Opinion

Mishkin Ex Rel. Liquidation of the Business of Adler, Coleman Clearing Corp. v. Ensminger (In Re Adler, Coleman Clearing Corp.)

247 B.R. 51
1999 Bankr. LEXIS 1819
1999 WL 1613498

Court: United States Bankruptcy Court, S.D. New York
Filed: Dec 15, 1999
Status: Published
Author: Garrity
On the bench: Garrity
Cited by: 25 cases
Authority: More cited than 76.3%

noting that even if the value of transferred stock had risen "their value at the time of the transfer ... is the only value that has any bearing for purposes of § 548”

How later courts described this case

noting that even if the value of transferred stock had risen "their value at the time of the transfer ... is the only value that has any bearing for purposes of § 548”
stating that a goal of 546(e) is to “promote investor confidence”
illustrating that only where a company is on its “deathbed” will a court not give the assets a going concern value
"We may consider evidence uncovered after the advent of bankruptcy to determine the value of the debtor’s assets at the time the alleged insolvency occurred.”

Written by the judges who cited it.

The opinion

DECISION ON TRUSTEE’S COMPLAINT SEEKING JUDGMENT UPHOLDING HIS DETERMINATIONS REGARDING CERTAIN CUSTOMER CLAIMS

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Introduction

Adler, Coleman Clearing Corp. (“Adler” or “debtor”) is subject to this liquidation proceeding under the Securities Investor Protection Act of 1970, as amended, 15 U.S.C. §§

78aaa-lll

(1970) (“SIPA”). Edwin B. Mishkin, Esq., is the Securities Investor Protection Corporation’s (“SIPC”) court-appointed trustee (the “trustee”) for Adler’s liquidation. Prior to its demise, Adler acted primarily as a clearing firm serving various introducing firms and their customers on a fully disclosed basis, pursuant to clearing agreements (with the introducing brokers) and Customer Agreements (with those brokers’ customers). Hanover Sterling & Company (“Hanover”) was among those introducing brokers.

In accordance with the procedures which we established at the outset of the case, more than 15,000 customers filed claims against Adler to recover cash and/or securities in their accounts when SIPC closed Adler. As required by SIPA, the trustee has reviewed the filed claims and, where appropriate, has distributed cash or securities to the customers.

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Among the customers who have filed claims against Adler are former Hanover customers whose claims arise from transactions that purportedly occurred during the period from February 17 through 24, 1995, the last five business days of Hanover’s existence (the “Final Week”). They assert preferred SIPA customer claims

against Adler to recover (i) the cash proceeds of their purported sales to Hanover of stocks (the “House Stocks”)

in which Hanover was the market maker (the “Challenged Sales”), and (ii) for some of them, brand name securities other than House Stocks (the “Blue Chips”) which they purportedly purchased with the cash proceeds from the Challenged Sales (the “Challenged Blue Chip Buys”, and together with the Challenged Sales, the “Challenged Trades”).

The trustee denied those former customers’ claims. Pursuant to a December 18, 1996 application, he sought an order (i) upholding his determinations denying those claims, and (ii) expunging the objections to those determinations filed by those customers herein. In substance, he says that we should disallow their claims for cash and Blue Chips, but allow those customers to retain the House Stocks that were in their accounts prior to the Challenged Sales. The posted prices for the House Stocks are a fraction of what they were during the Final Week and the House Stocks are not worth nearly as much as the cash and/or securities in the customers’ accounts. A group of those customers (the “Claimants”) opposed the application, and on consent of the parties, we deemed the application a complaint (the “Complaint”) initiating an adversary proceeding under Part VII of the Federal Rules of Bankruptcy Procedure.

All agree that under SIPA, the Claimants are “customers” of Adler, and that we must apply the SIPC Rules, 17 C.F.R. §§ 300.501 through 300.503 (the “Series 500 Rules”), to determine whether they hold preferred “customer claims” for the cash and/or securities they say was in their accounts. As support for his Complaint, the trustee contends that the Claimants do not hold claims for cash and/or securities under those rules because the Claimants (i) did not authorize their brokers to make the Challenged Trades; (ii) lacked the funds to pay for the Challenged Blue Chip Buys and (iii) did not receive trade confirmations for the Challenged Trades that Hanover supposedly effected on February 24, 1995. The trustee also contends that, in any event, under Adler’s August 22, 1994 clearing agreement with Hanover (the “Clearing Agreement”), he can cancel the Challenged Trades and that pursuant

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to SIPC Rule 300.503, he can avoid the Challenged Trades as fraudulent transfers under the Bankruptcy Code and New York’s Debtor and Creditor Law, and because they are illegal trades under the federal securities law, the Martin Act (New York’s Blue Sky law) and the criminal provisions of SIPA.

On March 6, 1998, we denied a motion filed on behalf of 90 Claimants for an order dismissing the Complaint for failure to state a claim.

See Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.),

218 B.R. 689 (Bankr.S.D.N.Y.1998)

(“Ensminger I”

). In doing so, we held that the Complaint is legally sufficient and that if the trustee could prove the allegations in support of his Complaint, we would grant him judgment upholding his determinations respecting the Claimants, and overruling the Claimants’ objections to those determinations. On March 13, 1998, we granted the trustee’s cross-motion for partial summary judgment on the Complaint against the 65 Claimants who are asserting claims based upon the trades that Hanover effected on February 24. None of them received written confirmations of their trades from Adler. We held that they did not hold claims for cash or securities under the Series 500 Rules.

See Mishkin v. Ensminger (In re Adler, Coleman Clearing Corp.),

218 B.R. 13, 22-24 (Bankr.S.D.N.Y.1998)

(“Ensminger II

”). We assume familiarity with those decisions.

We conducted a trial on the issues raised in the Complaint on March 13, March 17, March 19 and March 20, 1998.

In May and June 1998, we approved settlements between the trustee and 18 Claimants. The trustee and the remaining Claimants submitted post-trial memoranda of law and proposed findings of fact and conclusions of law.

We heard oral argument on October 2, 1998.

The Claimants say that we should deny the trustee any relief under the Complaint because they hold valid SIPA claims for the cash and/or securities allegedly in their accounts. They maintain that they are innocent customers and that the trustee wants to make them scapegoats for the illegal, ill advised and fraudulent conduct of others. They assert that the Short

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Sellers (as we define that term below) intentionally destroyed Adler and Hanover by their illegal short selling of House Stocks, because they drove down the prices of those securities and in doing so, overwhelmed Hanover’s and Adler’s abilities to maintain their prices. They contend that the Short Sellers succeeded in their illegal scheme, but only after a protracted battle with Adler Hanover where— in a calculated business decision — Adler cooperated with Hanover to support the price of the House Stocks by funding all of Hanover’s House Stock purchases in unprecedented levels. They argue that Adler financed Hanover’s (and its own) defense of the Short Sellers with full knowledge that Hanover had no cash to pay for its House Stock purchases and inadequate customer demand to counteract the illegal short selling pressure. For them, Adler made a business decision to finance Hanover in reliance on Adler and Hanover’s abilities to force the Short Sellers to “buy back” the House Stocks that they had sold “naked”. They state that Adler’s belief that it would ultimately profit from the illegal short selling motivated its conscious disregard for Hanover’s wrongdoing, and that ultimately, the trustee, standing in Adler’s shoes, enforced the illegal short sales by conducting a buy-in of the House Stocks on March 20 and 29, 1995, in which he received $17 million on behalf of the estate. Thus, the Claimants deny that we should grant judgment to the trustee on the Complaint. They say, hmong other things, that they can enforce those trades under the Clearing Agreement and the trustee cannot rescind them or otherwise avoid them because Adler guaranteed Hanover’s performance under those trades.

As we will explain, the evidence proves, among other things, that beginning on or about January 20, 1995, the Short Sellers illegally manipulated the prices of the House Stocks downward and that Hanover initially sought to combat that action by purchasing large quantities of House Stocks at the posted prices. It also shows that on February 16, Hanover knew that it could not defeat the Short Sellers and knew that because it was operating in violation of its net capital requirements, it was obligated by law to cease trading. However, Hanover did not shut down, and it masked its true financial position and deceived Adler and the regulators long enough for a group of Hanover brokers to generate the Challenged Trades. They did so to give the Claimants preferred SIPA claims in Hanover’s inevitable liquidation proceeding, because they knew that the regulators would shut down Hanover when they learned of its true financial condition. Some of the Claimants are family members or close friends of certain of the Hanover Brokers and they were selected for the favored treatment for that reason. Those brokers favored the other Claimants in an effort to secure their future business. Indeed, after the regulators closed Hanover, all the Hanover Brokers went to work for broker-dealers and solicited those Claimants’ business. The evidence proves that Adler and the regulators were unaware of Adler’s true financial condition until on or about February 23, and could not reasonably have been expected to know about it prior to that time. Moreover the evidence establishes that while the Claimants are seeking to enforce the Challenged Trades as if those transactions settled, the regulators actually closed Adler before those trades cleared. No one has paid for the Blue Chips that the Claimants seek to recover and Hanover had no funds to pay for the Challenged Sales when it purportedly bought the House Stocks from the Claimants. Adler did not guarantee the Challenged Trades. The trustee has established that we should permit him to avoid those transactions.

Accordingly, as we will explain, we award the trustee judgment on his Complaint and uphold his determinations disallowing the Claimants’ claims and expunging the Claimants’ objections to those determinations. We do so as to some of

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the Claimants, because they failed to establish that they hold claims for cash and/or securities under SIPC Rules 300.501 and/or 300.502, either because they have not shown that they authorized their Hanover brokers to effect the Challenged Sales or because they lacked the funds to pay for the Challenged Blue Chip Buys.

In any event, we award the trustee judgment on the Complaint as against all Claimants because we find under the Clearing Agreement, he can cancel the Challenged Trades, and that pursuant to SIPC Rule 300.503, he can avoid the Challenged Trades as fraudulent transfers under the Bankruptcy Code and New York’s Debtor and Creditor Law, and because they are illegal trades under the federal securities law, the Martin Act (New York’s Blue Sky law) and the criminal provisions of SIPA.

Before discussing the merits of the Complaint, we consider one matter. Throughout their papers, the Claimants, directly and indirectly, have asked us to reconsider and/or revise certain of the rulings that we made in

Ensminger I

through

Ensminger V.

The trustee says that those rulings are the law of the case and govern our disposition of the Complaint and, in any event, that we should not alter them. Under the law of the case doctrine, if a court decides a rule of law, that decision should continue to govern in subsequent stages of the same case.

See DiLaura v. Power Authority of the State of New York,

982 F.2d 73, 76 (2d Cir.1992). Application of that doctrine is discretionary because a court can freely reconsider its own decisions prior to the entry of final judgment.

Id.

Thus, although our decisions in

Ensminger I

through

Ensminger V

serve as the law of the case, the Claimants are correct that, among other things, pursuant to Fed.R.Civ.P. 54(b), we can revise our decision in

Ensminger II,

because we have not entered a final judgment granting partial summary judgment in that matter.

See Gallant v. Telebrands Corp.,

35 F.Supp.2d 378, 394 (D.N.J.1998). The Claimants say that we should “revise” that decision to deny the trustee’s summary judgment motion. As we will explain, even assuming,

arguendo,

that Rule 54(b) empowers us to so “revise” that decision, the Claimants have not established any basis for us to do so. Likewise, the Claimants are correct that even though in

Ensminger I

we denied their motion to dismiss the Complaint, we can revisit the legal arguments and determinations we made therein. As necessary, we will review the Claimants’ requests in that regard. As we will explain, we find no merit to their requests.

Facts

On February 25, 1995 (the “Filing Date”), the Honorable Loretta A. Preska of the United States District Court for the Southern District of New York entered an order pursuant to SIPA § 5(b) finding that Adler’s customers required the protections SIPA affords, appointing the trustee to liquidate Adler’s business and removing the liquidation proceeding to this court. UF ¶ 1. Until the regulators shut it down, Adler was a securities clearing firm which

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was a member of the New York Stock Exchange (“NYSE”), the Securities Investors Protection Corp. (“SIPC”) and the National Securities Clearing Corp. (“NSCC”) and a broker-dealer registered with the Securities Exchange Commission (“SEC”).

Adler acted as clearing firm for 42 introducing or correspondent broker-dealers, including Hanover.

Id.

¶¶ 2-3, 9. It cleared trades for more than 66,000 customers, including 15,500 Hanover customers.

See

December 17, 1996 Declaration of John P. Norris in Support of Trustee’s Application to Disallow Certain Claims of Hanover Customers (the “Norris Deck”) (Trustee Ex. 37) ¶¶ 14-15 ¶ 17;

Transcript of March 13, 17, 19 and 20, 1998 Trial (“Tr.”) (Press) 48:21-49:14.

Hanover was a broker-dealer registered with the SEC and a member of NASD and SIPC. Its principal office was in New York City and it had a branch office in Boca Raton, Florida.

Hanover’s business almost exclusively concerned acting as the .underwriter for the initial public offering (an “IPO”) of securities issued by certain companies, and then acting as a market maker for the underwritten securities. UF ¶ 20. Hanover made orderly markets for those securities by holding itself out as ready and able to buy them. Hanover was the lead underwriter in the IPOs of, and the dominant market maker for, the House Stocks. UF ¶¶ 21, 22. Adler cleared trades for Hanover pursuant to its August 22, 1994 Clearing Agreement.

Id.

¶ 13; Trustee Ex. 771 (Clearing Agreement). Adler required Hanover customers whose trades it cleared to sign a standard form customer agreement (the “Customer

*67

Agreement”),

see

Trustee Ex. 66, although apparently not all Claimants actually executed one. Among other things, the Clearing Agreement called for Adler to: (a) clear and settle trades at Hanover’s instruction; (b) prepare and mail trade confirmations to Hanover’s customers; (c) settle contracts and securities transactions between Hanover and other broker-dealers (the Street), and between Hanover and its customers; (d) perform cashiering functions for Hanover’s customers’ accounts; and (e) maintain copies of the documentation relating to the accounts of Hanover’s customers. Clearing Agreement ¶ 3(a). Each Claimant that is party to a Customer Agreement agreed that it would not enter into an order to trade or carry any security until after [the customer] has received and reviewed a letter entitled “Disclosure Statement Pursuant to SEC Approved Amendments to New York Stock Exchange Rules 382 and 405 Effective February 19, 1982” (the “Disclosure Letter”). Trustee Ex. 66 (Customer Agreement) ¶ 21. The Disclosure Letter explains that the Clearing Agreement allocates responsibilities between Adler and Hanover, and that under the Clearing Agreement, Adler’s responsibilities included the receipt, retention, and after they come into Adler’s possession, payment or delivery of funds or securities credited to customer accounts. Trustee Ex. 46. In essence, when a broker-dealer clears and settles claims, it ensures that after a trade is made, the securities and cash are recorded in the proper accounts and in the proper amounts. Norris Decl. ¶ 15. Adler booked a record in each customer’s account after it learned that a trade had been executed on behalf of that customer.

Id.

However, the trades did not settle until cash and securities were actually transferred to and from the accounts of the buyers and sellers.

Id.

At all relevant times, stock trades did not settle until five days after the trades were agreed upon.

The brokers at Adler’s introducing firms had the primary contacts with their customers, although Adler, as the clearing entity, held those customers’ cash and securities.

See

Norris Decl. ¶¶ 14-15. Adler cleared trades on a fully disclosed basis: the introducing firms’ customers knew that Adler held their property in their accounts, and Adler sent account statements and papers confirming trades directly to them. UF ¶ 9; Norris Decl. ¶ 14; Tr. (Press) 37:3-10, 48:21-49:14.

Hanover maintained its own proprietary, or trading accounts with Adler. Norris Decl. ¶ 16; Tr. (Press) 48:21-49:14. Adler held the securities for Hanover’s proprietary and customer accounts at its Depositary Trust Company account. It held the cash for Hanover’s proprietary accounts in its bank accounts. Adler cleared and settled trades between Hanover’s proprietary accounts and Hanover’s customers within the Adler system. It cleared and settled trades between Hanover’s customers and the Street through the NSCC, the clearing organization that matched Adler’s buy and sell orders with buy and sell orders from other brokerage houses. Norris Decl. ¶ 16; Tr. (Press) 48:21-4:9:14. Under the NSCC’s rules, Adler was contractually obligated to the NSCC to pay for Hanover’s trades with the Street; i.e., Adler guaranteed those trades.

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Hanover’s proprietary accounts contained the majority of the assets and liabilities associated with the firm. Norris Decl. ¶ 84. Trading in House Stocks affected Hanover’s proprietary accounts because all Hanover trades went through Hanover’s proprietary accounts.

Id.

¶ 85. Thus, no transaction among Hanover customers or between a Hanover customer and the Street took place without Hanover’s proprietary accounts acting as the “middle man”.

Id.

As broker-dealers, Adler and Hanover were subject to the SEC’s net-capital rule.

See

Press Decl. ¶ 16 (discussing SEC Rule 15c3-1). Net capital is a derivation of net worth, excluding certain non-liquid, non-secured assets and other adjustments the SEC determine necessary to protect the investment community and its customers.

Id.

The rule requires a broker-dealer to maintain certain levels of liquid capital, depending, in part, on the type of business the broker-dealer conducts. Net capital is the difference between a broker-dealer’s total capital (calculated in accordance with generally accepted accounting principles) and the aggregate of certain non-allowable assets, operational charges and ‘'‘haircuts”.

Id.

¶ 17. “Haircuts” represent charges against net capital for investment or proprietary positions that the broker-dealer holds in its proprietary accounts.

Id.

¶ 21. They are supposed to provide a safety margin based on, among other things, the status of the broker-dealer as a market maker and any undue concentration of securities for which it was a market maker.

Id.

¶ 21. The SEC requires broker-dealers to file financial information on a monthly and quarterly basis in the form of a Financial and Operational Combined Uniform Single Report (“FOCUS Report”).

Id.

¶ 18. The report includes a net capital calculation. A broker-dealer must calculate its net capital by the tenth business day of every month, and more frequently if the broker-dealer is approaching its net capital requirement.

Id.

¶ 19. If it falls out of net capital compliance, it must report the violation to its self-regulatory organization, which for Hanover was the NASD.

Id.

As of December 31, 1994, Hanover’s net capital requirement was $297,798 and its net capital position was $3,776,463. Press Decl. ¶ 24. Thus, it enjoyed excess net capital of $3,478,665.

Id.

By January 31, 1995, Hanover’s excess net capital position decreased to $162,000.

Id.

¶ 26. In large part, that decrease is attributable to increases in “haircuts” due to a substantial increase of House Stocks in Hanover’s proprietary accounts.

Id.

¶ 28. That was due to the illegal activities of certain broker-dealers. From approximately January 20, 1995 through at least March 20, 1995 (the “Short Selling Period”), those broker-dealers (the “Short Sellers”) engaged in considerable illegal short selling of House Stocks. UF ¶ 26.

During that period, the Short Sellers sold more House Stock shares than they possessed or had arranged to borrow, or were publicly available.

Id.

¶¶ 31, 32. They did so to depress the market prices of the House Stocks, in order to manipulate and deceive the market.

Id.

¶¶ 29-30. Moreover, to increase that downward price manipulation, at the outset of the Short Selling Period, the Short Sellers planted negative information regarding Hanover and certain of the House Stocks with Dan Dorf-

*69

man, a financial reporter for CNBC, who then broadcast a negative assessment of those securities on January 20, 1995, and reported that Hanover was under SEC investigation. UF ¶ 38. They also originated and spread rumors in the market that Hanover was going to fail due to the concerted short-selling scheme.

Id.

¶ 34.

The posted prices of the House Stocks were significant to Hanover both because it owned large quantities of those securities and used them to support its net capital, and because many of its customers owned large quantities of House Stocks. Norris Decl. ¶¶ 18; Press Decl. ¶¶ 28, 31; Trustee Ex. 769 (Claimants’ trade file); Trustee Ex. 29 (Hanover FOCUS Reports); Cl. Ex. 55 (activity file). In response to the illegal short selling, as the dominant market maker for those securities, Hanover could have lowered their posted prices to discourage the Short Sellers from selling them. Moran Dep. 143:9-23;

Norris Decl. ¶¶ 98-99. However, in so acting, Hanover would have created losses for its customers holding House Stocks, and for itself, to the extent that it held those securities in its proprietary account. Those losses eventually would have threatened Hanover’s net capital. Press Decl. ¶¶ 6, 13, 15.

Hanover first responded to the illegal short selling by supporting the House Stock prices. It purchased, through its propriety accounts, all the House Stocks that the Short Sellers were offering and at the prices that Hanover posted for them. Press Decl. ¶¶ 87-95. However, each time Hanover’s proprietary accounts purchased House Stocks, Hanover had to increase the “haircuts” it took against its net capital. UF ¶ 25. To avoid being out of net capital, Hanover had to match its House Stock purchases with sales of those securities to the Street or its customers. Thus, Hanover’s initial response to the Short Sellers offered only temporary relief because by February 13, 1995, Hanover realized that there were not enough interested House Stock buyers among its customers or the Street to account for the volume of House Stocks that the Short Sellers were selling, and that its net capital could not legally withstand the Short Seller’s efforts. Nonetheless, Hanover continued to acquire House Stocks in its proprietary account. However, to deceive Adler and the regulators into believing that it was in net capital compliance, Hanover began to record fictitious “buys” of House Stocks in real and phony customer accounts to make it look like it was matching its House Stock buys with sales of those securities at the posted prices. Between February 13 and 16, while it was acquiring House Stocks in its proprietary accounts, Hanover booked $3.3 million in fake House Stock buys in the accounts of 31 customers (the “Pre-Final Week Fake Buys”). We conclude that those “buys” were fake because (i) no one ever paid for them, Cl. Ex. 54 (trades file); Norris Decl. ¶¶ 101-05; Press Decl. ¶¶ 10-12; Trustee Ex. 34 (fake buys February 13-16); (ii) customers representing 75% of the “buys” by dollar value denied that they ordered them and no customers acknowledged ordering them; (Hi) Hanover booked 70% of those “buys” by dollar value in closed accounts, dormant accounts, accounts with no assets and/or no activity while Hanover cleared through Adler; (iv) because the remaining “buys” (30% in dollar value) were at unprecedented levels in the accounts where Hanover booked them; (v) the average “buy” ($63,-118) in those accounts is almost four times the average House Stock buy ($16,594) by Hanover customers prior to the Final Week; and (vi) Hanover masked a portion of the fake buys by booking $2.7 million of fake sales in customer accounts credited with fake buys to make it appear that there was sufficient cash in those accounts

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to pay for the “buys”.

See

Norris Decl. ¶¶ 101-02. By February 16, Hanover booked purchases of another $9.8 million of House Stocks in customer accounts having similar characteristics.

Id.

Although Hanover eventually canceled those transactions, we find that they too were fake transactions and that Hanover effected them to further its deceptive and illegal actions.

In January and February 1995, Hanover held its material assets in its bank and proprietary accounts, although it held the vast amount of its assets and liabilities in its proprietary accounts. Press Decl. ¶ 31. From January 31 through February 16, Hanover’s assets in its bank accounts decreased, while it accumulated significant amounts of House Stocks in its proprietary accounts.

Id.

Thus, there was no net increase in Hanover’s capital during that period.

Id.

As a result, using the posted prices as of February 16, and giving Hanover credit for the fake buys and buys that Hanover would later cancel, on that day, Hanover was out of net capital compliance by at least $2,000,000.

Id.

¶¶ 35-37. If we disregard the fake and canceled buys, Hanover’s net capital deficiency on that day was approximately $6.0 million.

Id.

¶¶ 38-43; Tr. 85:18-86:7.

The Clearing Agreement mandated that Hanover advise Adler if it fell out of net capital compliance, or even if it approached the minimum net capital requirement. Clearing Agreement ¶ 2(a)(iv) (Trustee Ex. 771). Nonetheless, Hanover failed to do so. Press Decl. ¶ 44.

The regulators would have closed Hanover on February 16 had they known the true extent of Hanover’s net capital deficiency. Tr. (Press) 66:25-68:2; Press Decl. ¶ 38; Tr. (Lowry) 714:12-17. The NASD would have done so if it knew the extent of Hanover’s net capital deficiency.

See

LaFond Dep. 10:8-13, 19:16-21:9.

However, as we will explain, the regulators and Adler were not aware of Hanover’s true financial condition.

During the Final Week, Hanover acquired more House Stocks and booked $59.2 million in House Stock “buys” in its customers’ accounts. Those customers only acknowledge $2.9 million of those “buys”, or less than 5% of them, and Hanover canceled $7.7 million of them before it closed. Norris Decl. ¶ 22, n.3. We find that $ 45.1 million of those “buys” in 199 accounts were fake (the “Fake Buys”)

(i.e.

the customers never ordered them) because: (i) customers explicitly deny making 90% ($40.4 million) of the Fake Buys and no customer has acknowledged any of the transactions as a real purchase,

see

Norris Decl. ¶¶ 58-61; (ii) at least two Hanover brokers whose accounts were booked with Fake Buys denied that they effected those trades;

(iii) Hanover brokers Catoggio and Garber took the Fifth Amendment when they were questioned about those trades, Garber Dep. 23-24; Catoggio 17-19; Norris Decl. ¶ 63; (iv) $10.8 million worth of those “buys” were recorded with Hanover brokers who were not working at Hanover when the “buys” allegedly took place in their customers’ accounts,

see

Norris Decl. ¶ 64; (v) over 77% of the dollar value of the “buys” occurred in accounts that never before had any trading activity cleared by Adler, and

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the average “buy” in those accounts was more than ten times the average House Stock buy in all Hanover accounts prior to the Final Week,

id.

¶ 24; Trustee Ex. 3C (dormant accounts); Trustee Ex. 5 (unprecedented accounts); Trustee Ex. 7 (average buys); (vi) the “buys” booked in 42 of the accounts, or over 22% of the dollar value ($10.1 million) were at least five times higher than other buys or sells in those accounts, Norris Decl. ¶ 29; (vii) the purchase volume of House Stocks during the Final Week was greater than any other five-day period in Hanover’s trading history with Adler,

see

Trustee Ex. 6 (total buys); Norris Deck ¶ 33; (viii) the accounts in which Hanover recorded the Fake Buys contained in aggregate approximately $300,000 in cash and securities;

and (ix) Hanover made several attempts to conceal the Fake Buys from Adler. As to the latter, Hanover booked sales of largely Blue Chip securities in the accounts of 31 customers who had been booked with Fake Buys, even though those customers did not own the Blue Chips and never attempted to borrow them with the intention of effecting short sales. These disguised and illegal short sales (the “Fake Short Sales”) made it appear as though those accounts held $15.5 million in cash (representing the proceeds of those fake sales), which could be used to pay for House Stocks later booked into the accounts, Norris Deck ¶¶ 40-51; Trustee Ex. 8 (fake short sale accounts); Trustee Ex. 10 (Adler trading reports). Hanover also submitted phony address changes to Adler — so that once it recorded the Fake Buys or Fake Short Sales, Adler sent confirmations of those “transactions” to the wrong addresses, thereby preventing the real customers from learning of the trades and complaining about them. Norris Deck ¶ 52; Trustee Ex. 17 (summary of address changes); Trustee Ex. 47 (notices of address changes). Moreover, Hanover booked some of the phony transactions into accounts that its brokers opened without authorization or which they failed to close after the customer directed them to do so. Norris Deck ¶¶ 53-57.

Hanover also effected fake buys of House Stocks in its proprietary accounts during the Final Week.

See

Norris Deck ¶ 90.

During the Final Week, House Stock sales totaled approximately $53.2 million. Norris Deck ¶ 87. The Short Sellers booked $21.4 million of those “sales” as part of their illegal short selling scheme.

Id.

During that week, Hanover booked approximately $31.5 million in House Stock sales for cash credits in the accounts of its customers, including the Claimants. Norris Deck ¶ 66. Mechanically, this meant that Hanover’s proprietary accounts purchased that amount of House Stocks from them and Hanover credited their accounts with cash credits aggregating $31.5 million. Trustee Ex. 770 (customers’ activity file); Cl. Ex. 55 (activity file); Norris Decl. ¶¶ 66-67. Although that level of House Stock “sales” by Hanover customers was unprecedented,

only 9% of the 5,900 cus

*72

tomers holding House Stocks were able to sell their securities,

see

Cl. Ex. 55 (activity file); Norris Decl. ¶ 69; Tr. 691:10-16, although many more of them unsuccessfully attempted to do so.

See

Trustee Ex. 64 (written customer complaints about Hanover’s refusal and failure to execute sell orders). Moreover, the customers who were able to “sell” their securities liquidated 80% of their holdings. Norris Decl. ¶ 68.

While many Claimants left their “sale” proceeds in their accounts, Hanover purported to use the proceeds of some of them to purchase Blue Chip securities for those Claimants’ accounts. During the Final Week, Hanover purchased $18.7 million in Blue Chips on behalf of the Claimants. Norris Deck ¶ 71. It booked more than 80% of those purchases ($15.4 million) on February 24, 1995, when Hanover was open for no more than 90 minutes.

Id.

The activity in the Final Week was unprecedented.

Hanover booked those Blue Chip buys in accounts where the “proceeds” of the House Stock “sales” exceeded $100,000. Norris Dec. ¶¶ 70-82. As we will explain, that was not by chance. Rather, the Hanover Brokers selected those customers because they knew Hanover was insolvent and that SIPA only insured up to $100,000 in cash in customer accounts and up to $500,000 in securities. By substituting the Blue Chips for the “cash”, Hanover was attempting to maximize the Claimants’ customer claims in the inevitable liquidation proceeding.

Almost all (94%) of the Blue Chip buys were concentrated in eight securities: Apple, Dell, Ford, Cisco Systems, IBM, AT & T, Birmingham Steel and Microsoft.

Id.

¶ 73. During Adler’s tenure clearing for Hanover, the Claimants never purchased (either in their Hanover accounts or elsewhere) Apple, Ford, IBM, AT & T or (other than Hanover broker John Lembo) Microsoft. Certain Claimants had purchased the remaining Blue Chips prior to the Final Week, but only in the aggregate amount of $194,553. Norris Deck ¶¶ 72-73; Trustee Ex. 26 (chart of Hanover Blue Chip buys); Trustee Ex. 27 (chart of eight Blue Chips); Tr.(Lowry) 647:25-649:8.

On January 27, 1995, Adler’s net worth was $11.11 million and it had excess net capital.

See

Trustee Ex. 35 (Adler’s January 27 FOCUS Report). Leaving aside any Hanover-related losses, its net worth remained roughly constant through February 16, 1995. Trustee Ex. 36 (declaration of Adler Chief Operating Officer Jay Za-remba);

see also

Norris Deck ¶ 115, Press Deck ¶ 46. Hanover’s $16.9 million loss in its proprietary accounts (by virtue of the fictitious and canceled transactions) was the net debt that Hanover owed Adler for the execution of its trades. Tr. (Press) 73:12-24. As we will explain, by the close of business on February 16, Hanover was insolvent and was never going to repay that contingent receivable. Accordingly, Adler’s true net worth on that day was at least a negative $5.8 million,

and it had a

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negative net capital of $ 12,777,324. Press Decl. ¶ 46.

On Friday, February 24, Hanover generally was not receiving or accepting telephone calls. LaFond Dep. 24:11-24, 66:14-21, 67:3-10. That day, at approximately 11:00 a.m., the NASD closed Hanover. Tr. (Lowry) 649:14-16; Norris Decl. ¶ 68. On Sunday, February 26, the NYSE directed Adler to cease operating as a broker-dealer. Adler did so. Trustee Ex. 89 (N.Y.SE letter); Trustee Ex. 90 (Cohan letter).

Discussion

We base our subject matter jurisdiction of this proceeding on SIPA §§ 78eee(b)(2)(A) and (b)(4) and the district court order dated February 27, 1995 referring and removing debtor’s case to this court. This is a core proceeding.

See

28 U.S.C. § 157 (b)(2)(A) and (B).

Claimants’ Claims for Cash and Securities under the SIPC Rules

The Claimants must prove that they hold preferred SIPA “customer claims”.

Jackman v. SIPC (In re Brentwood Securities, Inc.),

96 B.R. 1002, 1006-07 (9th Cir. BAP 1989);

Schultz and Schultz v. Omni Mutual Inc.,

93 Civ. 3700CKC), 1993 WL 546671 , *1 (S.D.N.Y. Dec. 30, 1993);

In re A.R. Baron Co., Inc.,

226 B.R. 790, 795 (Bankr.S.D.N.Y.1998);

see also

Hearings before the Subcommittee on Consumer Protection and Finance of the Committee on Interstate and Foreign Commerce, 95th Cong., 1st Sess. 233 (1977) (“when a customer sells securities, his claim from that time until settlement and delivery of the funds is a claim for cash”). The Claimants misplace their reliance on

Bell & Beckwith,

821 F.2d 333 , to support their contention that we must deem the credits posted into their accounts on the trade date to be the equivalent of “cash” for purposes of Rule 502. That case does not address the issue before us- — whether a customer has a claim for securities if he simultaneously sold stocks and purchased other stocks with the expected proceeds. It does stand for the proposition that the status of a claim— either for cash or for securities — is generally fixed upon the filing of the SIPA proceeding.

Although certain Claimants have made a prima facie showing that they hold preferred SIPA customer claims for “cash” representing the proceeds of the Challenged Sales, they have" not established the prima facie validity of their claims for “securities” in the form of the Blue Chips because the Challenged Sales never settled. A “claim for cash” is not “cash” within the meaning of SIPC Rule 300.502.

Avoiding The Challenged Trades

Fraudulent Transfers Under The Bankruptcy Code

Even assuming,

arguendo,

that all Claimants could make

prima facie

showings that they hold preferred SIPA claims for the cash and Blue Chips in their accounts, we agree with the trustee that he can avoid the Challenged Trades as intentionally and constructively fraudulent transfers under the Bankruptcy Code. Indeed, as we will discuss, one court in this district confronted almost identical facts and circumstances, and concluded, as we do, that trades booked by unscrupulous brokers seeking to maximize SIPA protection for certain customers are avoidable

*86

under §§ 548 and 544 of the Bankruptcy Code.

See SEC v. S.J. Salmon & Co.,

72 Civ. 560, slip. op. (S.D.N.Y. Aug. 8, 1973)

(“Salmon

#1”);

SEC v. S.J. Salmon & Co.,

72 Civ. 560, slip. op. (S.D.N.Y. Feb. 5, 1974)

(“Salmon

# 2”).

Fraudulent Conveyance under 11 U.S.C. § 548 (a)(1)(A)

Section 548(a)(1)(A) of the Bankruptcy Code states that a trustee

may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor ... if the debtor voluntarily or involuntarily ... made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date such transfer was made or such obligation was incurred, [or] indebted

$ sfc H* ❖ H*

11 U.S.C. § 548 (a)(1)(A). Under § 550 of the Bankruptcy Code,

to the extent that a transfer is avoided under section ... 548 ... of [title 11], the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of the property, from' — ■

(1) the initial transferee of the transfer or the entity for whose benefit such transfer was made ....

Id.

§ 550(a).

Thus, to prevail on this claim, the trustee must show that (i) Hanover intended to hinder, delay or defraud Adler’s creditors or SIPC, (ii) Hanover dominated or controlled Adler’s disposition of its property, and (iii) the Claimants are responsible under applicable law for Hanover’s fraudulent acts as the ultimate beneficiaries of the final week trades.

See Ensminger I,

218 B.R. at 705. Irrespective of the burden of proof to be applied,

we find that the trustee is entitled to judgment under §§ 548 and 550 of the Bankruptcy Code avoiding the Challenged Trades.

Hanover Intended to Hinder, Delay or Defraud Adler’s Creditors

The evidence shows that during the Final Week, Hanover’s principal brokers (Ageloff, Catoggio, DiBella, Lembo, Mancino, Scarfone, Wolf, Ashenfarb and Danny Garber) sold House Stocks and purchased Blue Chips for themselves and their family and friends, to insure that when Hanover failed, they would hold preferred SIPA claims. For example, those brokers historically held large amounts of House Stocks, but liquidated substantially all their securities and acquired Blue Chip securities during the Final Week. Trustee Ex. 803 (summary exhibit showing when certain brokers owned House Stocks). They went to great lengths to do the same for their friends and family, and for the most part, booked the Blue Chip buys in accounts where it was expected that the proceeds from the House Stock sales would exceed $100,000 in cash.

See

Trustee Ex. 805 (trading summary by broker);

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Cl. Ex. 54 (trade files); Cl. Ex. 55 (activities file).

Those brokers were aware of the nature and extent of the protection SIPA offers to customers of failed broker-dealers.

See

Trustee Ex. 53 (sample broker study guide for registered representative accreditation which includes section setting forth the specific SIPA coverage limitations); Trustee Ex. 65 ¶ 14 (customer monthly statement which includes notice of the SIPA coverage for cash and securities);

see also

Tr.(Lowry) 695:5-25, 697:11-16, 698:11-699:14 (Claimants’ expert Lowry acknowledging that evidence shows that at least some Claimants were told by their Hanover brokers that they needed to shift their holdings to maximize SIPA coverage). After Hanover closed, some of them admitted that they took their actions to vest the customers with preferred SIPA claims. Norris Decl. ¶¶ 76-82; Trustee Ex. 28 (customer admissions).

*89

Moreover, after Hanover closed, many of the brokers went to work for one of four firms: The Heritage Group, Euro Atlantic Securities, Norfolk Securities and PCM Securities. They solicited at least 34 of Hanover’s former customers in an effort to retain their business.

Further, all of the Hanover principals and the brokers whose customers allegedly benefitted most from their actions refused to testify about their activities and instead, invoked their Fifth Amendment privileges against self-incrimination,

and some of them have pleaded guilty to, or have been convicted of, violations of the securities laws, including, among other things, market manipulation of House Stock prices.

*90

That furthers our conclusion that Hanover and its brokers intended to defraud Adler and its customers.

See Ensminger IV,

1998 WL 160036 , *8-12 (admitting in part evidence of brokers’ prior misconduct to show intended to defraud Adler and SIPC in connection with Challenged Trades);

Ensminger V,

1998 WL 182808 , *6-9 (admitting evidence of brokers’ invocation of Fifth Amendment for purpose of drawing inference that they intended to defraud by their actions).

No one disputes that the stability of the House Stocks prices notwithstanding the illegal short selling is persuasive evidence of a massive market manipulation, and that Hanover engaged in criminal violations of the federal securities laws to avoid being closed by Adler. Likewise, no one dis-

putes that while Hanover’s brokers’ immediate purpose was to deceive Adler, they plainly intended for Adler’s creditors, including SIPC, to be the ultimate victims of their fraud. That is because, to the extent that we do not uphold the trustee’s determinations regarding the Challenged Trades, SIPC will have to pay for them, subject to its statutory limits. It would then be subrogated to the Claimants’ claims against Adler’s estate, as it is already subrogated to the claims of other former customers that it has paid to date.

See Ensminger

I, 218 B.R. at 695-96 (citing SIPA §§ 78fff-3(a) and 78fff-2(c)(1)). In accordance with § 548(a)(1)(A), SIPC qualifies as an “entity to which the debtor ... became ... after the date that such transfer was made or such obligation was

*91

incurred, indebted.”

See Gibson v. United States (In re Russell),

927 F.2d 413, 419 (8th Cir.1991) (noting § 548(a)(1) is satisfied by intent to hinder, delay or defraud future creditors);

European Amer, Bank v. Sackman Mortgage Corp. (In re Sackman Mortgage Corp.),

158 B.R. 926, 938 (Bankr.S.D.N.Y.1993) (same). Hanover plainly intended to hinder, delay and/or defraud Adler’s creditors.

Hanover Dominated or Controlled Adler’s Disposition Of Its Property

After joining Adler’s roster of introducing brokers in early October of 1994, Adler created a direct computer link with Hanover. Norris Decl. ¶ 19. Hanover brokers wrote trade tickets for their customers and then bought them to Hanover’s trading desk. Thereafter, the clearing and settlement process varied depending upon whether the trade involved House Stocks or other securities. For House Stocks, Hanover’s trading desk entered the information on the trading tickets into the computer and automatically transmitted the trading information to Adler.

Id.

Hanover entered trades involving Blue Chip securities (i.e. any security other than a House Stock), into Adler’s system in one of two ways. If the security was listed on NYSE or the American Stock Exchange, the Hanover trading desk called Adler’s trading desk for the price, and Adler’s trading desk executed and entered the trade into its computer system. For all unlisted Blue Chip securities (i.e. stock traded through NASDAQ), Hanover independently obtained a price for the securities, and then entered and executed the trade through its computer.

Id.

Those trades were not booked into Hanover’s customers’ accounts until the evening of the day on which Hanover made them, and were reflected in Adler’s computer system the next morning.

Id.

and n. 2. Thus, at a mechanical level, Hanover controlled what Adler knew about its customers’ trading.

See id.

¶ 19-21. Adler did not select the Hanover trades which were entered on its books and did not monitor the trades on a real time basis.

See

Cohan Dep. 111:8-11; Sanacore Dep. 45:2-46:12; W. Giordano Dep. 119:7-22. Unless Adler took affirmative steps otherwise, the trades Hanover unilaterally input automatically settled.

See

1997 Piazza Dep. 118:20-25, 199:5-8.

No one disputes that Adler’s processing of trades was largely automatic upon Hanover’s submission of trading data to Adler. The trustee contends that Hanover’s domination and control of Adler is inherent in the clearing process and maintains that it was the automatic registration of the securities in Adler’s trading system, coupled with Hanover’s ability to book the Challenged Trades during the Final Week, that enabled Hanover to dominate and control the process that left cash and Blue Chip entries in the Claimants’ accounts.

Although § 548(a)(1)(A) speaks of the debtor’s intent to hinder, delay or defraud creditors, we will impute to the debtor the fraudulent intent of a transferee of the debtor’s property when the transferee is in a position to dominate or control the debtor’s disposition of its property.

See Ensminger I,

218 B.R. at 704. Adler and Hanover had different officers, directors, shareholders and employees and none of Hanover’s principals, brokers or traders were Adler insiders. The Claimants contend that on those undisputed facts alone, we must conclude that Hanover did not dominate or control Adler’s clearing of the Challenged Trades. However, in

Ensminger I,

we held that the fact that Hanover is not an “insider” of Adler, does not preclude us from imputing Hanover’s fraudulent intent to Adler, provided that it dominated and controlled the disposition of Adler’s property. 218 B.R. at 704. We find no basis to alter that conclusion because the critical consideration under § 548(a)(1)(A) is whether the transferee dominates and controls the disposition of the debtor’s, property, not whether it holds a particular title or position of authority at the debtor.

See, e.g.,

5 Collier On Bankruptcy ¶ 548.04[1], at p. 548-24 (15th ed. rev.1999) (‘When the transferee

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or obligee is in a position to dominate or control the debtor’s disposition of his property, however, his intent to hinder, delay, or defraud creditors many be imputed to the debtor so as to render the transfer fraudulent within section 548(a)(1), regardless of the actual purpose of the debtor transferor”);

see also

5 Colliee On Bankruptcy ¶ 548.LH[1] at 548-89 (15th ed. rev.1999) (discussing history of § 548(a)(1) ranging as far back as

*101

the Statute of Elizabeth, 13 Eliz., ch. 5 (1571)). In

Ensminger I,

218 B.R. at 707, we held that the

Salmon

decisions are entirely consistent with the Series 500 Rules, §§ 546(e) and 548 of the Bankruptcy Code, SIPA and subsequent decisions construing these rules and statutes.

The only distinction of any import between this case and the

Salmon

cases is the involvement of a clearing broker. This distinction makes no difference in the outcome of this case. In substance,

Salmon

involved a broker, knowing that it was insolvent and that securities for which it made a market would plummet in value, “buying” those securities from certain customers for the purpose of maximizing their SIPA claims. The same fraud was perpetrated here, and we will not permit it to succeed merely because Hanover cleared its trade through another broker.

Constructive Fraud under 11 U.S.C. § 548 (a)(1)(B)

As a preliminary matter, the Claimants contend that pursuant to § 546(e), the trustee cannot avoid the Challenged Trades and return the House

Stocks to their accounts under § 548(a)(1)(B), because those transactions constitute either settlement payments or margin payments.

Section 546(e) states, in relevant part, as follows:

Notwithstanding section[] 548(a)(1)(B) ... of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment, as defined in section 101 ■ or 741 of this title, made by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.

11 U.S.C. § 546 (e).

The trustee denies that § 546(e) is applicable. First, he correctly notes that in

Ensminger I,

we held that if the trustee could prove that there were no payments of any kind for the Challenged Trades, there could be no “settlement” or “margin” payments, regardless of how broadly we defined those terms.

See

218 B.R. at 703-

*102

04. He maintains that the evidence conclusively proves that there were no payments and, as such, § 546(e) is inapplicable.

Second, he contends that the plain reading of the term “settlement payment” is a payment upon the settlement of a trade, and that because none of the Challenged Trades booked in the regular way settled, there were no settlement payments for those Challenged Trades.

Third, he argues that applying § 546(e) to the Challenged Trades would defeat the purpose of the statute. He says that the specific purpose of the statute is to prevent the insolvency of one securities firm from spreading to other securities firms and possibly threatening the collapse of the affected market, and that its broader goal is to protect the smooth working of the securities markets. For the trustee, the statute protects the purchase and sale of securities in the ordinary course of business and that when trading occurs outside the ordinary course of business, such as massive market manipulation, § 546(e) should not protect it. He maintains that protecting the Challenged Trades will not serve either the specific or broader goals of the statute. He notes that the Challenged Trades were cleared only through Adler and there was no contact with other clearing firms and the general securities clearing network for these transactions. He argues that canceling the Challenged Trades will hardly spread insolvency to other brokerage houses and, in fact, will not have an impact on other brokerage houses at all. Among other things, as support, the trustee cites

Zahn v. Yucaipa Capital Fund,

218 B.R. 656 (D.R.I.1998). There, in noting that the purpose of § 546(e) is to prevent the insolvency of one firm from infecting the entire securities clearing system, the court explained that this danger was the by-product of the guarantees given by the participants in that system.

The system depends upon a series of guarantees, made by all parties in the chain, that they will live up to their obligations regardless of a default by another party in the chain.... If the pre-bankruptcy trades by a bankrupt intermediary could be set aside, then the guarantees that allow the system to function would be threatened, the parties could not proceed with confidence, and a bankruptcy by one party in the chain could spread to the other parties in the chain, threatening a collapse of the entire industry.

Id.

at 676 (citations omitted). The trustee says that in the clearing system, other entities such as the NSCC guaranteed Adler’s performance of its obligations that were cleared through the system and that if he were able to recover settlement payments made by Adler to the NSCC, NSCC would be deprived of cash paid to it by Adler, but still be obligated to guarantee Adler’s performance. In that scenario, the trustee says that Adler’s bankruptcy would cause a ripple effect in the system. Indeed, he says that this is what happened to Adler: Hanover could not perform its obligations to NSCC, so its liabilities effectively were transferred to Adler as NSCC’s guarantor. He says that there is no such systemic effect of any payments sought from the Adler estate by the Claimants. According to the trustee, because the domino effect that § 546(e) seeks to prevent is linked to the chain of guarantees, and no one contends that any other participant in the clearing system further guaranteed Adler’s performance of that guarantee, if the trustee avoids the Challenged Trades,, no other participant in the clearing system, let alone the system itself, will be affected. More broadly, he contends that to the extent the Challenged Trades were trades at all, they were not “ordinary course” trades that need to be preserved to protect investor confidence, especially because many of the Claimants allegedly did not know of the transactions until after Adler closed. He also maintains that, as the Challenged Trades were part of a scheme to defraud Adler and SIPC, if we enforce

*103

them, we will be providing others seeking to defraud SIPC a blueprint to do so.

Finally, the trustee contends that SIPA nullifies § 546(e). He notes that the Bankruptcy Code applies to SIPA liquidations only to the extent it is consistent with SIPA,

see

SIPA § 78fff(b),

and, citing

SIPC v. Charisma Securities Corp.,

506 F.2d 1191 (2d Cir.1974), he contends, in substance, that a Bankruptcy Code provision is inconsistent with SIPA if it impairs the effective and efficient operation of SIPA.

He says that SIPA is designed to protect only customer assets that were entrusted to broker-dealers in the ordinary course of business, and that, as such, § 546(e) could not mandate SIPA protection for fraudulent transactions that were never protected by SIPA in the first place. He contends that we will dramatically curtail SIPA’s purpose of protecting investor confidence and protecting customer property if we apply § 546(e) to protect the Challenged Trades. He says that not only would this perpetuate a fraud, but it would limit the fund of customer property that might be available to other customers — of Adler or other failed firms — in need of SIPA protection.

The Claimants argue that because § 546(e) bars a trustee from avoiding transfers made in furtherance of securities transactions even if intentionally fraudulent under state law.and preserves only the avoidance power in the case of intentional fraud by the debtor under § 548(a)(1)(A), it is strong evidence that Congress intended to satisfy securities customers’ legitimate expectations that executed trades will be completed. They maintain that § 546(e) works in harmony with the Series 500 Rules and SIPA to sustain confidence in the securities market by providing that transactions will be disturbed in only extremely limited circumstances.

The Claimants say that even if Hanover effected the Challenged Trades to defraud Hanover and SIPC, that is no basis for us to find, as the trustee and SIPC urge, the trades “never happened” or “were not real”. They say that the factual predicate for that argument is that the ultimate buyers of the House Stocks underlying the Challenged Trades were buyers who had not authorized their purchases, and that it is factually wrong because they sold their House Stock to Hanover, not the unauthorized buyers. They also allege that the trustee has acknowledged that fraudulent trades “exist” by enforcing pre-Final Week Fake Buys against the alleged “buyers” of the underlying securities, and enforcing the illegal short sales against the Short Sellers.

They deny that application of

*104

§ 546(e) depends upon the existence of a participant’s guarantee, and contend that in making that argument, the trustee is asking us to make an exception to § 546(e) where Congress has not done so. In any event, they contend that the Challenged Trades became the subject of various obligations and guarantees to deliver.

Thus, they argue that the trustee’s sole recourse is under § 548(a)(1)(A) of the Bankruptcy Code.

The Claimants are correct that the definitions of “settlement payment” and “margin payment” in § 741 of the Bankruptcy Code apply herein, because § 546(e) applies and incorporates them by reference, even though the provisions of subchapter III of chapter 7 do not apply to SIPA cases; and that many courts define the term “settlement payment” broadly to include any transfer made toward completion of the settlement process, whether made on trade date, the scheduled settlement date, or any other date.

See Ensminger I

, 218 B.R. at 704 (citations omitted). However, we disagree with their view of the applicable facts and law, find no basis to alter our determination in

En-sminger I

regarding the applicability of § 546(e) in this case, and conclude that the trustee has shown that § 546(e) does not apply herein.

Contrary to the Claimants’ assertion, the trustee does not assail the Challenged Trades merely because they were not authorized. He has done so because he says that they are the result of a scheme to defraud Adler and SIPC, and he has proved as much. He has established that Hanover hatched a plan to create fraudulent SIPA claims, not bargained-for exchanges of cash and securities. He has proved that in the Final Week, Hanover’s House Stock “buys” were false, and that Hanover dictated which of its customers could “sell” their securities. Moreover, he has established that the Challenged Sales could not have occurred without the Fake Buys, since Hanover would not have had any “money” to pay the Claimants their cash and Blue Chips. Indeed, the trustee has established that Hanover was not even attempting to trade stocks. Its brokers engaged in criminal and other wrongful acts in booking the Challenged Trades, and they did so to enhance the SIPC claims of the Claimants, not to have the trades performed.

*105

Although SIPC Rule 300.503 was created to exclude claims based on fraud,

we disagree with the trustee that SIPA nullifies § 546(e). We need not resolve the parties’ disputes over the construction of the terms “settlement payment” and “margin payment” because irrespective of how broadly we define those terms, § 546(e) does not protect the Challenged Trades from the trustee’s claims under § 548(a)(1)(B) of the Bankruptcy Code. The Challenged Trades are the result of Hanover’s massive fraud, not ordinary course transfers, and the statute simply does not insulate transactions like these from attack under § 548(a)(1)(B) of the Bankruptcy Code.

See Wider v. Wootton,

907 F.2d 570, 573 (5th Cir.1990)(in authorizing a trustee to recover, as preferences, payments made to third parties as a result of a fraudulent scheme pursuant to which a broker sent out false confirmation slips that represented fictitious securities purchases, court rejected the defendants’ assertion that § 546(e) protected the transactions, stating, in part, that it “will not implicitly authorize fraudulent business practices through an unjustified extension of the stockbroker defense”);

see also In re Integra Realty Resources,

198 B.R. 352, 360 (Bankr.D.Colo.1996) (court determined that § 546(e) was inapplicable because there was not really an exchange of securities and the recipients of the securities paid no consideration for their shares). Further, without addressing the parties’ contentions regarding the role of “guarantees” under § 546(e) (except to reiterate that Adler did not guarantee the Claimants’ Challenged Trades), we agree with the trustee that any other result is contrary to the goals of § 546(e) because it will undermine, not protect or promote investor confidence, since we will be endorsing a scheme to defraud SIPC.

To prove that we should avoid the Challenged Trades under § 548(a)(1)(B), the trustee must show that: (i) Adler received less than reasonably equivalent value in exchange for the obligations it purportedly was placed under and/or the transfers it purportedly effected in connection with the Challenged Trades; and (ii) Adler was either insolvent at the time of the Challenged Trades, was engaged in, or about to engage in, a business or transaction for which the property remaining constituted unreasonably small capital, or intended to incur, or believed it would incur, debts beyond its ability to pay when they matured. 11 U.S.C. § 548 (a)(1)(B).

For these purposes, the term “value” means “property, or satisfac

*106

tion or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor”. 11 U.S.C. § 548 (d)(2)(A). Outside of the foreclosure context, reasonably equivalent value means something similar to fair market value.

BFP v. Resolution Trust Corp.,

511 U.S. 581 , 545, 114 S.Ct. 1757 , 128 L.Ed.2d 556 (1994);

see also Davis v. Suderov (In re Davis),

169 B.R. 285, 299 (E.D.N.Y.1994) (“ ‘Absent unusual circumstances, [fair market value] will typically be the controlling consideration’ ”) (citations omitted). Other factors considered include the nature of the property in question and its relative marketability, and the number of persons appearing and bidding on it.

Davis,

169 B.R. at 299 (citation omitted);

accord Barber v. Golden Seed Co., Inc.,

129 F.3d 882, 387 (7th Cir.1997) (“[T]he formula for determining reasonable equivalent value is not a fixed mathematical formula; rather, the standard for ‘[rjeasonable equivalence should depend on all of the facts of each case,’ an important element of which is fair market value”) (quoting

In re Bundles,

856 F.2d 815, 824 (7th Cir.1988));

Cooper v. Ashley Comm., Inc. (In re Morris Communications NC, Inc.),

914 F.2d 458 , 466 (4th Cir.1990);

see also Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.),

92 F.3d 139, 149 (3rd Cir.1996) (“ ‘The touchstone is whether the transaction conferred realizable commercial value on the debtor’ ”) (citation omitted).

The Claimants say that Adler received “reasonably equivalent value” for the cash it credited to their accounts in connection with the Challenged Sales (and thus, the obligation to pay the Claimants if Hanover did not) in a variety of ways. They contend that they gave value by their enforceable promise to deliver the House Stocks to Adler which, once delivered, stood as security for the purchase price, and that Adler received value in the form of the $18 fee it received for every transaction that it cleared and that Adler contracted to receive those fees for clearing Hanover’s trades as compensation for the risk inherent in acting as a clearing broker. They also argue that Adler acquired the future value of the House Stocks in a cornered market where a buy-in of the illegal short sales would “reap the gold”, “crush” the illegal short sellers, and make Adler “quite wealthy. They maintain that Adler had been financing Hanover’s purchase of House Stocks for weeks while its inventory grew by huge amounts, and that it did so knowing that it could use those stocks for a buy-in not only to cover Hanover’s debt, but also to profit handsomely. They say that the validity of that decision was proven three weeks later when the trustee effected a buy-in of the House Stocks which netted $17 million for Adler’s estate.

By definition, the Claimants alleged “promise” to deliver securities to Adler cannot constitute “value”.

Cf.

11 U.S.C. § 548 (d)(2) (“value” does not include an “unperformed promise to furnish support to the debtor”). In any event, the value of that promise was worth no more than the underlying securities which, as we will discuss, were practically worthless. The fees that Hanover agreed to pay as a charge for clearing trades represented a service fee, not funds for the purchase of goods.

See

Trustee Ex. 771 Ex. A ¶ 10 (stating in Clearing Agreement that “[Hanover] agrees to pay [Adler] for its services pursuant to his Agreements the amounts set forth at Exhibit A”). Moreover, since Adler closed before any of the trades effected during the Final Week could settle in the ordinary course, Adler was not paid any fees for clearing the Challenged Trades.

Contrary to the Claimants’ assertions, and as we have explained, Adler did not intend to “reap the gold”. Moreover, unlike state fraudulent conveyance law, which expressly incorporates an element of “good faith” in defining “fair consideration”,

see, e.g.,

N.Y. Debt. & Cred. L. § 272 , § 548 is not so qualified in assess

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ing whether the transferor received reasonably equivalent value.

See R.M.L.,

92 F.3d at 148-49 (footnote omitted);

see also

5 Collier On Bankruptcy ¶ 548.05[1][b] at p. 548-324 (15th ed. rev.1999) (“In a significant change from the ‘fair consideration’ standard [under New York law and the Uniform Fraudulent Conveyance Act], ‘reasonably equivalent value’ does not contain a good faith component”).

But see Barber v. Golden Seed Co., Inc. (In re Ostrom-Martin, Inc.),

191 B.R. 126, 130 (Bankr.C.D.Ill.1996) (employing a totality of the circumstances test, including an assessment of the good faith of the transferee, in determining whether a debtor received reasonably equivalent value under § 548(a)(1)(B)),

aff'd,

129 F.3d 382 (7th Cir.1997);

Washington v. King William County (In re Washington),

232 B.R. 340, 342 (Bankr.E.D.Va.1999) (same). Thus, in assessing whether Adler received reasonably equivalent value for the Challenged Sales, we look only to the fair market value of the House Stocks, not to Adler’s good faith in receiving the stocks. Adler’s alleged intent to use the House Stocks to effect a buy-in of the illegal short sales is irrelevant. So too are the prices at which the trustee bought in those securities. In effecting the March 1995 buy-in of the House Stocks and thereby closing out Adler’s “fail to receive” positions in those securities, the trustee did not purport to effect the buy-ins at market prices' — he merely charged the same prices at which the securities were originally sold short.

The Claimants say that Adler received value in connection with the Challenged Blue Chip Buys in the form of: (i) cash in their accounts used to purchase the Blue Chips; (ii) the House Stocks and their proceeds as security for Hanover’s obligations to pay for the Blue Chips; (iii) their legal obligation to pay for the Blue Chips; (iv) a hen on any Blue Chips purchased to secure their obligation to pay the and (v) fees for clearing purchase price; the transactions.

Disregarding the “proceeds” of the Challenged Sales, no Claimant had sufficient cash in his or her account to pay for the Challenged Blue Chip Buys. In the aggregate, the Claimants who purchased Blue Chips had less than $400,000 in their accounts as of the close of business on February 16. Hanover booked a total of $13.3 million in Blue Chip buys into their accounts during the Final Week.

See

Trustee Ex. 770 (activity files for favored customers). The Challenged Sales were phony and thus the “proceeds” of those fake transactions provided no security to Adler. The Claimants contend that they have paid for the Blue Chips. Thus, their purported obligation to do so is not “value” to Adler. Moreover, their lien theory of value assumes that the Blue Chips were delivered to them or Adler, which they were not.

See Ensminger I,

218 B.R. at 27 (finding that the trustee’s records do not indicate that the Blue Chips were ever received by the Adler estate). Finally, as discussed previously, the fees that Adler would have been paid in connection with the Blue Chip purchases were nothing more than a service charge.

We agree with the trustee that, at bottom, the only “value” Adler received in connection with the Challenged Trades was the House Stocks. We consider the extent of that value. The trustee says that even assuming,

arguendo,

that Hanover never violated its net capital requirement, the House Stock prices it posted were artificially high since it was conducting a massive market manipulation to inflate the prices, and that those prices could not have existed without its market manipulation. Thus, he says that by definition, Adler would have paid out much more than the House Stocks were worth when these

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trades settled. As support, he points to, among other things, the fact that once Hanover was out of business and unable to manipulate the market, the prices dropped precipitously. He says that there is no one to whom Adler could have sold the House Stocks for anything close to what Adler is purportedly obligated to pay the Claimants for them and that we should take that into account in determining whether Adler received “reasonably equivalent value” in connection with the Challenged Trades. He says that in valuing the House Stocks, we should utilize the market prices that would have existed absent Hanover’s fraud, but assuming that Hanover had not been closed on February 16, or we should use the market prices that would have existed if Adler had been closed on February 16. In either event, he says that the prices that actually existed on February 27 most accurately reflect the House Stock values as of February 16, because they are unaffected by Hanover’s market manipulation. He maintains that using those prices, it is clear that Adler did not receive “reasonably equivalent value” in exchange for the House Stocks.

The Claimants say the House Stocks are reasonably equivalent value for the cash and Blue Chips credited to their accounts, and criticize the trustee’s methodology as unprecedented and unsound.

Citing

Moms Communications,

they say that we need look no further than the posted market price of the House Stocks during the Final Week to determine whether Adler received reasonably equivalent value in exchange for the transfers of cash and Blue Chips to the customers’ accounts. They say that where, as here, the House Stocks were the subject of two illegal manipulations, one forcing the price down from its published market price and one, in defense, maintaining the previously unmani-pulated market price, we should use the market price during or before the self-canceling manipulations. They contend that Lowry did precisely that, and criticize the trustee’s methodology in selecting the February 27 House Stock prices for determining whether Adler received “reasonably equivalent value” for the House Stocks. They say that the trustee myopically focuses solely on the market prices for House Stocks published by a handful of short selling broker/dealers on February 27, while, in contrast, their expert examined all prices at the critical time to determine value.

They say that Lowry’s analysis takes into account the prices that ready, willing and able buyers (including Adler) were paying for the House Stocks in February 1995, even through the Final Week. They maintain that even as the trustee assumes a fact that does not exist,

ie.

that Hanover was out of business and

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not making a market for the House Stocks on February 16, 1995, he fails to consider the affect on the market price of the House Stocks caused by any manipulations, including the illegal short selling, the negative publicity planted by the Short Sellers, the negative publicity caused by shutting down Hanover and Adler, the future demand for the House Stocks created by the illegal short selling, Adler’s ability to remain in business if Hanover had actually closed on February 16, and any other factors which could have affected the market price of the House Stocks during the Final Week.

Finally, they assert that the trustee’s expert, Joel Press, belies his contention that because Hanover should have been shut down for net capital violations on February 16, all subsequent trades can be ignored, because he testified that he has had numerous experiences where broker-dealers engaged in questionable or illegal activities that disguised net capital problems and trades were booked and honored anyway,

see

Tr.(Press) 105:16-106:12, and that brokers routinely discover net capital violations on the part of their introducing firms.

Id.

99:15-100:9. Moreover, they contend that because the Short Sellers did not own (and did not arrange to borrow) those stocks, every short sale that Hanover purchased created an opportunity for a buy-in by Adler. They assert that, at a minimum, that buy-in would have netted the Final Week prices. Further, they maintain that Adler was not concerned about the Fake Buys and the Fake Short Sales because its plan all along was to effect a buy-in at market prices.

Contrary to the Claimants’ assertions, we are not bound by the posted prices of the House Stocks in the Final Week. In

Salmon,

the court upheld the

NASD’s finding “that although other broker-dealers were also publishing quotations with respect to debtor’s securities, debtor could not have liquidated its securities” at the posted prices.

Salmon # 1

at 23. This approach, the court noted, “was justified by subsequent events which saw the collapse of the [house stock] prices when the debtor closed its doors.”

Id.

Moreover, neither

Morris Communications,

nor the case it cites,

United States v. 100 Acres of Land, More or Less, in Marin County, State of California,

468 F.2d 1261 (9th Cir.1972),

cert. denied,

414 U.S. 822 , 94 S.Ct. 119 , 38 L.Ed.2d 54 (1973), valued an asset under § 548 where the underlying transaction was tainted by fraud. However, in

Morris Communications,

the Fourth Circuit found that the lower court should not have disregarded an exchange made “without any fraud or improper action by either party” and held that when there is an arms-length transaction by parties that have equal knowledge, a court should not substitute its own view of a fair market price.

See

914 F.2d at 465, 474-75. The Challenged Trades were tainted with fraud; they were hardly arms length transactions. The Claimants have not established that Adler intended to effect the buy-in and, in any event, the buy-in is irrelevant. Moreover, Press testified unequivocally that Hanover should have been closed down on February 16. Tr. (Press) 66:25-68:2. Indeed, all the experts agree that Hanover was out of net capital on February 16 and should have been closed. Tr.(Press) 66:25-68:2; Norris Decl. ¶ 45; Tr.(Lowry) 714:12-17. So did the NASD’s representative.

See

La-Fond Dep. 10:8-13, 19:22-21:9. Despite a tremendous supply and little or no demand

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for the House Stocks at the posted prices, during the Final Week, the prices remained stable. Hanover was virtually the only willing buyer at those prices (“purchasing” $61.5 million of House Stocks), and by the Final Week it knew that it was never going to pay for its purchases. Meanwhile, there was no shortage of sellers at Hanover’s posted prices — $24 million from February 13 through 16, and $64.1 million during Hanover’s final week.

See

Norris Decl. ¶¶ 22-65, 94 and 110. Even Lowry agrees that the stability in the prices was a hallmark of massive market manipulation. Tr.(Lowry) 707:17-708:10, 708:20-23. Thus, we disagree with the Claimants that the manipulated House Stock prices during the Final Week are the appropriate measure for determining reasonably equivalent value under § 548(a)(1)(B) of the Bankruptcy Code.

Once Hanover was out of business and no longer manipulating the securities market, the House Stocks prices dropped precipitously. On February 27, the business day after Hanover closed, those prices dropped more than 75%. Norris Decl. ¶ 108. While we can attribute some of that decline to the fact that Hanover was no longer acting as a market maker for the stock,

see

Tr.(Press) 714:18-715:3, we find that it was largely attributable to the fact that Hanover was no longer creating the illusion of demand. Norris Decl. ¶ 107.

Based upon all of the forgoing, we conclude that the posted prices of the House Stocks during the Final Week — a time when Claimants acknowledge that Hanover was actively manipulating the market — is not an appropriate measure of their value for purposes of § 548(a)(1)(B). Rather, we find that the posted prices of the House Stocks on February 27 are a more accurate reflection of their value.

Claimants also assail the selection of February 27 prices because they claim that the date assumes that Adler would have been forced to liquidate all of the House Stocks on one day. Neither Hanover nor Adler was open for business on February 27, 1995. Trustee Ex. 52, Bates No. AREG 0005 (February 26, 1995 letter from NYSE prohibiting Adler from conducting business); Trustee Ex. 87, Bates No. 000024 (N.Y.SE timeline). Claimants concede that Adler held the majority of the House Stocks, including the entire issue of many of the securities.

See

Cl. MOL at p. 1. Accordingly, the “market price” on February 27 reflects a date when none of the shares could be sold even though many (if not all) of Hanover’s thousands of customers would have wanted to sell at that point. If they could have done so, the downward pressure would have further reduced the market prices of the House Stocks.

See

Tr.(Norris) 460:3-9. Finally, the fact that the House Stock prices were still subject to downward pressure exerted by the Short Sellers on February 27 is immaterial in light of the fact that one-and-a-half years after Hanover closed, when the market was no longer tainted by Hanover and the Short Sellers, the prices were still less than 25% of the February 27 prices.

See

Trustee Ex. 72. As Judge Herzog noted in

Salmon

“if the subsequent decline [in stock prices] indicates the true value of the securities on the critical date, a finding of unfair consideration may rest on the values which subsequently come to light.”

Salmon # 1

at p. 17.

Section 548(a)(1)(B) also requires that Adler have been insolvent at the time of the Challenged Trades, or have operated or have been about to operate with unreasonably small capital as a consequence of the trades. 11 U.S.C. § 548 (a)(1)(B). A company is insolvent when “the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation.” 11 U.S.C. § 101 (32)(A);

R.M.L.,

92 F.3d at 154-55 (a company is insolvent when its debts exceed its assets).

In the context of a going concern, “fair valuation” is determined “by the fair market price of the debtor’s assets that could be obtained if sold in a prudent manner within a reasonable period of time to pay the debtor’s debts.”

Lawson v.

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Ford Motor Co. (In re Roblin Industries, Inc.),

78 F.3d 30, 35-36 (2d Cir.1996) (citing

Rubin v. Manufacturers Hanover Trust Co.,

661 F.2d 979, 995 (2d Cir.1981);

Syracuse Engineering Co. v. Haight,

110 F.2d 468, 471 (2d Cir.1940);

Coated Sales, Inc. v. First Eastern Bank, N.A. (In re Coated Sales, Inc.),

144 B.R. 663, 666-67 (Bankr.S.D.N.Y.1992)). The key difference between liquidation value and fair market value is that the latter involves a reasonable time frame.

See Travelers International v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.),

203 B.R. 890, 895 (D.Del.1996) (citing

DuVoisin v. Anderson (In re Southern Industrial Banking Corporation),

71 B.R. 351, 356 (Bankr.E.D.Tenn.1987)),

rev’d on other grounds,

134 F.3d 188 (3d Cir.),

cert. denied,

523 U.S. 1138 , 118 S.Ct. 1843 , 140 L.Ed.2d 1093 (1998).

However, where a company is on its “deathbed”, we will value its assets according to what could be obtained at a liquidation sale and not give them a “going concern value.”

See Coated Sales,

144 B.R. at 667 ;

accord In re Taxman Clothing Co.,

905 F.2d 166, 170 (7th Cir.1990) (“going concern value is not the proper standard if the business is ‘on its deathbed’ ”) (citation omitted);

Langham, Langston & Burnett v. Blanchard,

246 F.2d 529, 532 (5th Cir.1957) (not proper to give “going concern” value to assets of business that was “ ‘financially dead or mortally wounded’ ”) (citation omitted);

Foley v. Briden (In re Arrowhead Gardens, Inc.),

32 B.R. 296, 299 (Bankr.D.Mass.1983) (interpreting § 547 and stating “ ‘[ujnless a business is on its deathbed ... the “fair value” of its assets ... is the going concern value or fair market price’ ”) (citation omitted),

appeal dismissed,

776 F.2d 379 (1st Cir.1985). “Deathbed” indications include ongoing fraud, struggling to stay in business before fraud is discovered, fraud used in an attempt to alleviate cash flow problems and an inability to reorganize post-bankruptcy.

See Coated Sales,

144 B.R. at 667-68 ;

see also

N.Y. Deb.

Cred. §§ 278-79 .

The trustee contends that by taking $31.5 million out of the estate during the Final Week, when Hanover and Adler were insolvent, Hanover intended the Challenged Sales to defraud Adler’s creditors, including SIPC. Relying on

Stochastic Decisions, Inc. v. DiDomenico,

995 F.2d 1158, 1172 (2d Cir.),

cert. denied,

510 U.S. 945 , 114 S.Ct. 385 , 126 L.Ed.2d 334 (1993), the trustee contends that under § 276 of the New York Debtor and Creditor law, he can avoid the Challenged Sales from the Claimants because Hanover was acting as their agent and the statute permits him to recover from anyone who participates in the fraudulent transfer. Alternatively, the trustee contends that for the same reasons he says he can avoid the Challenged Trades as constructively fraudulent transfers under § 548(a)(1)(B), he can avoid them under §§ 273 and 274 of the New York Debtor and Creditor Law.

The Claimants contend that to avoid a transfer under § 276 of the New York Debtor and Creditor Law as actually fraudulent, a creditor must demonstrate that the debtor intended to hinder, delay or defraud its creditors. They dispute the trustee’s reading of

Stochastic,

and argue that because the trustee has not alleged, let alone proven, Adler’s fraudulent intent, he is not entitled to relief under § 276 of the New York Debtor and Creditor Law. They maintain that, contrary to the trustee’s assertion,

Stochastic

does not address the issue of “fraudulent intent” under § 276, or even the elements to establish an actual fraudulent conveyance under the statute. They say that the district court had found that there had been a fraudulent conveyance and that the determination was not the subject of the appeal. They maintain that, on appeal, the court only considered whether the remedy of money damages was available against a participant to the fraud, and found that it was. They deny that the court derived the fraudulent intent necessary to establish an

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actual fraudulent conveyance under § 276 from a participant other than the debtor. Thus, they argue that

Stochastic

does not relieve the trustee from adducing clear and convincing evidence of the debtor’s fraudulent intent to establish an actual fraudulent conveyance under § 276 of the New York Debtor and Creditor law.

We disagree with the Claimants’ reading of that case. In

Stochastic,

the transferee, a lawyer who was not the debtor, was also the transferor. He masterminded the fraudulent transfers and retained some of the transferred assets for himself. 995 F.2d at 1172 . Contrary to the Claimants’ assertion, on appeal, the court considered the fraudulent conveyance claim and held, among other things, that the transferee was liable for a fraudulent transfer. The court stated that:

The New York Court of Appeals has made it clear that the pertinent provisions of the New York Debtor and Creditor Law provide a creditor’s remedy for money damages against parties who participate in the fraudulent transfer of a debtor’s property and are transferees of the assets and the beneficiaries of the conveyance .... It follows that [the lawyer] was properly held liable on the fraudulent conveyance claim.

Id.

Thus, we find that

Stochastic

supports the trustee’s assertion. Further, the New York Debtor and Creditor Law, which is New York’s version of the Uniform Fraudulent Conveyance Act,

see

30 N.Y. Jur.2d

Creditor’s Rights

§ 296 (1997), and § 548 are derived from the statute of 13 Elizabeth.

See

37 Am.Jur.2d

Fraudulent Conveyances

§ 3 (1968); (citations omitted); 5 Collier On Bankruptcy ¶¶ 548.01[2] at p. 548-8, 548.LH[2] at p. 548-89 (15th ed. rev.1999). The two statutes devolve from the same source, are founded on the same principles and are designed to effectuate the same purposes. Thus, we fail to see why the intent imputation doctrine would not apply in New York as well, and none of the cases which the Claimants cite hold that it does not apply.

We also find that for the reasons we found that the Challenged Trades can be avoided as fraudulent transfers under § 548(a)(1)(B), the trustee is entitled to judgment avoiding them under §§ 273 and 274 of the New York Debtor and Creditor Law.

Recission of Trades Under Non-Bankruptcy Law

The trustee also has established that we should uphold his determinations and rescind the Challenged Trades because they are fraudulent under New York common law and because they are illegal under the federal securities laws, New York’s Blue Sky Laws, and/or the criminal provisions of SIPA.

Common Law Fraud

Under New York (or federal common) law, the elements of a fraud claim are that: (i) the defendant made a material false representation; (ii) the defendant knew it was false; (iii) the defendant acted with intent to defraud; (iv) the plaintiff reasonably relied on the false representation; and (v) the plaintiff was damaged.

Marcus v. AT & T Corp.,

138 F.3d 46 , 62 (2d Cir.1998) (citing

Pence v. United States,

316 U.S. 332, 338 , 62 S.Ct. 1080 , 86 L.Ed. 1510 (1942);

Turtur v. Rothschild Registry Int'l, Inc.,

26 F.3d 304 , 310 (2d Cir.1994);

Gershon v. Hertz Corp.,

215 A.D.2d 202, 202-03 , 626 N.Y.S.2d 80 (N.Y.A.D.1995)). The trustee must establish each element by clear and convincing evidence.

See In re Embers 86th Street, Inc.,

184 B.R. 892, 897 (Bankr.S.D.N.Y.1995) (citations omitted). When a contract or conveyance is based on fraud or misrepresentation, the equitable remedies of cancellation or rescission are appropriate. 60 N.Y. Jur.2d

Fraud and Deceit

§ 194 (1987);

Davis v. William Rosenzweig Realty Operating Co.,

192 N.Y. 128, 134 , 84 N.E. 943 (N.Y.1908);

Murkofsky v. Jerry,

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152 Misc.2d 141, 142-43 , 584 N.Y.S.2d 707 (N.Y.Sup.Ct.1992).

It is settled that under New York law, guarantors cannot avoid their obligations absent a clear showing that the obligee was guilty of fraudulent concealment and misrepresentation or any other circumstances inconsistent with a bona fide transaction.

See

63 N.Y. Jur.2d

Guaranty and Suretyship

§ 172 (1987). Moreover,

[consistent with the holdings that guarantors may' not easily avoid their obligations, courts have also made it clear that duties of inquiry and awareness fall upon the guarantor.

Chemical Bank v. Layne,

[ 423 F.Supp. 869, 871 (S.D.N.Y.1976).] Thus, in applying New York law, the court in

Mohasco Industries, Inc. v. Giffen Industries, Inc.,

335 F.Supp. 493, 497 (S.D.N.Y.1971) stated: “Then obligee is not under an obligation to disclose to a surety information of which the surety has knowledge readily to hand. A surety cannot ‘rest supinely, close his eyes, and fail to seek important information’ and then seek to avoid liability under the guaranty by claiming he was not supplied such information”.

Magee v. Manhattan Life Insurance Co.,

92 U.S. 93 , 23 L.Ed. 699 (1876).

Marine Midland Bank v. Smith,

482 F.Supp. 1279, 1286 (S.D.N.Y.1979),

aff'd,

636 F.2d 1202 (2d Cir.1980). As a preliminary matter, the Claimants contend that Adler cannot rescind the Challenged Trades under New York law because Adler guaranteed them and all the transfers made in connection therewith, the Claimants did not make any false statements to Adler in connection with those transactions, and Adler had full knowledge of Hanover’s unauthorized buying and other machinations engaged to maintain the price of the House Stocks, and continued to guarantee the trades regardless.

Under New York’s Statute of Frauds, no “special promise to answer for the debt, default or miscarriage of another person” is enforceable absent a writing signed by the guarantor. N.Y. Gen. Oblig. L. § 5-701 (McKinney 1989). The Claimants argue that several documents govern their contractual relationship with Adler. First, they cite to the (i) the Customer Agreement (for those Claimants who signed one); and (ii) the Clearing Agreement, of which the Claimants are third party beneficiaries. They say that because under the Clearing Agreement, Adler agreed “to settle and clear” both the Claimants sales and buys and Hanover’s sales and buys,

see

Clearing Agreement, ¶ 3(a)(i)(iii), like the NSCC, Adler stood in the middle between the Claimants, as seller, and Hanover, as the buyer. They contend that because the meaning of the contractual obligation “to clear and settle” is not readily apparent from the Clearing Agreement itself, it can only be understood by reference to the practices of the securities industry. They say that the Customer Agreement and Confirmations incorporate the “customs”, “practices” and “usages” of the exchange or market over which Adler executed the trades. Moreover, they argue that interpreting those three writings as an expression of the parties’ intention, read in light of the words used and their meanings in the securities industry, and in accordance with the customs, practices and usages of the over-the-counter market, NYSE and NASD, it is clear that Adler was obligated to deliver cash and Blue Chips to the Claimants accounts upon execution of the Challenged Trades. They argue that towards completion of its obligations, Adler debited the House Stocks from the Claimants’ accounts and credited the cash proceeds and, for those Claimants who ordered the Blue Chips, Adler debited the purchase pr

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