# Irving H. Picard, Trustee for the Liquidation of B v. ABN AMRO Custodial Services (Ireland) Ltd. (f/k/a

> United States Bankruptcy Court, S.D. New York · January 23, 2020

URL: https://www.frixlaw.com/law-library/cases/10460356

## Case

- **Court:** United States Bankruptcy Court, S.D. New York
- **Decided:** January 23, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

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## How later opinions describe it (automated extraction)

- discussing precedent in BLMIS adversary proceedings

## Opinion text

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------ --------X
SECURITIES INVESTOR PROTECTION :
CORPORATION, : Adv. Pro. No. 08-01789 (SMB)
:
Plaintiff-Applicant, : SIPA Liquidation
:
‒ against ‒ : (Substantively Consolidated)
:
BERNARD L. MADOFF INVESTMENT :
SECURITIES LLC, :
:
Defendant. :
--------------------------------------------------------X
In re: :
:
BERNARD L. MADOFF, :
:
Debtor. :
--------------------------------------------------------X
IRVING PICARD, Trustee for the Liquidation :
of Bernard L. Madoff Investment Securities :
LLC, :
:
Plaintiff, :
:
‒ against ‒ : Adv. Pro. No. 10-05355 (SMB)
:
ABN AMRO BANK (IRELAND) LTD. (f/k/a :
FORTIS PRIME FUND SOLUTIONS BANK :
(IRELAND) LIMITED) and ABN AMRO :
CUSTODIAL SERVICES (IRELAND), LTD. :
(f/k/a FORTIS PRIME FUND SOLUTIONS :
CUSTODIAL SERVICES (IRELAND) LTD.), :
:
Defendants. :
--------------------------------------------------------X
MEMORANDUM DECISION DENYING MOTION FOR
LEAVE TO FILE SECOND AMENDED COMPLAINT

A P P E A R A N C E S:

BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
David J. Sheehan, Esq.
Regina Griffin, Esq.
Tracy L. Cole, Esq.
Elizabeth McCurrach, Esq.
A. Mackenna White, Esq.
Of Counsel
Attorneys for Plaintiff
LATHAM & WATKINS LLP
885 Third Avenue
New York, New York 10022
Christopher R. Harris, Esq.
Thomas J. Giblin, Esq.
Kevin Mallen, Esq.
Attorneys for Defendants
STUART M. BERNSTEIN
United States Bankruptcy Court:
Plaintiff Irving H. Picard, as trustee (the “Trustee”) for the liquidation of Bernard
L. Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor
Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”), has moved (“Motion”)1 for leave to
file his Proposed Second Amended Complaint (“PSAC”)2 seeking to recover two
subsequent transfers totaling $265.5 million from ABN AMRO Bank (Ireland) Ltd.
(f/k/a Fortis Prime Fund Solutions Bank (Ireland) Limited) (“Fortis Bank”) and ABN
AMRO Custodial Services (Ireland) Ltd. (f/k/a Fortis Prime Fund Solutions Custodial

1 See Memorandum of Law in Support of Trustee’s Motion for Leave to File Second Amended
Complaint, dated Feb. 22, 2019 (“Trustee Memo”) (ECF Doc. # 165); see also Reply Memorandum of
Law in Further Support of Trustee’s Motion for Leave to File Second Amended Complaint, dated May 23,
2019 (“Trustee Reply”) (ECF Doc. # 179). “ECF Doc. # _” refers to documents filed on the electronic
docket of this adversary proceeding. References to other dockets will include the case number.
2 A copy of the PSAC is attached as Exhibit A to the Declaration of Regina Griffin in Support of the
Trustee’s Motion for Leave to File Second Amended Complaint, dated Feb. 22, 2019 (“Griffin
Declaration”) (ECF Doc. # 166). “(¶ _ )” refers to paragraphs in the PSAC.
Services (Ireland) Ltd.) (“Fortis Custodial Services,” and together with Fortis Bank, the
“Defendants”). The Defendants oppose the Motion on the basis that the amendment is
futile.3 For the reasons set forth herein, the Motion is denied.

BACKGROUND
Unless otherwise indicated, the background information is taken from the well-
pleaded factual allegations of the PSAC and other information the Court may consider in
determining whether the pleading is legally sufficient.

A. Madoff’s Ponzi Scheme
At all relevant times, Bernard L. Madoff operated the investment advisory arm of
BLMIS as a Ponzi scheme. (¶ 53.) He purported to employ a “split-strike conversion”
strategy (“SSC Strategy”) under which BLMIS would purchase a basket of stocks
intended to track the S&P 100 Index and hedge the investment by purchasing put
options and selling call options on the S&P 100 Index. (¶¶ 59, 61-64.) In reality, BLMIS
never purchased any securities on behalf of its investors and sent monthly statements to
investors containing falsified trades typically showing fictitious gains. (¶¶ 59, 60.) All

investor deposits were commingled in a JPMorgan Chase Bank account held by BLMIS,
and the funds were used to satisfy withdrawals by other investors, benefit Madoff and
his family personally, and prop-up BLMIS’s proprietary trading division. (¶ 59.)
The BLMIS Ponzi scheme collapsed and Madoff was arrested by federal agents
for criminal violations of federal securities laws on December 11, 2008 (the “Filing

3 See Memorandum of Law in Opposition to the Trustee’s Motion for Leave to File Second
Amended Complaint, filed Apr. 29, 2019 (“Fortis Memo”) (ECF Doc. # 174).
Date”). (¶ 35.) The Securities and Exchange Commission (“SEC”) contemporaneously
commenced an action in the United States District Court for the Southern District of
New York, and that action was consolidated with an application by the Securities
Investor Protection Corporation (“SIPC”) asserting that BLMIS’s customers needed the
protections afforded by SIPA. (¶¶ 35, 36.) On December 15, 2008, the District Court

granted SIPC’s application, appointed the Trustee and his counsel, and removed the
SIPA liquidation to this Court. (¶ 37.)
At a plea hearing on March 12, 2009, Madoff pleaded guilty to an eleven-count
criminal information and admitted that he “operated a Ponzi scheme through the
investment advisory side of [BLMIS].” (¶ 40; accord ¶ 76.)

B. Two Subsequent Transfers at Issue
Fortis Bank and Fortis Custodial Services are Irish companies incorporated in
2003 and 1995, respectively. (¶¶ 78-79.) The Defendants along with their affiliates,
employees and business groups worked together as one unified entity (collectively,
“Fortis”) to provide banking services to clients worldwide including financing, hedge

fund services, and asset management services. (¶¶ 3, 80, 85, 91, 224.)
The two transfers at issue arose out of a May 2, 2007 swap transaction (“Swap
Transaction”) between Fortis Bank and Rye Select Broad Market XL Fund (the “Rye XL
Fund”).4 (¶¶ 2, 166, 193.) Rye XL Fund was an affiliate of Rye Select Broad Market

4 See Amended and Restated Confirmation of Interest Swap Transaction, dated Jan. 30, 2008
(“Swap Confirmation”), a copy of which is annexed as Exhibit B to the Declaration of Thomas J. Giblin in
Support of Defendants’ Opposition to Trustee’s Motion for Leave to File Second Amended Complaint,
filed Apr. 29, 2019 (“Giblin Declaration”) (ECF Doc. # 175).
Fund L.P. (the “Broad Market Fund”), a fund managed by Tremont Partners, Inc.
(“Tremont”), that invested all of its assets with BLMIS. (¶ 244.) Under the Swap
Transaction, Rye XL Fund deposited funds with Fortis Bank as collateral and Fortis
Bank agreed to pay Rye XL Fund three times the returns that would have been
generated had the collateral amount been invested directly in Broad Market Fund. In

return for providing Rye XL Fund with leveraged returns on its hypothetical investment
in Broad Market Fund, Fortis Bank earned millions in fees and interest including the
spread on the floating interest rate charged to Rye XL Fund based on the collateral
deposited with Fortis Bank. (¶ 194.)
Rye XL Fund initially provided $10 million in collateral to Fortis Bank, (¶ 197),

but between May 2, 2007 and May 1, 2008, increased the collateral deposited under the
Swap Transaction to $235.5 million (the “Collateral Transfer”). (¶ 265.) Fortis hedged
its risk by investing three times the collateral amount directly in Broad Market Fund
(the “Hedge”). (¶¶ 195, 198.) Therefore, when the Swap Transaction grew to $235.5
million, Fortis’s investment in Broad Market Fund under the Hedge correspondingly
grew to $706.5 million. (¶ 198.) The Collateral Transfer is the first transfer that the
Trustee is seeking to recover.

The second transfer appears to relate to a $30 million July 1, 2008 redemption
(the “Partial Hedge Redemption,” and together with the Collateral Transfer, the
“Subsequent Transfers”) by either Fortis Bank or Fortis Custodial Services5 from Broad

5 Fortis Custodial Services was the registered subscriber of the account at Broad Market Fund, but
Fortis Bank was the actual owner. (¶ 258; see also ¶ 260.)
Market Fund. (¶¶ 257-60; ¶¶ 344-50 (Count Two); PSAC, Ex. G (listing the date and
amount of the Partial Hedge Redemption).) Rye XL Fund had the right to decrease the
amount of the collateral held by Fortis Bank. (Swap Confirmation at § 10(c).) Given
the structure of the Swap Transaction, if Rye XL Fund reduced the amount of its
collateral, Fortis Bank would reduce the Hedge by three times the reduction. While the

PSAC is silent, I assume that the Partial Hedge Redemption was triggered by a reduction
of $10 million in the Rye XL Fund collateral. Fortis Bank had no reason to render its
perfect hedge, see Picard v. ABN AMRO Bank (Ireland) Ltd. (In re BLMIS), 505 B.R.
135, 138 (S.D.N.Y. 2013); Picard v. Citibank, N.A. (In re BLMIS), 608 B.R. 181, 185
(Bankr. S.D.N.Y. 2019) (“Citibank”), imperfect by withdrawing its investment in the
Broad Market Fund absent a corresponding reduction in the collateral amount. My
assumption is merely for narrative purposes and does not affect the disposition of the
Motion.

C. This Adversary Proceeding
The Trustee contends that the Subsequent Transfers are traceable to initial
transfers from BLMIS, the initial transfers are avoidable and he can recover the
Subsequent Transfers from the Defendants under section 550(a)(2) of the Bankruptcy
Code. The initial transfers from BLMIS were made to Prime Fund and Broad Market
Fund, (¶¶ 244-48; PSAC, Exs. A, C (providing the BLMIS account information for the
funds) and Exs. B, D (listing the initial transfers)), and in the case of the Collateral
Transfer, the intermediate transferee was Rye XL Fund. (¶¶ 251-56; PSAC, Exs. E and F

(listing transfers to Rye XL Fund from Broad Market Fund and Prime Fund,
respectively).)
By the Motion, the Trustee seeks leave under Rule 15(a)(2) of the Federal Rules of
Civil Procedure to file the PSAC. According to the Trustee, (Trustee Memo at 1, 10-11),
the amendments are necessary to meet the more rigorous pleading requirements
relating to allegations of bad faith imposed by the District Court in SIPC v. BLMIS (In re
BLMIS), 516 B.R. 18, 21-24 (S.D.N.Y. 2014) (“Good Faith Decision”); see also SIPC v.

BLMIS (In re BLMIS), 590 B.R. 200, 204-05 (Bankr. S.D.N.Y. 2018) (discussing
precedent in BLMIS adversary proceedings), and the PSAC’s allegations against the
Defendants meet the heightened requirements. (Trustee Memo at 12-33.)
The Defendants assert that the amendments proposed in the PSAC are futile. In
the main, they argue that the Trustee has failed to sufficiently plead a lack of good faith

on the part of the Defendants and the PSAC alleges that they received the Subsequent
Transfers for value. Consequently, the Trustee’s claims are barred by the defense set
forth in section 550(b)(1) of the Bankruptcy Code. (Fortis Memo at 14-32.) In addition,
the initial transfers to Prime Fund and Broad Market Fund are protected by the safe
harbors set forth in sections 546(e) and 546(g) of the Bankruptcy Code, (id. at 32-37),
the Trustee is barred by 11 U.S.C. § 550(d) from recovering from the Defendants because
he already recovered the initial transfers through a settlement with Tremont and its
affiliates, (id. at 37-39), and the Subsequent Transfers did not deplete the estate because
the Defendants deposited greater amounts back into BLMIS (through Broad Market
Fund) than it received by way of the Subsequent Transfers. (Id. at 39-41.)

The Trustee replied to the Defendants’ opposition, (see Trustee Reply), and the
Court heard oral argument on September 25, 2019.
DISCUSSION
A. Standards Governing the Motion
Rule 15(a) of the Federal Rules of Civil Procedure, made applicable pursuant to
Rule 7015 of the Federal Rules of Bankruptcy Procedure, governs motions for leave to
amend pleadings. Generally, leave should be freely granted, but the court may deny the

motion in instances of undue delay, bad faith, dilatory motive, undue prejudice to the
opposing party or futility. Foman v. Davis, 371 U.S. 178, 182 (1962). The Defendants’
sole objection is that the PSAC is futile. (Fortis Memo at 3.) “An amendment to a
pleading is futile if the proposed claim could not withstand a motion to dismiss
pursuant to FED. R. CIV. P. 12(b)(6).” Lucente v. Int’l Bus. Machs. Corp., 310 F.3d 243,
258 (2d Cir. 2002).

“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted); accord Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when 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; accord
Twombly, 550 U.S. at 556. It is not sufficient for the complaint to plead facts that
“permit the court to infer . . . the mere possibility of misconduct,” Iqbal, 556 U.S. at 679;
he must state “the grounds upon which his claim rests through factual allegations
sufficient ‘to raise a right to relief above the speculative level.’” ATSI Commc’ns, Inc. v.

Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 555).
Determining whether a complaint states a plausible claim is a “context-specific task that
requires the reviewing court to draw on its judicial experience and common sense.”
Iqbal, 556 U.S. at 679. The court should assume the veracity of all “well-pleaded factual
allegations,” and determine whether, together, they plausibly give rise to an entitlement
of relief. Id.

In deciding the motion, “courts must consider the complaint in its entirety, as
well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to
dismiss, in particular, documents incorporated into the complaint by reference, and
matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322 (2007). The court may also consider documents that the
plaintiff relied on in bringing suit and that are either in the plaintiff’s possession or that

the plaintiff knew of when bringing suit. Chambers v. Time Warner, Inc., 282 F.3d 147,
153 (2d Cir. 2002); Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993);
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47–48 (2d Cir. 1991), cert. denied,
503 U.S. 960 (1992); McKevitt v. Mueller, 689 F. Supp. 2d 661, 665 (S.D.N.Y. 2010).
Where the complaint cites or quotes from excerpts of a document, the court may
consider other parts of the same document submitted by the parties on a motion to
dismiss. 131 Main St. Assocs. v. Manko, 897 F. Supp. 1507, 1532 n. 23 (S.D.N.Y. 1995).
If “the documents contradict the allegations of a plaintiff's complaint, the documents
control and the [c]ourt need not accept as true the allegations in the complaint.” 2002
Lawrence R. Buchalter Alaska Tr. v. Philadelphia Fin. Life Assurance Co., 96 F. Supp.
3d 182, 199 (S.D.N.Y. 2015) (quoting Bill Diodato Photography LLC v. Avon Prods.,

Inc., No. 12–CV–847, 2012 WL 4335164, at *3 (S.D.N.Y. Sept. 21, 2012)) (citing
authorities).
Here, the PSAC relies on and/or quotes from the First July 2003 Email, the
Second July 2003 Email, the July 2004 Meeting Excerpt, the Credit Application, the
Swap Confirmation, and the Tremont Settlement.6

B. Claims to Recover Subsequent Transfers
Section 550(a)(2) of the Bankruptcy Code allows the Trustee to recover an
avoidable transfer from “any immediate or mediate transferee of” the initial transferee.
To plead a subsequent transfer claim, the Trustee must plead that the initial transfer is
avoidable, and the defendant is a subsequent transferee of that initial transferee, that is,
“that the funds at issue originated with the debtor.” Picard v. Legacy Capital Ltd. (In re
BLMIS), 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016); accord Silverman v. K.E.R.U. Realty

Corp. (In re Allou Distribs., Inc.), 379 B.R. 5, 30 (Bankr. E.D.N.Y. 2007). The Court
assumes for the purpose of analysis that the initial transfers are avoidable and that the
initial transfers were the source of the Subsequent Transfers.
Section 550(b) of the Bankruptcy Code provides a defense to a subsequent
transferee who “[took] for value, . . . in good faith, and without knowledge of the

voidability” of the initial transfer. Ordinarily, the transferee must raise section 550(b)
as an affirmative defense. Legacy, 548 B.R. at 36. In addition, an objective, reasonable
person test usually applies to determine a transferee’s good faith. See Marshall v.
Picard (In re BLMIS), 740 F.3d 81, 90 n. 11 (2d Cir. 2014) (“The presence of ‘good faith’
depends upon, inter alia, ‘whether the transferee had information that put it on inquiry

6 Other than the Swap Confirmation which was defined above, these documents are defined and
described in the succeeding text.
notice that the transferor was insolvent or that the transfer might be made with a
fraudulent purpose.’”) (quoting Christian Bros. High Sch. Endowment v. Bayou No
Leverage Fund, LLC (In re Bayou Grp., LLC), 439 B.R. 284, 310 (S.D.N.Y. 2010)).
However, in the Good Faith Decision, the District Court ruled that good faith should be
determined under a subjective standard, 516 B.R. at 21-23, and placed the burden of

pleading a lack of good faith on the Trustee. Id. at 23-24. Before addressing good faith,
I consider the other element of section 550(b), “value.”
1. Value
Although the District Court shifted the burden of pleading good faith, the burden
of pleading value for purposes of section 550(b) remains with the subsequent transferee

who is in a better position to identify the value given for the subsequent transfer.
Citibank, 608 B.R. at 195; Picard v. BNP Paribas S.A. (In re BLMIS), 594 B.R. 167, 206
(Bankr. S.D.N.Y. 2018) (“BNP”). Where the burden of pleading rests on the defendant,
the Court may nevertheless dismiss the claim pursuant to Federal Civil Rule 12(b)(6) if
the defense is apparent on the face of the complaint. Official Comm. of Unsecured
Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 158 (2d Cir.
2003). “Value” within the meaning of section 550(b) is “merely consideration sufficient
to support a simple contract, analogous to the ‘value’ required under state law to achieve
the status of a bona fide purchaser for value.” 5 COLLIER ON BANKRUPTCY ¶ 550.03[1] at
550-25 (Richard Levin & Henry J. Sommer eds., 16th ed. 2019) (“COLLIER ON
BANKRUPTCY”); Citibank, 608 B.R. at 195; Enron Corp. v. Ave. Special Situations Fund

II, LP (In re Enron Corp.), 333 B.R. 205, 236 (Bankr. S.D.N.Y. 2005). Once a
subsequent transferee meets the three elements of § 550(b)(1), a later subsequent
transferee that acted in good faith (and regardless of value or knowledge of avoidability)
is fully protected. See 11 U.S.C. § 550(b)(2); Coleman v. Home Sav. Ass’n (In re
Coleman), 21 B.R. 832, 836 (Bankr. S.D. Tex. 1982); accord 5 COLLIER ON BANKRUPTCY ¶
550.03[1] and [4].

The PSAC pleads that Fortis Bank gave value for the Subsequent Transfers.
Under the Swap Transaction, in exchange for the Collateral Transfer and related interest
and fees, Fortis Bank was obligated to pay Rye XL Fund leveraged returns based on a
hypothetical investment in Broad Market Fund equal to three times the amount of the
Collateral Transfer. (¶¶ 193-94, 196 (chart illustrating the relationship between the
Collateral Transfer and the leveraged returns); see also ¶ 2.) In addition, Fortis Bank

was required to pay interest to Rye XL Fund on the amount of the collateral transferred.
(Swap Confirmation at § 4.) As a result, the Collateral Transfer was made to Fortis
Bank as part of the Swap Transaction, and Fortis Bank gave value for the transfer by
satisfying its obligations under the Swap Transaction – providing leveraged returns to
Rye XL Fund and paying interest on the amount of the collateral.

The Defendants also provided value for the Partial Hedge Redemption because
they surrendered a portion of their equity interest in Broad Market Fund in return. (See
¶ 260 (discussing Fortis Bank’s “redemption request”).) Surrendering equity interests
constitutes value for purposes of section 550(b) because it is consideration sufficient to
support a simple contract. CLC Creditors’ Grantor Tr. v. Howard Sav. Bank (In re
Commercial Loan Corp.), 396 B.R. 730, 744 (Bankr. N.D. Ill. 2008); accord Redmond
v. Brooke Holdings, Inc. (In re Brooke Corp.), 515 B.R. 632, 641-42 (Bankr. D. Kan.
2014).
The Trustee responds that equity interests in Broad Market Fund were worthless
because the fund was insolvent. (Trustee Reply at 16.) The Court disagrees. Initially, it
is possible for equity shares of an insolvent entity to have value for purposes of section
550(b). See Brooke Corp., 515 B.R. at 642 (“Nothing in § 550 requires the adoption of a
balance-sheet test for the value of stock transferred to the issuer for redemption. [Stock

of an insolvent corporation] could have value because of control issues or because
solvency is on the horizon.”).
Moreover, equity interests in the Broad Market Fund have substantial value. In
September 22, 2011, the Court approved a settlement with Tremont and its funds
(“Tremont Settlement”).7 (¶ 269.) As part of the Tremont Settlement, Broad Market

Fund received an allowed customer claim against the BLMIS SIPA estate in an amount
not less than $1,647,687,625.00, (“SIPA Claim”), and a pro rata portion of an additional
$800 million customer claim once the settling defendants satisfied their settlement
payment obligations. (Tremont Settlement at ¶ 5.) Tremont agreed that distributions
received in respect of the SIPA Claim would be “equitably allocated” including among
Broad Market Fund’s partners and/or investors. (Tremont Settlement at ¶¶ 5, 5(c).)
The Trustee recently reported that substantial distributions have been made to holders
of customer claims. (See Trustee’s Twenty-Second Interim Report for the Period April
1, 2019 Through September 30, 2019, dated Oct. 31, 2019 at ¶¶ 2, 11 (reporting
distributions of $13.489 billion against allowed customer claims of $19.307 billion)
(ECF Case No. 08-01789 Doc. # 19097).)8 Thus, Broad Market Fund has already

7 A copy of the Tremont Settlement is available at ECF Adv. Pro No. 10-05310 Doc. # 17-1.
8 The PSAC also states that Tremont investors received distributions from a class action filed
against Tremont’s BLMIS feeder funds, In re Tremont Sec. Law, State Law and Ins. Litig., No. 1:08-cv-
received tens if not hundreds of millions of dollars based on its allowed net equity claim
against the BLMIS SIPA estate and may receive more in the future.

Based on the foregoing, the PSAC pleads that the Collateral Transfer and the
Partial Hedge Redemption were received for “value” within the meaning of section
550(b) of the Bankruptcy Code.

2. Knowledge and Good Faith
As stated, the Trustee must plead that the Defendants lacked good faith when
they took the Subsequent Transfers, and he must also plead that Defendants had
knowledge of the avoidability of the initial transfer. Legacy Capital, 548 B.R. at 36.
The two concepts represent separate elements under section 550(b)(1), but they are
related.

a. Good Faith
To satisfy his burden of pleading a lack of good faith, the Trustee must allege that
each Defendant willfully blinded itself to facts suggesting that BLMIS was not actually
trading securities.9 Good Faith Decision, 516 B.R. at 22-23; Picard v. Merkin (In re

11117-TPG (S.D.N.Y.), which were in turn funded by customer claim distributions from BLMIS. (¶¶ 34,
217.)
9 The Trustee contends that it is sufficient to allege that the Defendants willfully blinded
themselves to fraud generally rather than to the fact that BLMIS was not trading securities and was
operating a Ponzi scheme. (Trustee Reply at 3-5.) In his moving brief, however, the Trustee asserted that
he had adequately pleaded willful blindness because, “[s]ince at least 2003, Fortis employees were
well aware of facts suggesting the high probability that Madoff could be engaging in fraud – in
particular, that Madoff might not be engaging in the trades he claimed and/or may have
misappropriated customers’ assets,” (Trustee Memo at 14), and “[t]hrough this relationship, Fortis
employees became aware of facts that led them to believe there was a high probability that Madoff might
not be trading and/or have custody of Harley’s assets – in other words, that BLMIS might be engaging in
fraud.” (Id. at 14-15.) The PSAC does not allege another type of fraud at BLMIS that the Defendants
believed was highly probable.
BLMIS), 563 B.R. 737, 752 (Bankr. S.D.N.Y. 2017). Willful blindness consists of two
elements: “(1) the defendant must subjectively believe that there is a high probability
that a fact exists and (2) the defendant must take deliberate actions to avoid learning of
that fact.” Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011). If a
person who is not under an independent duty to investigate “nonetheless, intentionally

chooses to blind himself to the ‘red flags’ that suggest a high probability of fraud, his
‘willful blindness’ to the truth is tantamount to a lack of good faith.” Picard v. Katz, 462
B.R. 447, 455 (S.D.N.Y. 2011), abrogated on other grounds by SIPC v. BLMIS, (In re
BLMIS), 513 B.R. 437 (S.D.N.Y. 2014).
Neither recklessness nor negligence constitutes willful blindness. “[A] reckless

defendant is one who merely knows of a substantial and unjustified risk of such
wrongdoing, see ALI, Model Penal Code § 2.02(2)(c) (1985), and a negligent defendant
is one who should have known of a similar risk but, in fact, did not, see § 2.02(2)(d).”
Global-Tech, 563 U.S. at 770. Acting in the face of a “known risk” does not establish
willful blindness. Id. Furthermore, “deliberate indifference” to the risk does not
establish willful blindness. See id.

The Trustee’s reliance on Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y.
2010), a securities fraud case involving a BLMIS feeder fund, is misplaced. He contends that any fraud is
sufficient quoting the District Court’s statement that the defendants “turn[ed] a blind eye to obvious signs
of fraud” without showing that Madoff was running a Ponzi scheme. (Trustee Reply at 5 (quoting Anwar,
728 F. Supp. 2d at 410).) The fraud in that case concerned Madoff’s operation of a Ponzi scheme.
Moreover, the fraud that Fortis Bank allegedly suspected and ignored obviously had to relate to
the Ponzi scheme. Otherwise, if Fortis suspected that Madoff was charging some personal expenses to
BLMIS but was ignorant of the Ponzi scheme, it would nonetheless be deemed to have received the
Subsequent Transfers in bad faith because Madoff was running a fraudulent scheme that Fortis Bank
never suspected.
b. Knowledge of Avoidability
To plead that a Defendant knew that it was receiving the proceeds of an avoidable
transfer, the Trustee must plausibly allege that the Defendant “possess[ed] knowledge of
facts that suggest a transfer may be fraudulent.” Banner v. Kassow, 104 F.3d 352, 1996
WL 680760, at *3 (2d Cir. Nov. 22, 1996) (summary order) (quoting Brown v. Third
Nat’l Bank (In re Sherman), 67 F.3d 1348, 1357 (8th Cir. 1995)). Section 550(b)(1) does
not impose a duty to investigate or monitor the chain of transfers that preceded the
subsequent transfer, but “[s]ome facts strongly suggest the presence of others; a
recipient that closes its eyes to the remaining facts may not deny knowledge.” Bonded
Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 898 (7th Cir. 1988)

(Easterbrook, J.). This standard “essentially defines willful blindness which, the District
Court has held, is synonymous with lack of good faith.” Legacy, 548 B.R. at 38; see also
id. at 38-39 (noting that some courts and commentators have suggested that the good
faith and knowledge elements of 11 U.S.C. § 550(b)(1) are one and the same). Here, the
parties have not identified a distinction between the two elements of § 550(b)(1).

3. Allegations of Willful Blindness
a. The First Prong
The first prong of the willful blindness inquiry asks whether the Defendants
subjectively believed that there was a high probability that BLMIS was not trading
securities at the time of the transfer.10 Many of the allegations regarding the

10 Given the disposition of the Motion, the Court assumes that the knowledge of all Fortis affiliates
is imputable to the Defendants. The Defendants vehemently dispute this.
Defendants’ subjective beliefs are based on items of information received (or not
received) by affiliates of the Defendants, in some cases four years before the Swap
Transaction and the due diligence that preceded it. The allegations fall into two
categories: what they learned or couldn’t confirm and the implications from actions that
they took. The allegations relating to Harley encompass both.

i. The Administration of Harley
Fortis Prime Fund Solutions (Bahamas) Limited (“Fortis Bahamas”), an affiliate
of the Defendants, served as the administrator for Harley International (Cayman) Ltd.
(“Harley”), a BLMIS feeder fund formed in 1996. While Fortis Bahamas served as the
administrator, BLMIS served the triple role of Harley’s investment advisor, broker-

dealer and custodian. Harley and Fortis Bahamas were subject to Bahamian investment
regulations and the authority of the Securities Commission of the Bahamas (“SCB”). In
2003, the Bahamas passed stricter regulations governing the administration of
investment funds requiring the administrator to (i) verify that the fund’s service
providers, including the custodian, were “fit and proper,” and (ii) report to the SCB if it
“knows or has reason to believe” that “an investment fund . . . is carrying on business in
a manner that is or is likely to be prejudicial to investors or creditors of the investment
fund.” (¶¶ 92-100.)

According to the PSAC, the stricter regulations raised concerns regarding Fortis
Bahamas’ role as Harley’s administrator presumably because it required Fortis Bahamas
to vouch to some extent for BLMIS. On July 23, 2003, Fortis executive Sue Novo
emailed (“First July 2003 Email”)11 colleague Brenda Buckley regarding Fortis’s role as
administrator for Harley. The email acknowledged that Buckley had “quite rightly
raised the issue of broker dealer accounts and how [Fortis] can work with them within
our principles.” Fortis Bahamas needed to consider “‘control’ of the assets with regard
to segregation versus pooled accounts, restrictions on money movements/transfers,

[i]nsurance cover for the assets should the broker go bust, in particular if we have a
lien/charge over them.” Finally, Fortis Bahamas needed to “be very careful” if Harley
remained regulated by the SCB because “the responsibilities of the [a]dministrator are
very onerous, with somewhat of an overall responsibility for the Fund, responsibility to
the investors, responsibility for the actions of the Directors and I believe in the latest
legislation, responsibility for [c]ustodian.” (¶¶ 103-05; First July 2003 Email at Bates
No. FPFS E 000009364.)

Novo followed-up with another email to Buckley on the same day (“Second July
2003 Email”).12 She reiterated a concern about what would happen to Harley’s
investment, “in particular if anything happens to the broker. We should also have
confirmation as to how the Harley assets are held with the broker eg segregated/pooled
account and my comment below viz insurance is probably also valid as well.” (¶ 106;
Second July 2003 Email at Bates No. FPFS E 000009363.)

The Novo/Buckley emails were forwarded to others including Fortis Bahamas’
officer Rhonda Eldridge. On July 24, 2003, she sent a letter to BLMIS seeking

11 A copy of the First July 2003 Email is attached as Exhibit F to the Giblin Declaration.
12 The Second July 2003 Email is also included in Exhibit F to the Giblin Declaration.
confirmation that BLMIS acted as an agent for Harley and that Harley’s funds were
segregated from BLMIS’s own assets and assets of other customers. Fortis Bahamas
also requested a “SAS 70 Report,” which at the time was an industry standard audit
report prepared by broker-dealers and custodians setting forth the controls in place to,
inter alia, protect customer securities from fraud. One week later, BLMIS employee

Frank DiPascali confirmed in a letter stating that “all security positions held are
segregated for the exclusive benefit of [Harley].” In an internal Fortis email chain
roughly one month after DiPascali’s letter, Eldridge, Buckley and others stated that
DiPascali had not provided the assurances and information Fortis required, but the
PSAC does not provide a factual basis for this conclusion. (¶¶ 107-10.)

The answer to Fortis’s concerns regarding the additional responsibilities imposed
on it by the new Bahamian regulations was to change jurisdictions. Fortis employee
Roger Hanson suggested to Buckley that Fortis should replace Fortis Bahamas with
Fortis Prime Fund Solutions (Cayman) Limited (“Fortis Cayman”) as administrator of
Harley. Hanson noted that this change would require the consent of a Harley investor
(“Harley Investor A”) who had made a loan to the fund. He suggested that the
Defendants’ parent company – Fortis Bank N.V. – loan funds to Harley Investor A to
repay the pre-existing loan. If Fortis could not effect the loan and the change in
jurisdiction, Hanson opined that Fortis Bahamas should resign as Harley’s
administrator. (¶¶ 111-12.)

Buckley agreed that jurisdiction should be changed away from the Bahamas but
was hesitant to have Fortis lend money to Harley Investor A until she had more
information about BLMIS’s operations:
I am still extremely uncomfortable with giving financing to [redacted] and
now possibly [redacted] given their investment in Harley and the broker
dealer relationship with Madoff. Before this option can be considered
further we will need some assurance of how the front and back office are
separated in Madoff and if two separate streams of trade information can
be provided, that will allow independent reconciliation of trades in Harley.
Without this, I do not support financing by Fortis to [redacted].
. . .
[I]f financing is to be considered seriously then I think he should be asked
to put pressure on Madoff to give the assurances we need or else appoint
another custodian to Harley. I would agree therefore that the only option
at present is to proceed with the transfer of administrator (and possibly
pitch [to replace BLMIS] for the custodian work).
(¶¶ 113-15.) A senior executive agreed with Buckley stating that “this must be addressed
properly.” (¶ 116.)
Replacing the administrator with a non-Bahamian entity would not eliminate the
operation of Bahamian law because Harley was still a Bahamian entity. Therefore,
Fortis set out to change Harley’s jurisdiction as well. To facilitate the change, Fortis
agreed to reimburse up to $25,000 in expenses incurred by Harley’s investors and other
parties relating to the change. (¶¶ 119-120.) Ultimately, Fortis transferred the role of
administrator of Harley from Fortis Bahamas to Fortis Cayman effective October 2003
– before the new Bahamian regulations took effect. In December 2003, Harley’s name
was officially changed to reflect that it was now a Cayman entity. (¶¶ 118, 121.)
Even after relocating to the Cayman Islands, Fortis continued to raise questions
about Madoff. In a July 26, 2004 email, Eldridge forwarded an excerpt (“July 2004
Meeting Excerpt”)13 from a meeting of Fortis’s Investment Banking Compliance

13 A copy of the July 2004 Meeting Excerpt is attached as Exhibit G to the Giblin Declaration.
Committee (“IBCoCo”) to another Fortis executive. The excerpt discussed whether
Fortis should continue to provide administration, custody, financing and other services
to a hedge fund that invested solely in Harley (“Harley Investor B”) given its concerns
about Madoff’s multiple roles with Harley:
[I]t appears that Madoff who acts as the Broker Dealers [sic] as well as the
Custodian for Harley effectively is the investment manager of the Harley
Fund. . . . Madoff’s double role implies that there is no guarantee that the
trades and positions provided by Madoff to Fortis as Administrator are
objective and it is not possible to obtain independent confirmations on
trades and positions.
Compliance/Legal Fortis Curacao14 has recommended negatively on the
requested [sic] due to the Madoff issue, in particularly [sic] given the size
of the increased limit [of financing] . . . .
(¶ 126; July 2004 Meeting Excerpt at Bates No. FPFS E 000009372.) Ultimately, the
IBCoCo decided against increasing the financing amount for Harley Investor B:
The IBCoCo deems it however remarkable that . . . Cayman/Curacao and
London apparently disagree on whether to keep providing administration
services to [redacted] given the Madoff issue stated above[.]
Given the above the committee is not comfortable with accepting the client
as presented, especially as a credit proposal is in the pipeline for an
increase to USD 160 mln.
(¶ 126; July 2004 Meeting Excerpt at Bates No. FPFS E 000009372.)15 Despite Fortis’s
concern about Madoff, Fortis Cayman continued to serve as Harley’s administrator until
Madoff’s arrest. (¶ 129.)

14 “Fortis Curacao” refers to Fortis Fund Services (Curaçao) NV.
15 The PSAC refers to an additional instance in which the IBCoCo denied a request by a new client
for financing to invest in Harley. (¶ 128.)
ii. The $56 Million Redemption
Beginning in 2001, Fortis’s investment management arm (then-operating
through MeesPierson-branded entities) invested tens of millions of dollars of its clients’
money in BLMIS feeder funds managed by Tremont. (¶ 130.) After meeting with
Madoff, MeesPierson personnel noted several red flags in a May 15, 2003 internal
memorandum:
 Madoff’s secrecy and lack of transparency;
 BLMIS’s exceptionally stable returns;
 BLMIS’s returns were inconsistent with the returns one would expect
from a money manager employing the SSC Strategy;
 BLMIS left investor relations to feeder funds such as Tremont and
hardly granted meetings with end investors; and
 BLMIS’s trades and assets could not be verified.
(¶ 132.)
After newly-formed “Fortis Multi-Management” assumed control of
MeesPierson’s investment book in 2006, including its Tremont investment which had
grown to over $70 million, Mark Geene of Fortis Multi-Management emailed Tremont
stating that Fortis had been internally discussing its Madoff investments “at length . . .
especially the opaque structure/process” surrounding BLMIS and wished to meet with
both Tremont and BLMIS personnel. (¶¶ 133-34.)16 Tremont informed Geene that

16 Tremont had a pre-existing contractual obligation to prepare diligence reports and arrange onsite
diligence visits for Fortis Multi-Management. (¶ 134.)
Madoff refused to meet and Fortis Multi-Management had to settle for a meeting with
Tremont only. (¶ 135.) The meeting was scheduled for May 19, 2006.

Before the meeting, Geene sent questions he wished to address, including (i) why,
“[i]f [Madoff] can so quickly and efficiently put his trades on just ahead of market rally,”
he doesn’t “also close out his positions as quickly once the rally has played out and book
the gains?”; and (ii) whether Madoff had “collateral arrangements with his option
counterparties?” (¶¶ 137-38.) According to the Trustee, Geene’s latter inquiry went to
the difference between options traded over an exchange and those traded over-the-
counter (“OTC”). There is no counterparty risk associated with exchanged-traded
options because the exchange guarantees the obligations. Options traded OTC, on the

other hand, are open to counterparty risk, and collateral arrangements can mitigate that
risk. (¶¶ 139-41.)
The parties met as scheduled. Following the meeting, one Tremont executive
described the meeting as “challenging” while another recounted:
The results of that meeting left them [Fortis Multi-Management] nervous
(we didn’t talk details) and they went back and explained their
apprehensions with Eric. They have $70m with Madoff, and we derive
over $1m in fee from this. My suggestion was two-fold. First in the short
run, lets [sic] get them comfortable with Madoff, via Bob and Cynthia.
Second, lets [sic] facilitate a meeting in the Madoff offices.
(¶¶ 141-42.)
Geene and Tremont scheduled a follow-up conference call in August 2006. In
advance of the call, Geene emailed another list of questions about Madoff, the SSC
Strategy, OTC options trading, and custodial arrangements, including:
 “details with respect to collateral: how often exchanged (daily/weekly),
how conservative are the haircuts, does Madoff use minimum
[thresholds] and why does Tremont not see the exchange of
collateral?”;
 whether “investment banks quote for puts as well as calls and on both
sides (buy/sell)? How will he hedge the basis risk: for instance when
hitting Goldman for puts with 2B he cannot instanteniously [sic] trade
2B in equities the same second: does he average is [sic], is he using his
time slicing methodology (still: basis risk (or alpha??) remains. Does
he have to do calls with the same investment bank (later that day based
upon the same grid?)?”; and
 Tremont should “elaborate a bit on the ‘hiding of trades’ between
Feeder trades and Madoff Securities trades as he has to trade for the
Feeder before his own trading.”
(¶¶ 144-50.) Geene also asked Tremont for a third-party opinion letter that “the Feeder
accounts cannot be touched” in the event of a BLMIS bankruptcy as well as a full due
diligence questionnaire (“DDQ”) for BLMIS. (¶¶ 151-52.) Tremont employees
acknowledged internally that they could not produce a BLMIS DDQ but eventually
produced one that was not as fulsome as ones prepared for other money managers. (¶
153.)
By October 2006, Geene and others at Fortis Multi-Management grew
dissatisfied with Tremont’s inability to answer their Madoff-related questions. In an
internal Tremont email dated October 9, 2006, a Tremont executive acknowledged that
Fortis Multi-Management “may now not be investing in” a separate leverage deal
involving a Tremont-managed synthetic BLMIS feeder fund. (¶ 156.)
In November 2006, Fortis acquired a 70% interest in Cadogan Management
(“Cadogan”) – a management company that would allow Fortis to conduct hedge fund
due diligence in-house. Cadogan was suspicious of Madoff and described him as a
“‘black box’ investment dilemma . . . a phenomenal long-term track record but . . .
meaningful access to meaningful information [was] unavailable.” Prior to the
acquisition, Cadogan had advised its investors that it was “highly skeptical” of Madoff
listing the following:
i. the competitive difficulties of the space;
ii. the apparent mismatch between Madoff’s supposed AUM [assets under
management] and the size of the options market which would need to
accommodate this capital;
iii. the immense implied net revenues given the estimated AUM and the
reported results;
iv. the extraordinary complexity and opacity of the Madoff investment
vehicles;
v. the lack of any spin-off of senior personnel over the years; and,
vi. the smoothness of returns relative to other traders in the area.
(¶¶ 157-59.) Cadogan was so concerned with what it called the “intellectual mismatch”
between Madoff’s results and those of his competitors that it had a policy against
investing in BLMIS feeder funds. (¶ 161.)
In February 2007, Fortis Multi-Management redeemed the remaining $56
million it had invested in the Broad Market Fund. In December 2008, the month of
Madoff’s arrest, Cadogan wrote to investors that it and Fortis Multi-Management had
decided to redeem because of “[t]he unwillingness of the Madoff organization to provide
sufficient transparency to evaluate the investment and other merits of that portfolio’s
investment.” (¶ 163.)
iii. Shifting Explanations Relating to BLMIS Option
Trades
In May 2001, Fortis Bahamas asked BLMIS for “[a] list of counter-parties for the
OTC S&P 100 options.” BLMIS responded that its OTC option counterparties were
“major financial institutions” but would not disclose their identities because “[t]his
information is considered confidential and proprietary.” (¶¶ 171-72.)

In October 2006, Tremont sent Fortis the private placement memoranda (the
“PPMs”) for Broad Market Fund and Rye XL Fund. The PPMs indicated that BLMIS
purchased options OTC. Likewise, the DDQ prepared by Tremont for Fortis Multi-
Management on November 30, 2006 stated that BLMIS executed “all option trades”
OTC. (¶¶ 173-75.) After completing its diligence for the Swap Transaction with Tremont
at the end of November 2006, Laurence Headlam of Fortis Prime Fund Solutions USA
requested that a credit application (the “Credit Application”)17 be drafted for review by
Fortis’s Central Credit Committee. Despite the PPMs and DDQ stating that BLMIS
options were traded OTC, Headlam’s application to the credit committee omitted any

details about the market in which BLMIS options were traded. (¶¶ 176-77.)
In January 2007, Headlam drafted a second credit application for a different
swap unrelated to Tremont which stated that BLMIS option trades “may be effected in
the over-the-counter market or on a registered options exchange.” (¶ 178.)

iv. The Swap Transaction
As further evidence of the Defendants’ subjective belief in the high probability
that BLMIS was not trading securities, the PSAC highlights certain provisions in the
Swap Confirmation that protected Fortis Bank in the event BLMIS was revealed to be a
fraud or became insolvent. First, Fortis Bank had a security interest in the collateral Rye

17 A copy of the Credit Application is attached as Exhibit E to the Giblin Declaration.
XL Fund transferred under the Swap Transaction, and such collateral constituted one-
third of the amount Fortis Bank deposited with Broad Market Fund under the Hedge.
Therefore, Fortis Bank’s exposure to BLMIS through Broad Market Fund was less than
that of other investors in the fund. (¶¶ 199-200, 216.)

Second, Fortis Bank negotiated an indemnification provision in the Swap
Transaction under which Rye XL Fund agreed to indemnify and reimburse fees and
costs “[i]n the event that [Fortis Bank] or any of its Affiliates becomes involved in any
capacity in any action, proceeding or investigation brought by or against any person . . .
in connection with” the Swap Transaction. (¶¶ 201-04.)

Third, Fortis negotiated a “claw-back” provision under which Rye XL Fund would
reimburse Fortis Bank to the extent Fortis Bank had to return any portion of amounts
redeemed from Broad Market Fund:
In the event that [Fortis Bank] would be required to return all or any
portion of any payment received with respect to any investment in [Broad
Market Fund] (whether pursuant to the terms of the investment in the
Fund, any insolvency law, regulation, court order or otherwise (“Claw-
back Obligation”), then notwithstanding anything herein to the contrary,
[Rye XL Fund] will, upon demand by [Fortis Bank], pay to [Fortis Bank]
an amount in cash equal to such Claw-back Obligation.
(¶¶ 205-10.)
Fourth, Fortis Bank entered into a side letter agreement in May 2007 with Broad
Market Fund which contained a “most favored nations” clause requiring Broad Market
Fund to offer Fortis Bank the most favorable redemption rights of liquidity or
redemption that the fund gave to any other investor. The clause was triggered in
September 2007 when Tremont gave another leverage provider – ABN AMRO Bank
N.V., presently known as the Royal Bank of Scotland (“RBS”) – the right to redeem half
of its investment on five-days’ notice (thirty-one days faster than the typical Tremont
investor) in the event
[BLMIS] becomes the subject of a formal investigation by a U.S. court,
governmental or regulatory body or agency related to a specific breach of a
U.S. securities law or regulation and the effect of such a breach, as
reasonably determined by the Calculation Agent, have a material adverse
effect on [BLMIS] and its ability to conduct its investment management
business . . . .
(¶¶ 211-14.)
v. Implausibility of the Trustee’s Theory
The PSAC does not actually plead that the Defendants subjectively believed that
Madoff was not trading securities or segregating assets. Instead, it tries to create the
inference. It relies on the existence of red flags, Madoff’s lack of transparency and his
opacity, his exceptionally stable returns that were inconsistent with the SSC Strategy,
BLMIS’s multiple roles, its personnel, but red flags do not imply an awareness of
Madoff’s fraud because “the more compelling inference as to why Madoff's fraud went
undetected for two decades was his proficiency in covering up his scheme and deceiving
the SEC and other financial professionals.” Elendow Fund, LLC v. Rye Inv. Mgmt., 588
F. App’x 27, 29 (2d Cir. 2014) (addressing scienter under the federal securities laws)
(summary order) (quoting Meridian Horizon Fund, L.P. v. KPMG (Cayman), 487 F.
App’x 636, 641 (2d Cir. 2012)). In addition, the PSAC alleges that Fortis could not
confirm Harley’s trades (although the PSAC omits the portion of the Second July 2003
Email in which the author says Harley independently priced its trades other than the
over-the-counter trades) or confirm that BLMIS was segregating Harley’s assets. It also
suggests that Fortis (and Harley) pulled out of the Bahamas because Fortis did not want
the added responsibility of vouching for BLMIS and withdrew $56 million from the
Broad Market Fund because of concerns with Madoff and BLMIS.

The PSAC’s allegations do not plausibly imply that Fortis Bank subjectively
believed in the high probability that BLMIS was not trading securities. Under the Swap
Transaction, Fortis Bank invested over $470 million of its own funds in the Broad
Market Fund (three months after it withdrew $56 million from the same fund) over and
above the amount of collateral posted by Rye XL Fund. The Broad Market Fund
invested all of its assets with BLMIS so that Fortis Bank’s investment was really with
BLMIS. The Trustee’s argument that Fortis Bank surrendered a worthless equity
interest in the Broad Market Fund in exchange for the Partial Hedge Redemption

essentially concedes that the Broad Market Fund was worthless if BLMIS was a Ponzi
scheme. It is simply not plausible for Fortis Bank to have entered into the Swap
Transaction and invested $470 million of its own funds with BLMIS while at the same
time subjectively believing in the high probability that BLMIS was not actually trading
securities, was stealing its investors’ assets and violating the federal securities laws.

The Trustee suggests that Fortis Bank was willing to lose $470 million of its own
money in a Ponzi scheme and pay Rye XL Fund three times the increase in the fictional
net asset value of the Broad Market Fund which was on BLMIS’s non-existent
investments and fraudulent bookkeeping in order to earn “millions of dollars” in fees
and interest. (¶ 194.) The Court rejected similarly implausible allegations in BNP and
Citibank. In Citibank, the Trustee sought to recover subsequent transfers from
Citibank, N.A. (“Citibank”) – an entity that had agreed to loan up to $400 million to
Prime Fund (“Prime Fund Deal”), another BLMIS feeder fund run by Tremont, with the
understanding that the loan proceeds would be used to invest with BLMIS. Citibank,
608 B.R. at 188, 191-92. The Trustee sought recovery of $343 million from Citibank, the
majority of which constituted repayment of the loan, id. at 193, 202-03, asserting that
Citibank received the transfers while subjectively believing there was a high probability
that Madoff was a fraudster. The Court rejected the theory as “absurd”:

The [proposed amended complaint] implies that the [d]efendants entered
into the Prime Fund Deal to earn interest and fees. The interest and fees
aggregated approximately $43 million over the roughly three year life of
the loan. The idea that the Defendants would loan $400 million to a
borrower to invest the proceeds in a criminal, fraudulent enterprise in
order to earn between $14 million and $15 million in annual fees and
interest is absurd . . . .
Id. at 202 (record citations omitted).
Likewise, in BNP, the Trustee sought recovery of $156 million from BNP Paribas
S.A. (“BNP Bank”) – an entity that had provided loans to entities for the purpose of
investing in BLMIS and entered into various leverage deals including swaps linked to
BLMIS feeder funds. BNP, 594 B.R. at 182-84. BNP Bank moved to dismiss asserting,
inter alia, that it took the subsequent transfers in good faith, i.e., that it was not willfully
blind to Madoff’s Ponzi scheme. Id. at 186. The Court agreed ruling that the Trustee’s
theory was implausible:
The Defendants’ ability to collect on whatever leverage BNP Bank
extended to direct investors in BLMIS or investors in BLMIS feeder funds
ultimately depended on the value of the BLMIS investments. If BLMIS
was a Ponzi scheme, the securities listed in the BLMIS customer
statements were non-existent and BNP Bank’s collateral was as worthless
as its borrowers’ investments in BLMIS or a BLMIS feeder fund.
According to the [proposed amended complaint], BNP Bank nonetheless
engaged in billions of dollars of risky transactions, including loans and
extensions of credit that ultimately depended on the value of BLMIS
accounts, to earn “tens of millions of dollars in fees and interest
payments,” and raise BNP Bank’s position as a world leader in the fast-
moving derivatives market. This theory is as preposterous as the scheme
alleged by the plaintiff in Fabrikant, and it is implausible to suggest that
the Defendants would make loans or engage in the transactions described
in the [proposed amended complaint] if they believed that there was a
high probability that BLMIS was not actually trading securities.
Id. at 203-04 (record citations and footnote omitted).
These rulings relied heavily on then-District Judge Sullivan’s decision in
Buchwald Capital Advisors LLC v. JP Morgan Chase Bank, N.A. (In re Fabrikant &
Sons, Inc.), 480 B.R. 480 (S.D.N.Y. 2012), aff’d, 541 F. App’x 55 (2d Cir. 2013). There,
the defendant banks (the “Banks”) made prepetition secured loans to two entities that
operated a jewelry business (the “Debtors”). Id. at 483-84. The Debtors then allegedly
transferred the loan proceeds to entities unaffiliated with the Debtors but affiliated with
and owned and controlled by the Debtors’ owners, the Fortgangs (the “Affiliates”), id. at
484, leaving the Debtors with encumbered assets but without the loan proceeds.

In subsequent litigation commenced against the Banks to avoid the Banks’ loans
and liens, the unsecured creditors committee sought to collapse the first leg of the
transaction (the Banks’ loans to the Debtors) with the second leg (the Debtors’ transfer
of the loan proceeds to the Affiliates) under the collapsing principles discussed in HBE
Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995), contending that the Banks knew or
should have known that the loans were part of a fraudulent scheme by which the
Debtors would transfer the loan proceeds to the Affiliates.18 According to the plaintiff,
the Banks were aware of the Debtors’ poor financial condition, the transfers to the
Affiliates, the Affiliates’ lack of any relationship to the Debtors and the poor loan

18 Following the confirmation of the chapter 11 plan, the GUC Trustee was substituted for the
committee as the plaintiff.
documentation. Id. at 488-89. They nevertheless made loans to raise their profiles and
earn commissions. After this Court dismissed the complaint for failure to state a claim,
the plaintiff appealed.

Judge Sullivan affirmed, stating that the plaintiff’s theory “requires an inference
that is highly implausible, bordering on the absurd”:
In essence, [the plaintiff] alleges that the Banks took the massive risk of
continuing their lending relationships with the [Debtors and Affiliates] on
the speculative hope that there may be sufficient liquidity in the ‘Fabrikant
Empire’ . . . as a whole to enable the Banks to obtain repayment through
personal guarantees and other pressure. Such an assertion would be
nonsensical if the Banks were in fact aware that Debtors and the Affiliates
had to use the same dollars to repay separate obligations. Put simply,
drawing all inferences in favor of [the plaintiff], it is difficult to see what
benefit the Banks could hope to obtain by lending ever-larger amounts of
money to failing companies. The [complaint’s] wholly conclusory
allegations that the Banks were clouded in judgment due to lavish
commissions is equally implausible, since the loss of principal would have
far outweighed the commissions earned on the loans[.]
Id. at 489 (record citations and corresponding quotation marks omitted) (emphasis
added).
The idea that Fortis Bank would risk over $400 million through the Hedge and
pay Rye XL Fund three times the increase in a net asset value based ultimately on
BLMIS’s non-existent investment to earn millions in fees and interest while subjectively
believing in the high probability that BLMIS was a fraud is equally “preposterous” and
“absurd.” The Trustee nevertheless argues that Fortis Bank dealt with its strong
suspicions by requiring certain protections in the Swap Confirmation. However, the
protections were commonplace and provided little or no protection if BLMIS was really
a Ponzi scheme. First, the Trustee points out that Fortis Bank maintained a security
interest in the Collateral Transfer representing one-third of the Hedge investment in
Broad Market Fund. (¶ 216.) In other words, Fortis took solace in the fact that it would
only lose around $470 million of its own money because the rest of its investment was
covered by the collateral.19 Hedging an investment, in this case only one-third of that
investment, does not imply that Fortis Bank suspected it was investing in an illegal
enterprise. See BNP, 594 B.R. 204 n. 9 (“[I]t is not uncommon to purchase hedges, such

as credit default swaps, to guard against the default of one’s obligor.”).
Second, the Trustee touts two forms of indemnification that Fortis negotiated
with Rye XL Fund. (¶¶ 201-10.) Rye XL Fund agreed to reimburse Fortis Bank “[i]n the
event that [Fortis Bank] or any of its Affiliates becomes involved in any capacity in any
action, proceeding or investigation brought by or against any person . . . in connection

with” the Swap Transaction. (¶ 202.) In addition, if Fortis Bank was compelled to
return any payment it received in connection with its investment in the Broad Market
Fund (defined as the “Claw-back Obligation”), Rye XL Fund “will, upon demand by
[Fortis Bank], pay to [Fortis Bank] an amount of cash equal to such Claw-back
Obligation.” (¶ 207.)

These indemnification provisions do not imply a subjective belief that BLMIS was
in all likelihood a Ponzi scheme. In the first place, an indemnification provision is a
common feature in business contracts including those that have nothing to do with
Ponzi schemes. See 4Kids Entm’t, Inc. v. Upper Deck Co., 797 F. Supp. 2d 236, 246
(S.D.N.Y. 2011) (The Term Sheet “contains all the provisions one regularly finds in

19 In fact, this is precisely what happened. Although not mentioned in the PSAC, the Defendants
lost approximately $450 million when BLMIS collapsed although they have likely recovered some of those
losses through distributions from the Trustee to the Broad Market Fund and from the Broad Market Fund
to its investors.
business contracts, including . . . indemnifications.”). In the second place, if Fortis Bank
believed that BLMIS was not trading securities, it would also believe that the
indemnifications were worthless. Rye XL Fund was formed in July 2006 “as a Special
Purpose Vehicle for the sole and exclusive purpose of gaining exposure by way of Total
Return Swaps to the [Broad Market Fund].” (Credit Application at 1.) It had few assets

beyond its investment in another swap transaction (see Credit Application at 7); Prime
Fund and the Broad Market Fund, themselves BLMIS feeder funds, (¶ 243), funded the
Collateral Transfer, (¶¶ 251-55); and their ability to continue to fund Rye XL Fund
depended on their own BLMIS investments. Fortis Bank’s willingness to accept Rye XL
Fund’s promise of indemnity implies the opposite of what the Trustee is trying to
suggest. See Citibank, 608 B.R. at 205 (“That the Defendants ultimately closed the
Prime Fund Deal and subsequently extended it solely on the strength of the Tremont
Indemnity implies the opposite of what the Trustee contends: the Defendants did not
believe that BLMIS was a fraudulent operation.”).

Third, the Trustee points to the “most favored nations” clause requiring Broad
Market Fund to give Fortis Bank the most favorable redemption rights it offered to
another investor. (¶¶ 211-14.) However, the PSAC does not allege that any investor had
superior redemption rights when the most favored nations clause was negotiated in May
2007. (¶ 211.) Rather, it was not until September 2007 when another leverage provider
– RBS – received a superior redemption right that Tremont granted Fortis Bank a
special redemption right. (¶ 212.)
Accordingly, the Court concludes that the PSAC fails to plead that the Defendants
had a subjective belief in a high probability that BLMIS was not trading securities and
was not segregating its investors’ assets when they received the subsequent transfers.

b. Second Prong
Even if the Trustee adequately pleaded the first prong, he failed to plead the
second prong, i.e., that the Defendants turned a blind eye to BLMIS’s highly probable
fraud. If Fortis subjectively believed that BLMIS was probably a fraud, it would have
been peculiar for Fortis to continually inquire about Madoff’s operations and conduct
due diligence. Elendow Fund, LLC v. Rye Select Broad Mkt. XL Fund (In re Tremont
Sec. Law, State Law, and Ins. Litig.), No. 10 Civ. 9061(TPG), 2013 WL 5179064, at *5

(S.D.N.Y. Sept. 16, 2013), aff'd, 588 F. App’x 27 (2d Cir. 2014). Yet, the PSAC sets forth
numerous instances in which Fortis performed due diligence and had ongoing
deliberations concerning BLMIS.20 Fortis communicated directly and met with Madoff
and other BLMIS employees in New York from “at least 2001 through 2008” in
connection with its role as Harley’s administrator. (¶ 95.) When the Novo/Buckley July
2003 email chain was forwarded to Eldridge, Eldridge followed-up with DiPascali to
inquire about asset segregation and to request a SAS 70 Report. (¶¶ 107-08.) Fortis’s
IBCoCo met in 2004 to discuss performing services for, and providing financing to,
Harley Investor B. (¶ 126.) Geene met with Tremont in May 2006 sending questions

20 The PSAC also omits references to Fortis’s due diligence included in the original complaint at a
time before the willful blindness standard was imposed by the District Court. For example, Fortis Bank
conducted due diligence at BLMIS in June 2006 and came away with “a favorable impression of the firm’s
execution capabilities and some insight into the source of their alpha generating capability in the context
of the market timing strategy.” Furthermore, Madoff’s level of secrecy surrounding the scale of activity
and number of clients was “understandable,” and Fortis concluded that there was no immediate risk to
collateral values. (Original Complaint, dated Dec. 8, 2010, at ¶ 86 (ECF Doc. # 1-1).) .
about BLMIS in advance. (¶¶ 133-42.) Geene had a conference call with Tremont in
August 2006 again sending questions beforehand and requesting a third-party opinion
letter regarding asset separation as well as a DDQ for BLMIS. (¶¶ 144-53.)

Most importantly, Fortis performed extensive due diligence in the late summer
and fall of 2006 in connection with the Swap Transaction. (¶¶ 166-68.) Fortis’s
diligence efforts culminated in the submission of the Credit Application in November
2006 to Fortis’s Central Credit Committee to approve the Swap Transaction. (¶ 176.) In
addition to providing detailed information about the Swap Transaction, the Credit
Application included extensive information about Tremont, BLMIS and the Tremont
funds that Fortis had learned. Among other things, it noted that Tremont was the

general partner and provided investment management services to both Broad Market
Fund (referred to as the Master Fund) and Rye XL Fund (referred to as the Feeder
Fund), and the Broad Market Fund had an excellent track record. In addition, Tremont
was a registered investment advisor with the SEC, Tremont and the Tremont Group are
regarded as “exemplary and top tier,” Tremont carried out extensive due diligence on
Madoff “in line with the Tremont Investment Process” and “has sufficient risk
management capabilities to control the investment into the Madoff account,” and
reconciled the BLMIS daily trade tickets that BLMIS provided against the BLMIS
monthly statements. (Credit Application at 3-5.)

The Credit Application also discussed BLMIS and Madoff. BLMIS utilized the
SSC Strategy purchasing forty to fifty large cap stocks hedged with equity index options.
“Madoff has been successfully executing this strategy since the 1960’s” and had $20
billion in assets under management. BLMIS’s performance “is regarded as sustainable.
Madoff has a 40 year track record in the chosen strategy, executed 10% to 15% of the
trades on the NYSE and NASDAQ and has consistently performed. The strategy is the
dominant strategy of Madoff and forms the cornerstone of their reputation.” Madoff
was selective and only accepted investment “when they have capacity,” but “Tremont
have [sic] an excellent relationship with Madoff which should continue to supply

Tremont with the required capacity in the future.” Madoff was a leading market maker
in all S&P 500 stocks and over 200 NASDAQ issues, his clients included JP Morgan
Chase Investments, Charles Schwab, Harley International Cayman Limited and
Tremont and finally, Chinese walls existed between the brokerage and custody sides of
the business.21 The Credit Application concluded that Tremont had “sufficient risk
management capabilities to control the investment into the Madoff account,” and “fully
recommended” the Swap Transaction. (Credit Application at 3-5, 8.)

Far from turning a blind eye to Madoff’s fraud, Fortis performed due diligence
when working on transactions involving Madoff and BLMIS as borne out in the Credit
Application and ultimately, put its money where its mouth was by investing $470
million of its own funds through the Hedge. There is always a risk that a broker will be a
fraud or become insolvent, and that included Madoff. But investing in the face of a
known risk or deliberate indifference to that risk is not willful blindness. Global-Tech,
563 U.S. at 770. Accordingly, the Trustee has failed to plead that the Defendants turned
a blind eye to Madoff’s fraud.22

21 The application also noted that Fortis had extended credit facilities to two funds invested with
BLMIS for amounts up to $600 million. (Credit Application at 8.)
22 The PSAC also discusses Fortis’s attempt to have AIG issue credit default swaps (“CDS”) to shift
“some” of Fortis’s $1 billion BLMIS exposure. (¶¶ 181-84.) However, the PSAC does not state the amount
CONCLUSION
For the reasons set forth herein, the Trustee’s Motion is denied. The Court has
considered the parties’ other arguments and concludes that they lack merit or have been
rendered moot by the disposition of the Motion. Settle order on notice.

Dated: New York, New York
January 23, 2020

/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge

of the proposed CDSs and whether AIG went through with the CDSs. Moreover, it is not uncommon to
purchase hedges, such as credit default swaps, to guard against the default of an obligor. BNP, 594 B.R. at
204 n. 19.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10460356. Public record. Not legal advice.