterling Defendants Subjectively Believed That There Was Any Probability That Madoff Was Running a Ponzi Scheme or Engaged in Fraud

i) The Sterling Partners Never Sought Insurance Because of Concerns About a Madoff Fraud or Ponzi Scheme

ii) Nothing About Sterling Stamos Undercut the Sterling Partners’ Trust in Madoff

iii) The Sterling Partners Understood That Madoff’s Returns Were Intended to Be Consistent and Were Not Concerned When They Were

iv) The Sterling Partners Thought Proprietary Strategies Entirely Appropriate and Were Not Concerned About Madoff’s “Black Box”

v) Madoff Deceived Many with His Highly Organized Fraud

• There Is No Evidence That Any of The Sterling Defendants Took Deliberate Action to Avoid Learning the Truth About Madoff’s Ponzi Scheme

• Willful Blindness Must Be Proven As To Each Individual Sterling Defendant

The Trustee’s opposition papers argue the Sterling Defendants were aware of facts that suggest a high probability of fraud and that they, in fact, intentionally blinded themselves of those facts or consciously avoided confirming the truth. The Trustee cites to the testimony of Chief Investment Officer of Sterling Stamos, Noreen Harrington, to establish the Sterling Defendants were warned that Madoff was either “engaged in illegal front-running or a fiction.” However, the Sterling Defendants claim that when examined by Counsel for the Sterling Defendants as to what proof she had, Ms. Harrington testified she did not “have the hard tangible facts to be able to say that [she] was right or wrong” about Madoff; and, she also advised “I have been wrong before, I could be wrong now.”

The Court will now have to decide whether there is enough evidence in the record such that a reasonable juror could differ as to whether the Sterling Defendants subjectively believed there was a high probability that facts exist demonstrating a fraud; and that the Sterling Defendants took deliberate actions to avoid learning of that fact. Time will tell whether the Trustee has submitted enough evidence to go forward against the Sterling Defendants.

Stay tuned for future updates.