10-2378-bk(L),

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10-2676-bk(CON),
10-2677-bk(CON), 10-2679-bk(CON), 10-2684-bk(CON), 10-2685-bk(CON), 10-2687-bk(CON),
10-2691-bk(CON), 10-2693-bk(CON), 10-2694-bk(CON), 10-2718-bk(CON), 10-2737-bk(CON),
10-3188-bk(CON), 10-3579-bk(CON), 10-3675-bk(CON)
To be Argued by:
DAVID PARKER

United States Court of Appeals

for the

Second Circuit

In Re: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,

Debtor.

_______________________________
ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK

REPLY BRIEF FOR APPELLANTS LAWRENCE ELINS

AND MALIBU TRADING AND INVESTING, L.P.

KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.

Attorneys for Appellants Lawrence Elins
and Malibu Trading and Investing, L.P.
Of Counsel: 551 Fifth Avenue, 18th Floor
DAVID PARKER New York, New York 10176
MATTHEW J. GOLD (212) 986-6000
JASON OTTO
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Table of Contents

Table of Authorities ........................................................................................................ii

Preliminary Statement ..................................................................................................... 1

Argument ......................................................................................................................... 3

POINT I Account Statements Establish Obligations and Securities

Positions for Net Equity Claims ............................................................ 3

POINT II Section 78fff-2(b) Is Irrelevant to the Definition of Net Equity ........... 4

POINT III New Times I Does Not Support Net Investment in this Case ............... 5

POINT IV Appellees’ “Equity” Arguments Are Irrelevant and Wrong ................. 5

POINT V Neither the SEC Nor SIPC Is Entitled to Deference ............................. 6

POINT VI The Trustee’s Avoidance Powers Are Irrelevant to the

Determination of Net Equity ................................................................. 7

POINT VII The Elins Objections Were Properly Raised Below ............................. 8

Conclusion .................................................................................................................... 10

i
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Table of Authorities

Page(s)

CASES

In re Bernard L. Madoff Investment Securities LLC,

424 B.R. 122 (Bankr. S.D.N.Y. 2010) ........................................................................ 7
In re New Times Securities Services, Inc.,
371 F.3d 68 (2d Cir. 2004) .................................................................................... 4, 6

Levy v. Southbrook International Investments, Ltd.,

263 F. 3d 10 (2d Cir. 2001), cert. denied, 535 U.S. 1054 (2002) ............................. 6

STATUTES
Securities Investor Protection Act, 15 U.S.C. §78aaa, et seq. ............................... passim

Securities Investor Protection Act, 15 U.S.C. §78fff-2(b) ............................................. 4

OTHER AUTHORITIES
Fed. R. Bankr. P. 9026 .................................................................................................... 9

Fed. R. Civ. P. 46 ............................................................................................................ 9

ii
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Preliminary Statement
Appellants Lawrence Elins and Malibu Trading and Investing, L.P.

(collectively, “Elins”) respectfully submit this Reply Brief in support of their

appeal (No. 10-2691) from an order of the United States Bankruptcy Court for the

Southern District of New York (the “Bankruptcy Court”) dated March 8, 2010 (the

“Order”), based upon a Memorandum Decision issued on March 1, 2010 (the

“Decision”), holding that, as to the single legal issue addressed in the Order and

Decision and now on appeal,1 customer claims are to be determined by a “Net

Investment Method”2 asserted by trustee Irving Picard (“Picard”) rather than

pursuant to the statutory definition of net equity under the Securities Investor

Protection Act, 15 U.S.C. §78aaa, et seq. (“SIPA”).

Appellees Picard and the Securities Investor Protection Corporation

(“SIPC”) have filed briefs that take positions that are inconsistent with their

1
The Bankruptcy Court adopted a procedure to address discrete legal issues
seriatim. The first issue presented, and so the only issue before this Court, is
whether the SIPA statutory definition of net equity governs.
2
The “Net Investment Method” is more accurately described as a “cash in/cash
out” method that ignores the statements sent to customers and instead recognizes
only the cash deposits made by customers and amounts paid to them. However,
because “Net Investment Method” is the term used by most parties submitting
briefs in this appeal, Elins is using that term as well.

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obligations under SIPA to protect victims of the Madoff fraud.3 They have

concocted a standard unmoored to the language of SIPA under which investors

have no idea to what extent their investments may be protected by SIPC.

The Securities and Exchange Commission (the “SEC”) supports the position

of Picard and SIPC, although with a twist (the so-called “constant dollar”

approach) that was not properly before the Bankruptcy Court below and that would

not cure the defects in Picard’s and SIPC’s position.4

In addition, this Court should reject Appellees’ argument that Elins waived

objections to Picard’s improperly introduced evidence, because the record clearly

shows that Elins has consistently objected to its consideration.

3
Picard and SIPC respectively submitted the Brief for Trustee-Appellee Irving H.
Picard, as Trustee for the Substantively Consolidated SIPA Liquidation of Bernard
L. Madoff Investment Securities LLC and Bernard L. Madoff, dated September 20,
2010 [docket #283] (“Picard Br.”) and Brief of Appellee Securities Investor
Protection Corporation, dated September 20, 2010 [docket #282] (“SIPC Br.”).
4
Brief of the Securities and Exchange Commission, Amicus Curiae, in Support of
Appellee and Affirmance of the Order of the Bankruptcy Court, dated September
21, 2010 [docket #296] (“SEC Br.”).

2
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Argument

POINT I

ACCOUNT STATEMENTS ESTABLISH OBLIGATIONS

AND SECURITIES POSITIONS FOR NET EQUITY CLAIMS
Elins adopts and incorporates the legal arguments set forth in Point I of

Reply Brief for Appellants Sterling Equities Associates, Arthur Friedman, David

Katz, Gregory Katz, Michael Katz, Saul Katz, L. Thomas Osterman, Marvin

Tepper, Fred Wilpon, Jeff Wilpon, Richard Wilpon, and Mets Limited Partnership

[docket #338] (the “Sterling Reply Brief”).

Appellees’ argument that SIPA provides protection to victims of certain

types of frauds but not others, Picard Br. at 32, SIPC Br. at 26, is utterly without

support in the text of the statute, which makes no such distinction.

Furthermore, Appellees have not even attempted to address the point made

in Elins’ initial brief,5 at 9, that the Bankruptcy Court’s interpretation of net equity

is flawed because it can produce nonsensical results. The statutory definition of

net equity cannot change based upon the facts of particular cases, and Picard’s ad

hoc construction falls apart if the facts are not as Picard alleges (as well could be

not only in the Madoff case but also in other cases). For example, if Picard were to

5
Brief for Appellants Lawrence Elins and Malibu Trading and Investing, L.P.,
dated August 9, 2010 [docket #177] (“Elins Brief” or “Elins Br.”).

3
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discover that Madoff had established a Swiss bank account, and were to recover

$40 billion from that source, he would have more than sufficient customer property

to pay in full the claims of victims he calls “net losers” as calculated under Picard’s

“Net Investment Method,” yet no customer property would be paid to those victims

Picard improperly calls “net winners” because, under the Bankruptcy Court’s

construct, they would have no claims. Indeed, even if Picard were to recover

sufficient funds to pay all customers the amount shown on their last statements,

under his construction, he still would not do so because the so-called “net winner”

claims would be disallowed.

POINT II

SECTION 78fff-2(b) IS IRRELEVANT

TO THE DEFINITION OF NET EQUITY
Elins adopts and incorporates the legal arguments set forth in Point II of the

Sterling Reply Brief.

Moreover, Appellees’ interpretation of Section 78fff-2(b) cannot be

reconciled with the result in In re New Times Securities Services, Inc., 371 F.3d 68

(2d Cir. 2004) (“New Times I”). In New Times I fraud victims for whom the debtor

had not purchased any securities were accorded securities claims for those

securities listed in their last account statements -- exactly the result that Picard and

SIPC now argue is precluded by Section 78fff-2(b).

4
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POINT III

NEW TIMES I DOES NOT SUPPORT

NET INVESTMENT IN THIS CASE
Elins adopts and incorporates the legal arguments set forth in Point III of the

Sterling Reply Brief.

POINT IV

APPELLEES’ “EQUITY” ARGUMENTS

ARE IRRELEVANT AND WRONG
Elins adopts and incorporates the legal arguments set forth in Point IV of the

Sterling Reply Brief. There is no basis in either the SIPA statute or in the record to

determine that some Madoff victims are more deserving than others.

In addition, SIPC’s argument that its obligations to make advances to

customers do not enhance the total consideration available to customers, SIPC Br.

at 19-25, is based on a highly unlikely hypothetical. So long as SIPC’s

subrogation claims are not paid in full – which is highly likely – the more that

SIPC pays to customers, the more that will be available to customers in the

aggregate.

5
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POINT V

NEITHER THE SEC NOR SIPC

IS ENTITLED TO DEFERENCE
Elins adopts and incorporates the legal arguments set forth in Point V of the

Sterling Reply Brief.

This appeal is not one where the Court is bound to defer to rules or

regulations issued by an agency, unless the agency’s position is plainly erroneous.

See, e.g., Levy v. Southbrook International Investments, Ltd., 263 F. 3d 10, 14 (2d

Cir. 2001), cert. denied, 535 U.S. 1054 (2002). The matter to be considered relates

to the SIPA statute itself, not agency issued regulations. Indeed, neither the SEC

nor SIPC has issued rules or regulations in this regard. See New Times I, 371 F. 3d

at 81 (“While the fact that the SEC interpretation has not been expressed in the

form of a rule or regulation crafted after notice and comment does not alone

determine the applicability of Chevron ... it counsels against affording Chevron

deference to the SEC’s interpretation.”) Furthermore, as set forth in points I

through IV above, the position advocated by the SEC and SIPC is plainly

erroneous.

Finally, neither the SEC nor SIPC has even suggested that either of them is

entitled to deference. The only appellee to argue for deference to the SEC and

SIPC is Picard.

6
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POINT VI

THE TRUSTEE’S AVOIDANCE POWERS ARE

IRRELEVANT TO THE DETERMINATION OF NET EQUITY
Elins adopts and incorporates the legal arguments set forth in Point VI of the

Sterling Reply Brief.

Further, Appellees have not even addressed the point made in the Elins

Brief, at 10, that the Bankruptcy Court’s attempt to make the claims allowance

process “consonant” with Picard’s avoidance powers (424 B.R. at 135-36, A3-569,

SPA-29)6 ignores the fact that Picard’s avoidance powers are an exception to the

claims allowance process. The very notion of claim avoidance comes into play

only if a claim otherwise is allowable. Making claims allowance “consonant” with

avoidance would cause the exception to swallow the rule.

Moreover, avoidance can be invoked only when a trustee has established all

of the predicates of an avoidable transfer. If and when Picard files a complaint

seeking to avoid transfers, Picard will be required to prove each of the elements of

his case, defendants will have an opportunity to assert defenses, and the

6
References to the items in the Joint Appendix, which was printed in three
volumes, are preceded by the notation “A1,” “A2” or “A3,” respectively and
references to the Special Appendix are preceded by the notation “SPA.” For the
Court’s convenience, following the “A” or “SPA” notation, we also have provided
paragraph, page or other clarifying references.

7
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applicability of the avoidance statutes to Madoff victims can be considered. The

Bankruptcy Court’s blending of claims allowance and avoidance would have the

effect of allowing Picard to impose avoidance in a blanket manner upon all victims

Picard improperly labels “net winners” without having to satisfy the procedural

and substantive standards for doing so and without affording customers any

opportunity to raise appropriate defenses.

POINT VII

THE ELINS OBJECTIONS WERE

PROPERLY RAISED BELOW
As stated in the Elins Brief, the Decision cannot be affirmed as a matter of

law because it expressly relies upon findings of fact that are not based upon

properly adduced evidence. Elins Br. at 11-13. Picard makes no effort to defend

the admissibility of the evidence he appended to his motion. Neither does Picard

defend the propriety of his injecting extensive self-serving affidavits into what was

supposed to be a determination of a legal issue. Instead, he raises solely

procedural issues based upon misstatements concerning the record below.

Picard’s statement that the Bankruptcy Court made its findings of fact

“based upon submitted evidence that was undisputed or to which no appellant

objected,” Picard Br. n. 6 at 10, is plainly incorrect. The record is clear that the

evidence submitted by Picard was disputed and was objected to: Elins timely

8
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objected below to Picard’s attempt to introduce into the record purported facts that

had not been tested by the fact-finding process. Elins Objection, A1-95, docket

#779 ¶7.

Picard’s argument that “Malibu Trading did not raise the judicial notice

argument below, waiving the issue,” Picard Br. n. 6 at 10, ignores the actual

sequence of the proceedings. After Picard filed the Looby Declaration, A1-501,

Elins objected to its use, A1-95, docket #779 ¶7. Picard’s motion, A1-270, did not

request that the Bankruptcy Court take judicial notice of the allegations contained

in the Looby Declaration, so the Elins Objection did not object to such notice. It

was not until after the Bankruptcy Court rendered the Decision without having

held an evidentiary hearing and adopted the Looby allegations wholesale that the

judicial notice issue arose. “Failing to object does not prejudice a party who had

no opportunity to do so when the ruling or order was made.” Fed. R. Civ. P. 46,

made applicable by Bankruptcy Rule 9026. Thus Elins timely objected to Picard’s

evidentiary requests, and Elins did not waive the issue.

For the same reasons, SIPC’s argument that the Elins issues were “raised for

the first time on appeal,” SIPC Br. at 3, should be rejected.

SIPC also belatedly argues that the Elins Objection was insufficiently

specific, SIPC Br. at 3, but the point needs no specificity beyond what was

provided in the Elins Objection. Joseph Looby, Picard’s expert, was not a Madoff

9
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employee and had no personal knowledge of the operations of Bernard L. Madoff

Investment Securities LLC. Even if the Looby Affidavit was based upon Looby’s

review of the secret Madoff books and records, it still was inadmissible hearsay.

This flaw tainted all of the substantive allegations in the Looby Declaration.

Conclusion

Elins respectfully requests that the Decision and Order be reversed.

Dated: New York, New York

October 12, 2010

Respectfully submitted,

KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.

By: /s/ David Parker

David Parker

551 Fifth Avenue, 18th Floor

New York, New York 10176
Telephone: (212) 986-6000
Facsimile: (212) 986-8866

Attorneys for Appellants

LAWRENCE ELINS and

MALIBU TRADING AND INVESTING, L.P.
Of Counsel:
David Parker
Matthew J. Gold
Jason Otto

10
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STATE OF NEW YORK )

) ss.: AFFIDAVIT OF
COUNTY OF NEW YORK ) CM/ECF SERVICE

I, Kersuze Morancy, being duly sworn, depose and say that deponent is not a
party to the action, is over 18 years of age.

On October 12, 2010

deponent served the within: Reply Brief for Appellants Lawrence Elins and Malibu
Trading and Investing, L.P.

upon: See attached Service List

via the CM/ECF Case Filing System. All counsel of record in this case are registered
CM/ECF users. Filing and service were performed by direction of counsel.

Sworn to before me on October 12, 2010

s/
Mariana Braylovskaya
Notary Public State of New York
No. 01BR6004935
Qualified in Richmond County
Commission Expires March 30, 2014
Job # 232499
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SERVICE LIST

Josephine Wang, Esq. Jonathan M. Landers, Esq.

Kevin H. Bell, Esq. MILBERG LLP
SECURITIES INVESTOR PROTECTION CORP. One Pennsylvania Plaza
805 15th Street, N.W. Suite 800 New York, New York 10119
Washington, D.C. 20005-2207

Helen Davis Chaitman, Esq. Stephen A. Weiss, Esq.

BECKER & POLIAKOFF LLP SEEGER WEISS LLP
45 Broadway One William Street
New York, NY 10006 New York, New York 10004

Carole Neville, Esq. Karen E. Wagner, Esq.

SONNENSCHEIN NATH & DAVIS POLK & WARDELL LLP
ROSENTHAL LLP 450 Lexington Avenue
1221 Avenue of the Americas New York, NY 10017
New York, NY 10020
David B. Bernfeld, Esq.
Steven Fishbein, Esq. BERNFELD, DEMATTEO & BERNFELD
SHEARMAN & STERLING LLP LLP
599 Lexington Avenue 600 Third Avenue
New York, NY 10022-6069 New York, NY 10016

Brian J. Neville, Esq. Daniel M. Glosband, Esq.

LAX & NEVILLE LLP GOODWIN PROCTER LLP
1412 Broadway, Suite 1407 The New York Times Building
New York, NY 10018 620 Eighth Avenue
New York, NY 10018
Chryssa V. Valletta, Esq.
PHILLIPS NIZER LLP Kelly A. Librera, Esq.
666 Fifth Avenue DEWEY & LEBOEUF LLP
New York, NY 10103 1301 Avenue of the Americas
New York, NY 10019
Jeffrey A. Mitchell, Esq.
GIBBONS P.C. Katharine B. Gresham, Esq.
One Pennsylvania Plaza, 37th Floor SECURITIES AND EXCHANGE
New York, NY 10019 COMMISSION
100 F Street, N.E.
David J. Sheehan, Esq. Washington, D.C. 20548
BAKER & HOSTETLER LLP
45 Rockefeller Plaza Timothy P. Kebbe, Esq.
New York, NY 10111 BRUNELLE & HADJIKOW, P.C.
1 Whitehall Street, Suite 1825
New York, NY 10004
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Lawrence R. Velvel, Esq.

Mark Warren Smith, Esq. Massachusetts School of Law
SMITH VALLIERE PLLC 500 Federal Street
509 Madison Avenue, Suite 1510 Andover, MA 01810
New York, NY 10022