Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan Regina L. Griffin Thomas L. Long Kathryn M. Zunno Catherine E. Woltering Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL) Plaintiff-Applicant, SIPA Liquidation v. (Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Adv. Pro. No. 10-05354 (BRL) Plaintiff, v. AMENDED COMPLAINT ABN AMRO BANK N.V. (presently known as THE ROYAL BANK OF SCOTLAND, N.V.), and RYE SELECT BROAD MARKET XL FUND, LP, Defendants. 10-05354-brl Doc 47 Filed 08/08/12 Entered 08/08/12 20:29:24 Main Document Pg 1 of 74
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Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan Regina L. Griffin Thomas L. Long Kathryn M. Zunno Catherine E. Woltering Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES INVESTOR PROTECTION CORPORATION, Adv. Pro. No. 08-01789 (BRL)
Plaintiff-Applicant, SIPA Liquidation v.
(Substantively Consolidated) BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Defendant. In re:
BERNARD L. MADOFF,
Debtor.
IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,
Adv. Pro. No. 10-05354 (BRL)
Plaintiff, v.
AMENDED COMPLAINT ABN AMRO BANK N.V. (presently known as THE ROYAL BANK OF SCOTLAND, N.V.), and RYE SELECT BROAD MARKET XL FUND, LP,
Defendants.
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Irving H. Picard (the “Trustee”), as trustee for the liquidation of Bernard L. Madoff
Investment Securities LLC (“BLMIS”), and the substantively consolidated estate of Bernard L.
Madoff, individually, under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. §§ 78aaa
et seq., for this Amended Complaint against ABN AMRO Bank N.V. (presently known as The
Royal Bank Of Scotland, N.V.) (“ABN/RBS”),1 and Rye Select Broad Market XL Fund, LP
(“Rye XL LP”)2 (collectively, ABN/RBS and Rye XL LP are referred to herein as the
“Defendants”) alleges the following:
I. NATURE OF THE ACTION
1. This adversary proceeding is part of the Trustee’s continuing efforts to recover
BLMIS customer property3 that was stolen as part of the massive Ponzi scheme perpetrated by
Bernard L. Madoff (“Madoff”) and others.
2. With this Amended Complaint, the Trustee seeks to recover approximately $237
million in subsequent transfers of BLMIS customer property collectively made to Defendant
ABN/RBS by Rye Select Broad Market Fund LP (“Broad Market”) and Rye Select Broad
Market Portfolio Limited (“Portfolio Limited Fund”), which were Madoff feeder funds, as well
as by the Rye Funds, as defined below. The Trustee also seeks to recover approximately $333.7
1 ABN/RBS is wholly owned by RBS Holdings N.V., which is wholly owned by RFS Holdings B.V., which is 97.72% owned by The Royal Bank of Scotland Group plc.
2 The Trustee has settled with Rye XL LP; however, objectors have appealed the settlement approval order issued by Judge Lifland. On June 27, 2012, the district court dismissed the appeal for lack of standing. 11-Civ-7330 (S.D.N.Y) (GED) ECF No. 35. On July 30, 2012, the objectors filed a Notice of Appeal of 6/28/12 Final Judgment Dismissing Tremont Appeal. 12-3052bk (2d Cir.), ECF No.1. The Trustee has named Rye XL LP in this Amended Complaint to preserve his rights in case the settlement is not ultimately approved. The Trustee believes the objections to the settlement are without merit and will dismiss Rye XL LP upon receipt of a non-appealable order dismissing the objections to the settlement.
3 SIPA § 78lll(4) defines “Customer property” as cash and securities at any time received, acquired, or held by, or for the account of, a debtor from, or for, the securities accounts of a customer, and the proceeds of any such property transferred by the debtor, including property unlawfully converted.
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million in subsequent transfers of BLMIS customer property collectively made to Defendant Rye
XL LP by Broad Market and Rye Select Broad Market Prime Fund LP (“Prime Fund”).4
3. Broad Market, Portfolio Limited, Prime Fund, and Rye Select Broad Market
Insurance Portfolio LDC (“Insurance Portfolio Fund”) (collectively, the “Tremont Feeders”) had
direct customer accounts with BLMIS’s investment advisory business (“IA Business”), investing
virtually all of their assets in their BLMIS customer accounts. The Tremont Feeders are wholly
owned, operated, and controlled by Tremont Partners, Inc. (“Tremont”).
4. In addition to the Tremont Feeders, as part of its larger network of funds, Tremont
also wholly owned, operated, and controlled two private investment funds, Defendant Rye XL
LP and Rye XL Portfolio (together, the “Rye Funds”). At all relevant times, Rye XL LP and
Rye XL Portfolio invested virtually all of their assets in the Tremont Feeders, or other Tremont
funds that invested virtually all of their assets directly or indirectly in BLMIS.
5. Rye XL LP, Broad Market and Prime Fund are Delaware limited partnerships
with their principal place of business in Rye, New York. Portfolio Limited Fund and Insurance
Portfolio Fund are Cayman Island companies that also had their principal place of business in
Rye, New York.
6. At all relevant times Defendant ABN/RBS was part of a sophisticated global
financial network providing banking and investment services to retail, private, and commercial
banking clients, including derivatives products and services.
7. As detailed herein, the Trustee seeks to recover: approximately $1.4 million of
customer property fraudulently transferred by BLMIS to Broad Market, which it then
4 The Trustee’s investigation is ongoing, and the Trustee reserves his right to supplement any transfer information with respect to initial transfers made by BLMIS to the Tremont Feeders, any subsequent transfers of such BLMIS Customer property to the Rye Funds, and/or any other affiliated Tremont entity, and any subsequent transfers of such BLMIS Customer property to any of the Defendants.
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subsequently transferred to ABN/RBS; approximately $333.7 million of customer property
fraudulently transferred by BLMIS to Broad Market and Prime Fund, which they then
subsequently transferred to Defendant Rye XL LP, of which a minimum of $87.5 million was
subsequently transferred by Rye XL LP to Defendant ABN/RBS; $74.4 million of customer
property fraudulently transferred by BLMIS to Portfolio Limited Fund, which it then
subsequently transferred to ABN/RBS; and $74.6 million of customer property fraudulently
transferred by BLMIS to Portfolio Limited Fund and Insurance Portfolio Fund, which they
subsequently transferred to Rye XL Portfolio, and which was subsequently transferred by Rye
XL Portfolio to Defendant ABN/RBS.
8. As described more fully below, Defendants received these subsequent transfers of
BLMIS customer property under circumstances in which they knew or should have known of the
fraud at BLMIS. Moreover, rather than conduct further due diligence in response to indicia of
fraud of which they were aware, Defendants ignored the warnings signs of fraud and chose to
look the other way.
II. JURISDICTION AND VENUE
9. The Trustee brings this adversary proceeding pursuant to his statutory authority
under SIPA §§ 78fff(b), 78fff-1(a), and 78fff-2(c)(3); sections 105(a), 544, 550(a), and 551 of
title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq. (the “Bankruptcy Code”); and the
New York Fraudulent Conveyance Act (New York Debtor & Creditor Law) (“NYDCL”)
§§ 273-279 (McKinney 2001), to recover avoided and avoidable transfers received by the
Defendants as subsequent transferees of funds originating from BLMIS.
10. This is an adversary proceeding brought in this Court, in which the main
3. Portfolio Limited Fund’s Transfers to Rye XL Portfolio Using Customer Property Redeemed from BLMIS
64. Beginning no later than November 1, 2006, Portfolio Limited Fund began
transferring funds into Rye XL Portfolio.
65. Upon information and belief, Portfolio Limited Fund used redemptions from
BLMIS to make the transfers to Rye XL Portfolio.
66. As detailed below, BLMIS fraudulently transferred a minimum of $617.9 million
in customer property to Portfolio Limited Fund during the 6-year period prior to the Filing Date 6 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
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(see Exhibit I), and between November 1, 2006 and April 16, 2008, Portfolio Limited Fund
transferred at least $74,298,573 of these funds to Rye XL Portfolio.7 The Portfolio Limited Fund
transfers to Rye XL Portfolio are set forth below. (See also Exhibit K.)
4. Insurance Portfolio Fund’s Transfers to Rye XL Portfolio Using Customer Property Redeemed from BLMIS
67. Beginning no later than January 2, 2008, Insurance Portfolio Fund began
transferring funds into Rye XL Portfolio.
68. Upon information and belief, Insurance Portfolio Fund used redemptions from
BLMIS to make the transfers to Rye XL Portfolio.
69. As detailed below, BLMIS fraudulently transferred a minimum of $93.9 million
in customer property to Insurance Portfolio Fund during the 6-year period prior to the Filing
Date (see Exhibit M), and on January 2, 2008, Insurance Portfolio Fund transferred at least
7 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
Date Amount 11/1/2006 $22,000,000 1/2/2007 $10,000,000 1/2/2007 $10,000,000 8/1/2007 $6,550,000
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$318,000 of these funds to Rye XL Portfolio.8 The Insurance Portfolio Fund transfers to Rye XL
Portfolio are set forth below. (See also Exhibit N.)
Date Amount 1/2/2008 $318,000
B. Defendant Rye XL LP’s Onshore Swap Agreement with Defendant ABN/RBS
70. Defendant Rye XL LP promised its investors returns that were three times the
return of Broad Market. At various times from inception through December 11, 2008, Defendant
Rye XL LP made independent decisions to use the proceeds of investors’ subscription and/or
other assets to fund swap agreements with third party leverage providers, including, but not
limited to, ABN/RBS. These swap agreements provided Defendant Rye XL with three times the
returns of Broad Market, the swaps’ so-called “reference asset.”
71. On November 1, 2007, Defendant Rye XL LP and Defendant ABN/RBS entered
into one such swap agreement (the “Onshore Swap”). Similar to a traditional loan, the Swap
required Rye XL LP to post collateral with ABN/RBS. On November 1, 2007, Defendant Rye
XL LP provided ABN/RBS with $7.5 million of initial collateral. Upon information and belief,
Defendant Rye XL LP used BLMIS customer property subsequently transferred to it from Prime
Fund and/or Broad Market to fund this $7.5 million of initial collateral.
72. As discussed more fully below, between February 2007 and August 2008, Rye
XL LP transferred a total of $80 million in additional collateral to ABN/RBS. Upon information
and belief, Defendant Rye XL LP used BLMIS customer property subsequently transferred to it
from Prime Fund and/or Broad Market to fund the $80 million of additional collateral. Under
the Onshore Swap, ABN/RBS agreed to provide Defendant Rye XL LP with an amount equal to 8 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
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three times the return on a hypothetical investment in Broad Market. As such, the Onshore Swap
provided Defendant Rye XL LP with a return equal to three times the return it would have
received had it invested the collateral directly in Broad Market.
73. For structuring the Onshore Swap with Defendant Rye XL LP, Defendant
ABN/RBS earned significant revenue in the form of fees and interest, which included, but was
not limited to: (1) the spread on the floating interest rate charged to Rye XL LP above that
charged internally for funding costs; and (2) an early termination fee on any reduction in the
Equity Notional in the first 18 months of the transaction.
C. Defendant ABN/RBS’s Proprietary Decision to Hedge the Onshore Swap by Investing in Broad Market
74. Under the Onshore Swap, ABN/RBS was free to generate the returns owed to
Defendant Rye XL LP as it saw fit. It could have invested the collateral in other hedge funds,
bonds, or even its own operations.
75. ABN/RBS, however, chose to generate the returns owed to Defendant Rye XL LP
by using the collateral received from Defendant Rye XL LP, together with its own funds
equaling two times Defendant Rye XL LP’s collateral, to purchase partnership interests in Broad
Market.
76. Accordingly, in November 2007, ABN/RBS made the proprietary and voluntary
decision to hedge its risk under the Onshore Swap by investing three times the collateral it
received from Defendant Rye XL LP in Broad Market (the “Onshore Hedge”). As a result,
ABN/RBS had a perfect hedge against what it owed to Defendant Rye XL LP under the Onshore
Swap.
77. As part of its Onshore Hedge, ABN/RBS was simply another investor in Broad
Market, and was free to redeem its Broad Market shares as it wished. The investments in and
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redemptions from Broad Market made by RBS as part of the Onshore Hedge were a proprietary
trading position, and were not required or mandated by the Onshore Swap.
78. Below is a chart showing the Onshore Swap and the Onshore Hedge:
D. The Onshore Subsequent Transfers at Issue
1. The Subsequent Transfers from Defendant Rye XL LP to Defendant ABN/RBS
79. Pursuant to the terms of the Onshore Swap, Defendant Rye XL LP could increase
or “upsize” the value of the swap transaction by providing ABN/RBS with additional collateral.
3x Returns
Defendant Rye XL LP --
Subsequent Transferee
Defendant ABN/RBS --
Subsequent Transferee
Broad Market – Reference Fund / Initial Transferee
Prime Fund – Initial Transferee
Bernard L. Madoff Investment Securities (BLMIS) – Debtor
The Onshore Swap
The Onshore Hedge
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80. Upon information and belief, in 2008, Defendant Rye XL LP transferred the
BLMIS customer property it received from Prime Fund and/or Broad Market, as detailed above,
to ABN/RBS to increase the collateral and, therefore, the overall size of the Onshore Swap.
81. From February 1, 2008 to August 1, 2008, Defendant Rye XL LP increased the
Onshore Swap from the original $7.5 million to $87.5 million through subsequent transfers of
BLMIS customer property received from Prime Fund and/or Broad Market to ABN/RBS, as set
forth below. (See also Exhibit O.)9
Date Amount 11/1/2007 $7,500,000 2/1/2008 $15,000,000
2. Defendant ABN/RBS’s Independent Redemption from Broad Market of a Portion of its Onshore Hedge
82. On November 3, 2008, ABN/RBS made the proprietary decision to redeem $1.4
million from Broad Market.10 Upon information and belief, in order to fulfill ABN/RBS’s
redemption request, Broad Market used funds from redemptions out of its BLMIS account, and
subsequently transferred $1.4 million of BLMIS customer property to ABN/RBS.
83. Below is a chart showing the subsequent transfers from the Tremont Feeders to
Rye XL LP and then to ABN/RBS as part of the investment of the Onshore Swap, as well as the
subsequent transfers to ABN/RBS as part of the Onshore Hedge.
9 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
10 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
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E. Rye XL Portfolio’s Offshore Swap Agreement with Defendant ABN/RBS
84. Similar to Rye XL LP, Rye XL Portfolio promised its investors returns that were
three times the return of Portfolio Fund Limited. At various times from inception through
December 11, 2008, Rye XL Portfolio made independent decisions to use the proceeds of
investors’ subscription and/or other assets comprising customer property to fund swap
agreements with third party leverage providers, including, but not limited to, ABN/RBS. These
swap agreements provided Rye XL Portfolio with three times the returns of Portfolio Limited
Fund, the swaps’ so-called “reference asset.”
$285,317,636 in Subscriptions Between
7/1/2007 and 10/23/2008
$87.5 Million in Collateral
3x Returns
Defendant Rye XL LP --
Subsequent Transferee
Defendant ABN/RBS --
Subsequent Transferee
Purchase of Shares for
Proprietary Hedge
$1.4 Million Return on
Proprietary Hedge
Investment
Broad Market – Reference Fund / Initial Transferee
Prime Fund – Initial Transferee
Bernard L. Madoff Investment Securities (BLMIS) – Debtor
The Onshore Swap
$945 Million in 6 Year Initial Transfers
$252 Million in 6 Year Initial Transfers
The Onshore Hedge
$48,387,616 In Subsequent
Transfers
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85. On September 1, 2006, Rye XL Portfolio and Defendant ABN/RBS entered into
one such swap agreement (the “Offshore Swap”). Similar to a traditional loan, the Offshore
Swap required Rye XL Portfolio to post collateral with ABN/RBS. On or around September 1,
2006, Rye XL Portfolio provided ABN/RBS with $30 million of initial collateral. Upon
information and belief, Rye XL Portfolio used BLMIS customer property subsequently
transferred to it from Portfolio Limited Fund to fund some or all of this $30 million of initial
collateral.
86. As discussed more fully below, between November 2006 and July 2007, Rye XL
Portfolio transferred a total of $111 million in additional collateral to ABN/RBS. Upon
information and belief, Rye XL Portfolio used BLMIS customer property subsequently
transferred to it from Insurance Portfolio Fund and/or Portfolio Limited Fund to fund some or all
of the $111 million of additional collateral.
87. Under the Offshore Swap, ABN/RBS agreed to provide Rye XL Portfolio with an
amount equal to three times the return on a hypothetical investment in Portfolio Limited Fund.
As such, the Offshore Swap provided Rye XL Portfolio with a return equal to three times the
return it would have received had it invested the collateral directly in Portfolio Limited Fund.
88. For structuring the Offshore Swap with Rye XL Portfolio, Defendant ABN/RBS
earned significant revenue in the form of fees and interest, which included, but was not limited
to: (1) the spread on the floating interest rate charged to Rye XL Portfolio above that charged
internally for funding costs; and (2) an early termination fee on any reduction in the Equity
Notional in the first 18 months of the transaction.
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F. Defendant ABN/RBS’s Decision to Hedge the Offshore Swap by Investing in Portfolio Limited Fund
89. ABN/RBS structured the Offshore Swap in such a way the Equity Notional
Amount was directly tied to the ABN AMRO becoming the “legal and beneficial owner” of the
“total number of Reference Fund Shares [ABN AMRO] was able to acquire” or the actual
“proceeds on the redemption of the relevant number of Reference Fund Shares previously held
by [ABN AMRO].”
90. Therefore, unlike the Onshore Swap, the Offshore Swap explicitly required
ABN/RBS to generate the returns owed to Rye XL Portfolio by investing in Portfolio Limited
Fund.
91. Accordingly, in September 2006, ABN/RBS used the collateral received from
Rye XL Portfolio, together with its own funds equaling two times Rye XL Portfolio’s collateral,
to purchase partnership interests in Portfolio Limited Fund, hedging its risk under the terms of
the Offshore Swap by investing three times the collateral it received from Rye XL Portfolio in
Portfolio Limited Fund (the “Offshore Hedge”).
92. Below is a chart showing the Offshore Swap and the Offshore Hedge:
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G. The Offshore Subsequent Transfers at Issue
1. The Subsequent Transfers from Rye XL Portfolio to Defendant ABN/RBS
93. Upon information and belief, Rye XL Portfolio made the decision to use the
subscription payments and subsequent transfers it received from its investors, including, but not
limited to, the BLMIS customer property it received from Portfolio Limited Fund and/or
Insurance Portfolio Fund to fund or increase the Offshore Swap with ABN/RBS.
94. Pursuant to the terms of the Offshore Swap, Rye XL Portfolio could increase or
“upsize” the value of the swap transaction by providing ABN/RBS with additional collateral.
95. Upon information and belief, in 2006 and 2007, Rye XL Portfolio transferred the
BLMIS customer property it received from Portfolio Limited Fund and/or Insurance Portfolio
3x Returns
Rye XL Portfolio -- Subsequent Transferee
Defendant ABN/RBS --
Subsequent Transferee
Portfolio Limited Fund – Reference Fund / Initial Transferee
Rye Select Broad Market Insurance Portfolio LDC –
Initial Transferee
Bernard L. Madoff Investment Securities (BLMIS) – Debtor
The Offshore Swap
The Offshore Hedge
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Fund, as detailed above, to ABN/RBS to increase the collateral and, therefore, the overall size of
the Offshore Swap.
96. From November 1, 2006 to July 2, 2007, Rye XL Portfolio increased the Offshore
Swap from the original $30 million to $141 million, as set forth below. (See also Exhibit P.)
97. Of this $141 million, at a minimum, $74.6 million was customer property
fraudulently transferred from BLMIS to Portfolio Limited Fund and/or Insurance Portfolio Fund,
which they subsequently transferred to Rye XL Portfolio, and Rye XL Portfolio then
subsequently transferred to Defendant ABN/RBS.11
98. On or around September 1, 2007, Portfolio Limited Fund and ABN/RBS executed
an amendment to the original Offshore Swap dated September 1, 2006 (“Offshore Amendment”).
The Offshore Amendment served to extend the termination date of the swap to September 30,
2009, among other revisions, which included but were not limited to: (1) addressing a possible
merger or acquisition of ABN, (2) agreeing that ABN/RBS had the right to conduct an annual
onsite inspect of all relevant documentation, including but not limited to Portfolio Limited
Fund’s and/or Tremont’s SEC Advisor’s Form ADV Part 2, annual audited financial statements
and the annual Independent Auditors Report on Internal Control prepared by the auditors 11 The Trustee expressly reserves his right to amend, revise, or supplement this transfer information upon further investigation and discovery.
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pursuant to SEC Rule 17a-5; and (3) providing ABN/RBS will forfeit any early termination fee
should it enter into any direct communications however arising with BLMIS or Madoff.
2. ABN/RBS’s Redemption from Portfolio Limited Fund
99. While ABN/RBS was required under the Offshore Swap with Rye XL Portfolio to
purchase shares of Portfolio Limited Fund, to Portfolio Limited Fund, ABN/RBS was simply
another investor in the fund.
100. On September 4, 2007, ABN/RBS redeemed $25 million from Portfolio Limited
Fund. Upon information and belief, in order to fulfill ABN/RBS’s redemption request, Portfolio
Limited Fund used funds from redemptions out of its BLMIS account, and subsequently
transferred $25 million of BLMIS customer property to ABN/RBS.
101. Between October 1 and December 1, 2008, ABN/RBS redeemed a total of
$74.464 million from Portfolio Limited Fund. Upon information and belief, in order to fulfill
ABN/RBS’s redemption request, Portfolio Limited Fund withdrew funds from its BLMIS
account, and subsequently transferred $74.464 million of BLMIS customer property to
ABN/RBS.
102. Below is a graph showing the subsequent transfers from the Tremont Feeders to
Rye XL Portfolio and then to ABN/RBS as part of the investment of the Offshore Swap, as well
as the subsequent transfers to ABN/RBS as part of the Offshore Hedge.
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VIII. ABN/RBS HAD UNIQUE AND NON-PUBLIC ACCESS TO INFORMATION AND DOCUMENTS IDENTIFYING NUMEROUS QUANTITATIVE AND QUALITATIVE RED FLAGS OF POSSIBLE FRAUD AT BLMIS
103. ABN/RBS and its related corporate entities had extraordinary visibility into
BLMIS and Madoff by virtue of their own roles, as well as the multiple roles as investors and
leverage providers to various feeder funds invested in BLMIS.
104. From the multiple roles, ABN/RBS’s extraordinary visibility into BLMIS
emanated from information it, as well as other members of the RBS Group, gathered.
105. As discussed more fully in Section IX, it was this extraordinary visibility into
BLMIS and Madoff that exposed ABN/RBS to facts indicating potential fraud at BLMIS.
Armed with such knowledge, rather than conduct further due diligence on BLMIS, ABN/RBS
instead decided to ignore significant indicia of fraud.
$318,000 in Subsequent Transfers
$141 Million in Collateral
3x Returns
Rye XL Portfolio -- Subsequent Transferee
Defendant ABN/RBS --
Subsequent Transferee
Purchase of Shares for
Proprietary Hedge
$74.4 Million Return on
Proprietary Hedge
Investment
Portfolio Limited Fund – Reference Fund / Initial Transferee
Insurance Portfolio Fund – Initial Transferee
Bernard L. Madoff Investment Securities (BLMIS) – Debtor
The Offshore Swap
$93.9 Million in 6 Year Initial Transfers
$617.9 Million in 6 Year Initial Transfers
The Offshore Hedge
$74,298,573 In Subsequent
Transfers
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106. Upon information and belief, as a result of the October 2007 acquisition of ABN
by RBS, any knowledge, information or materials regarding BLMIS, Madoff, or BLMIS Feeder
Funds previously obtained by ABN or RBS independently were subsequently shared with, and
imputed to, the resulting entity, Defendant ABN/RBS.
107. Further, upon information and belief, at all times relevant to this action, any
knowledge, information or materials regarding BLMIS, Madoff, or BLMIS Feeder Funds
obtained by ABNI was subsequently shared with, and imputed to, the ABN and/or Defendant
ABN/RBS.
108. At all times relevant herein, ABN/RBS knew Broad Market, Portfolio Limited
Fund, Prime Fund, Kingate Global Fund (“Kingate”), Ascot Partners LP (“Ascot”), and Fairfield
Sentry Limited (“Fairfield Sentry”) were almost entirely, if not entirely, invested in BLMIS.
109. Through its communications and dealings with multiple BLMIS Feeder Funds,
ABN/RBS had access to significant non-public information sufficient to identify numerous red
flags of possible fraudulent activity at BLMIS.
110. Based on its role as a sophisticated financial institution, ABN came across
different fund houses that were invested in Madoff. In fact, as early as August 2006, the same
ABN representatives were responsible for negotiating and structuring transactions with the
Tremont Feeders and Fairfield Sentry. As a result, the same ABN personnel gained cumulative
and widespread knowledge regarding Madoff and BLMIS.
111. In fact, by virtue of signing non-disclosure agreements with both Tremont and
Fairfield in 2006, ABN/RBS received considerable non-public information about BLMIS and
Madoff, including unique access to BLMIS account statements and trade confirmation
information.
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112. ABN/RBS also had unique access to information pertaining to BLMIS’s trading
activity, even among other large institutional investors in BLMIS Feeder Funds. Specifically,
ABN/RBS received trade confirmation information and monthly account statements on a regular
basis from Tremont and/or its administrator beginning as early September 2006, and continuing
through Madoff’s arrest in December 2008.
113. Moreover, in July 2006, copies of the Madoff Account Opening Documents for
the American Masters Broad Market Fund II Limited (renamed to become Portfolio Limited
Fund) were sent to representatives of ABNI in New York and ABN in London.
114. Access to BLMIS’s trade confirmation information, monthly account statements,
and Portfolio Limited Fund’s Madoff Account Opening Documents gave ABN/RBS unique
insight into BLMIS’s trading strategy and procedures, his role and discretion in serving as an
investment advisor, prime dealer and custodian, and the fee structure for Madoff’s services.
115. Receipt of these non-public documents provided ABN/RBS with a unique vintage
point from which to evaluate Madoff, BLMIS, and the purported trading strategy, and alerted or
should have alerted ABN/RBS to indicia of fraud at BLMIS.
116. Aside from ABN/RBS’s access to Madoff Account Opening Documents and
monthly BLMIS account statements and trading information, ABN/RBS was also privy to a
wealth non-public documents and information BLMIS Feeder Funds distributed only to investors
or potential investors, all of which provided ABN/RBS with knowledge of other indicia of
possible fraud at BLMIS.
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IX. ABN/RBS HAD KNOWLEDGE OF INDICIA OF FRAUD AT BLMIS AND WAS WARNED TO REDEEM ITS MADOFF RELATED INVESTMENTS
A. ABN/RBS’s Routine Request to Meet with Madoff was Repeatedly Denied
117. In February 2007, ABN’s management began discussions with Richard Glantz,
the control person for two entities called “Lakeview” and “Vista,” which were invested in one or
more BLMIS Feeder Fund.
118. ABN was exploring the possibility of investing in either Lakeview or Vista,
which would once again indirectly expose ABN to BLMIS. As part of its due diligence on Vista,
ABNI’s Schwartz wrote to Glantz to see “how your discussions have gone with Madoff with
respect to our ability undertake due diligence on them for this transaction. This is a critical issue
for us and we would appreciate a response as soon as practical.”
119. Glantz responded to Schwartz’s email saying:
In response to your request as to having access for due diligence with Madoff, I spoke to Frank DiPascali who is his operations chief who referred me directly to Bernie. Bernie simply said no. He does not do this. He was happy to allow Fortis who does not require this personal due diligence in the form you are requesting. He said he will not have a direct relationship with any bank on any account.
Bernie is in this way difficult and problematic.
AB[N] AMRO can get copies of all the transactions direct from Madoff at the same time I get them. I will be happy explore ways in which assist AB[N] AMRO to have sufficient control of the account. If credit needs to meet with Bernie or tour his plant, that it not possible now or in the future.
(emphasis added).
120. In response to Glatz’s email, Schwartz responds: “Richard – how do we invest
in this fund if we do not have a direct relationship and the ability to perform due diligence
on Madoff. We do not need to speak directly to Bernie but what about one of his subordinates?
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Your thoughts would be appreciated. Any help you can provide to get our credit people
comfortable would be appreciated.” (emphasis added)
121. Less than an hour later, Glatz replies: “The question of access [to Madoff] is
not open.” (emphasis added)
122. ABN’s inability to conduct independent due diligence on Madoff and the BLMIS
IA Business in connection with RBS’s potential investment in Vista was another red flag of
possible Madoff fraud. Refusal to deal directly with banks like ABN should have prompted
ABN to seriously question structured products and other propriety investments ABN had in
BLMIS Feeder Funds – including its investment in Portfolio Limited Fund.
123. Less than two months later, Schwartz emailed Tremont with a question from
ABN’s risk department: “How frequent are the inspections from Madoff’s regulators and what is
the nature of these inspections (e.g. perhaps there are more frequent lighter checks and less
frequent in-depth checks, etc.). Can you pls phrase the response in terms of which regulator is
doing the inspection as well (i.e. the SEC and/or the NASD?)” Tremont responded that
“Tremont cannot make any representations on the scope or frequency of inspections by US
regulatory agencies related to Madoff Securities.”
124. Tremont’s lack of knowledge regarding which regulator inspected BLMIS, the
scope of the inspections, and how frequently they took place should have prompted concern by
ABN, as Tremont was one of BLMIS’s largest IA clients, supposedly maintained a close
relationship with Madoff, and claimed to have transparency into the custodian, prime-broker and
investment advisor of its assets.
125. Yet, instead of demanding more information and access to Madoff or BLMIS,
ABN/RBS entered into the Offshore Amendment in September 2007, and Onshore Swap in
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November 2007, both of which specifically prohibited ABN from any direct communication
with Madoff or BLMIS. The Onshore Swap provided that “ABN AMRO will not be entitled to
the above mentioned amounts or fees if . . . ABN AMRO enters into any direct communications
however arising with the Account Manager [BLMIS] in respect of this transaction.” The
126. Madoff’s refusal to allow ABN to conduct independent due diligence on the IA
Business should have raised red flags, coupled with the lack of information and inability of
Tremont to answer basic questions about BLMIS despite having more than $3 billion invested,
and Tremont’s mandate that ABN could have no direct communication with Madoff or BLMIS
should have raised suspicions within ABN/RBS.
B. RBS Was Specifically Warned by a Due Diligence Firm that it Should Redeem its Madoff-Related Investments
127. In August 2007, just two months before RBS acquired ABN, members of RBS’s
Fund Derivatives group and Global Banking & Markets group contacted a specialized due
diligence firm (the “DD Firm”) regarding a portfolio of funds for which it was considering doing
a financing transaction. This portfolio included two BLMIS Feeder Funds, Ascot and Kingate.
128. In response to RBS’s request, a representative of the DD Firm provided a risk
report on the portfolio funds, including Kingate, as well comments on the funds for which the
DD Firm had additional information or insight. Included in this list was a comment regarding
Madoff. Specifically, RBS was told by the DD Firm in no uncertain terms that Kingate was a
BLMIS Feeder Fund and that the DD Firm advised all of its clients to redeem their interests in
BLMIS or BLMIS Feeder Funds due to a lack of transparency at BLMIS.
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129. A month later, in September 2007, internal Tremont documents indicate Tremont
approached RBS about Madoff lending and, “[RBS] indicated they were not comfortable with
Madoff.”
130. Just two months later, in October 2007, RBS acquired ABN, forming ABN/RBS.
Once again, internal Tremont documents provide insight into this transaction, stating “[i]t is
apparent that after buying ABN[,] [RBS] is really not comfortable” with Madoff and the newly
created entity appeared “to not be in control of their own business. . .”
131. Despite being told by the DD Firm that ABN should redeem from any fund with
exposure to Madoff, including Kingate—and perhaps because it was not in control of its own
business—by January 2008, the same ABN representative (now employed by ABN/RBS) who
received the DD Firm warning was in negotiations with FIM Advisers LLP to do a structured
product on Kingate.
132. In fact, this ABN/RBS representative wrote to FIM Advisors LLP, “[a]s per our
previous conversation regarding RBS track records on deals with single strategy HFs, we have
previously closed . . . multiple lending deals with single strategy fund of hedge funds . . . 2x
leveraged notes on a basket of 5 single strategy hedge funds.” But she notes, “[t]he above trades
are specific to RBS. As we have recently acquired ABN Amro, we are also in the process of
double checking their capacity in terms of dealing with single strategy single hedge fund. We
will revert to you once we have more updates on the ABN side.”
133. As evidenced in this email exchange, RBS not only acquired ABN in October
2007, but by January 2008 the two companies were functioning as one, sharing information, and
specifically addressing single-manager issues related to BLMIS Feeder Funds and existing deals
and future capacity.
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134. Despite the DD Firm’s warnings and its knowledge about other red flags of
potential fraud at BLMIS, ABN/RBS chose to ignore those red flags, and instead continued to
seek out opportunities to finance transactions on BLMIS Feeder Funds. In fact, in April 2008,
ABNI’s David Schwartz emailed Fairfield’s head of risk indicating ABN/RBS had “identified
some appetite for unleveraged exposure to Madoff Risk. Would you be interested in working
with us on this opportunity?”
135. It was not just the fees and interest generated as a result of structured products
underlying BLMIS Feeder Funds that motivated ABN/RBS. ABN/RBS was also motivated to
disregard red flags of fraud and express warnings about Madoff due to the potential for future
banking relationships and other business with these feeder funds.
136. In January 2008, ABN/RBS told Tremont they would “quid pro quo Madoff
capacity in return for distributing our [fund of funds]…” and in the April 2008 email from
ABN/RBS to Fairfield’s head of risk referenced in Paragraph 56, Schwartz indicated if Fairfield
was interested in RBS’s appetite for unleveraged exposure to Madoff risk, then ABN/RBS
“would also like to have some idea of what ABN/RBS would earn for this distribution.” In
effect, ABN/RBS used derivative products as leverage for retrocession rebates or the
commission/fees generated as a result of distribution rights for these funds.
137. Upon information and belief, the individuals responsible for entering into these
transactions underlying BLMIS Feeder Funds received financial compensation in the form of
bonuses for each deal closed or distribution relationship ABN/RBS was awarded. This
compensation served as motivation for this small number of individuals comprising ABN/RBS’s
various fund derivative and structured product groups, which were all parties to the various
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BLMIS related transactions to disregard the DD Firm’s warning and the numerous red flags of
potential fraud at BLMIS.
C. ABN/RBS Knew Madoff’s Performance Was Too Good To Be True
138. ABN/RBS knew or should have known that BLMIS produced returns that were
simply too good to be true, reflecting a pattern of abnormal profitability, both in terms of
consistency and in amounts that were simply not credible.
139. Beginning no later than May 2006, ABN entered into discussions with Tremont to
provide structured products on Rye XL Portfolio and Rye XL LP, which included discussions
about and a review of BLMIS and Madoff.
140. David Schwartz, a New York based employee of ABNI, worked in conjunction
with, and on behalf of, representatives from ABN in London to help facilitate communications
with various Tremont employees, arrange for due diligence, and obtain information necessary for
the internal approvals required to structure the transactions.
141. As part of this process, Tremont provided the Defendants with, among other
things, historical weekly returns for a BLMIS feeder managed by Tremont and portfolio balances
for the previous five years on the same date to show the near-perfect consistency of BLMIS’s
investment strategy.
142. While simultaneously negotiating with Tremont, a representative of ABN’s Fund
Derivatives group in London contacted Fairfield Greenwich Group (“Fairfield”) in June 2006
about the possibility of structuring a $5 million 4x leveraged certificate on Fairfield Sentry
Limited, which was at least 95% invested in BLMIS.
143. Through its conversations with Fairfield during the summer of 2006, ABN
learned Fairfield Sentry had experienced only “[t]hirteen down months in over 15 years (184
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months),” which resulted in “92.5% winning months.” Fairfield further touted to RBS that over
the 15 year life of the fund, the “[l]argest peak to trough drawdown was -0.64% in November
1994 and [Fairfield Sentry] took two months to recover.”
144. Moreover, during this same time period, ABN obtained the below graph from
Tremont detailing the distribution of monthly returns from September 2001 through November
2006.
145. In July 2006, ABN received further information showing BLMIS’s improbable
returns when it received a document from Tremont evidencing Broad Market’s returns from May
1994 through May 2006. As shown below, this document provided ABN with the data necessary
to analyze BLMIS’s returns over a 12 year period.
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146. Moreover, beyond being provided with the above, ABN was provided with a
summary showing the improbable consistency of BLMIS’s positive returns:
147. ABN was provided with historical returns detailing that in the 145 months since
Broad Market began investing substantially all of its assets in BLMIS, Madoff claimed to
generate positive returns 95% of the time, or about 137 out of 145 months. Moreover, during the
12 year period covered by this document, Broad Market averaged an annual return of 13.03%,
with its average negative return being only -0.16%.
148. Based on the substantial information provided to ABN by Fairfield and Tremont,
ABN/RBS knew or should have known returns this good would have required Madoff to
perfectly time the market for over 20 years.
149. Furthermore, this summary included utilizing an industry standard known as the
Sharpe ratio to gauge portfolio performance. The Sharpe ratio, developed by William Sharpe,
winner of the Nobel Prize in Economic Sciences, measures how well a trading strategy
compensates the investor for the risk taken. A higher Sharpe ratio indicates the strategy provides
a higher return relative the associated risk. For funds with monthly net asset values (“NAV”),
such as the Feeder Funds, the Sharpe ratio is calculated as follows:
(The Fund’s Average Monthly Rate of Return) – (That Month’s Risk-Free Rate) Standard Deviation of the Fund’s Monthly Returns
150. BLMIS’s Sharpe ratio was remarkable. When compared to the over 800 other
hedge funds that reported data to major hedge fund databases, the probability Madoff could
maintain such high Sharpe ratios by providing positive returns with very little volatility, was less
than 1%. When compared to funds that employed comparable strategies to Madoff’s SSC
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Strategy, that probability drops to less than 0.1%. In selling his services to FGG, Madoff noted
that other star managers might have higher returns, but he produced steady returns without the
volatility of those star managers. In fact, for a 13-year period, Fairfield Sentry had a higher
Sharpe ratio than Warren Buffett, George Soros, Bruce Kovner, and John Paulson in all but six
of 52 quarters between 1995 and 2007. The probability of Fairfield Sentry’s Sharpe ratio
outperforming these star money managers in almost every quarter for nearly 13 years is
approximately 1 in 200,000,000.
151. Based on its sophistication as a global financial institution, ABN/RBS knew or
should have known BLMIS’s returns could not be reproduced by other skilled hedge fund
managers, and those managers who attempted to employ the split-strike conversion strategy
purportedly used by BLMIS consistently failed even to approximate its results. Other similarly
sophisticated industry professionals viewed Madoff’s alleged perfect timing based on market
flow as indicative of illegitimate and illegal trading activity.
152. Nor did ABN/RBS perform any reasonable or independent due diligence into the
fact that BLMIS’s Sharpe ratio was nearly impossible for the Tremont Feeder Funds or Fairfield
Sentry to have retained such a consistently high Sharpe ratio.
153. ABN/RBS knew Madoff’s trading purportedly involved the purchase of a basket
of 35 to 50 S&P 100 stocks, most correlated to the S&P 100 Index, the sale of out-of-the-money
calls on the index and the purchase of out-of-the-money puts on the index. The sale of the calls
was designed to increase the rate of return, while allowing upward movement of the stock
portfolio to the strike price of the calls. The puts, funded in large part by the sale of the calls,
limited the portfolio’s downside. Madoff’s alleged trading strategy was typically known as a
“split-strike conversion” strategy. The strategy, in effect, created a boundary on a stock, limiting
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its upside while at the same time protecting against a sharp decline in the share price. RBS knew
that based on the Madoff’s purported trading strategy, returns were limited due to the sale of
calls, however, the return streams for Broad Market, Portfolio Limited Fund and Fairfield
produced results that were consistently too high to adhere to this trading strategy.
154. ABN/RBS understood that by design, BLMIS’s returns were supposed to be very
highly correlated to the performance of the S&P 100 Index. In fact, Annex 1 to the Offshore
Swap specifically defines the split strike conversion strategy as requiring the “purchase of a
group or basket of equity securities that are highly correlated to the S&P 100 Index” and
provides that should BLMIS fail to adhere to the split strike conversion strategy as defined, the
transaction could be terminated pursuant to the terms of the agreement. However, RBS had an
abundance of information showing BLMIS’s returns were not correlated to the S&P 100 Index.
155. ABN/RBS had historical return information for numerous BLMIS Feeder Funds,
including, but not limited to, Fairfield Sentry Limited, Portfolio Limited Fund, and Broad Market
dating back as early as 1994. The historical returns of each and every one of these funds showed
a lack of correlation.
156. ABN/RBS had in its possession an undeniable visual evidencing this lack of
correlation. Specifically, Tremont provided RBS with the graph below showing Portfolio Fund
Limited’s—and thus BLMIS’s—returns on $1,000,000 from September 1, 2001 to November
30, 2006:
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157. Rather than correlate to the S&P performance, which the majority of the time had
negative cumulative returns, BLMIS’s returns were consistently positive and increasing –
indeed, a diagonal line going straight up. Armed with this knowledge, and with access to
monthly BLMIS account statements and trading activity, ABN/RBS knew or should have known
that BLMIS’s returns were not the product of legitimate trading activity.
158. And finally, as reflected in the above return stream provided to ABN and
reproduced in paragraph 156, ABN/RBS was also aware of BLMIS’s performance versus the
S&P 100’s performance during seven crisis periods between April 2000 and December 2007,
including, but not limited to, the technology bubble burst and September 11, 2001 terrorist
attack.
159. In every instance, BLMIS’s performance was always positive, yet the S&P 100’s
performance was negative. In response, ABN/RBS chose to ignore these remarkable,
“unrealistic” results.
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D. ABN/RBS Knew That Madoff Lacked Independent Verification That Assets Existed and Assets Were Not Segregated
160. ABN/RBS knew that BLMIS functioned as investment advisor, prime broker and
the “in-fact” custodian of the purported securities.
161. Specifically, in July 2006, Fairfield provided ABN with documentation detailing
that:
a. BLMIS was the Custodian: “Non-discretionary brokerage accounts have
been established at BLM to house the assets of [Fairfield Sentry] employing this [split-
strike conversion] Strategy…”
b. BLMIS was the Prime Broker: “BLM executes all stock transactions using
their sophisticated trade execution technology” and “under an agreement with [Fairfield
Sentry], BLM executes the Strategy…”
c. BLMIS was the Investment Advisor: “BLM is authorized to determine the
price and timing of stock and options transactions in [Fairfield Sentry’s] account.” And
the “services of BLM and its personnel are essential to the continued operation of the
Fund, and its profitability, if any.”
162. Shortly thereafter, an internal ABN email from October 2006, reveals that while
ABN was still pursuing potential business with Fairfield, was also aware of red flags of potential
fraud and had serious questions about Madoff and the BLMIS IA Business.
163. Because BLMIS purported to operate as investment advisor, prime broker and the
“in-fact” custodian, as shown in the July 2006 documents ABN obtained from Fairfield, there
was no segregation between those who were responsible for trading and those who were are
responsible for recording trade activities. Nor was there segregation of signing authority and
authority over cash and securities transfers, deposits and withdrawals.
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164. A few months later, in October 2006, this red flag was specifically identified by
ABN as an area of significant concern in an internal email discussing a possible leveraged
product underlying Fairfield Sigma Limited, which was 100% invested in Fairfield Sentry, which
was in turn 95% invested in BLMIS.
165. As revealed in the email, a large issue ABN had in approving the Offshore Swap
was that BLMIS self-reported its trading positions. Some ABN employees questioned the
situation in which BLMIS was acting simultaneously as the adviser, the prime broker and the
custodian of the assets. Having all of these roles at the same time violated industry best
practices, and as the email exposes, ABN knew this and had concerns about the lack of an
independent custodian for the assets in BLMIS’s IA Business, who could verify the existence of
the trading and the claimed assets.
166. This structure—unusual for the hedge-fund industry—eliminated a key check and
balance by excluding an independent custodian of securities from the investment management
process. The lack of an independent custodian also furthered BLMIS’s lack of transparency.
167. Due to the questions ABN raised previously in connection with its Tremont
transactions, as ABN continued to negotiate with Fairfield, it was anxious to know more about
the relationship between Sentry and BLMIS, including how Sentry verified the trades reported
by BLMIS. ABN further questioned how Madoff supposedly used the put options in the SSC
Strategy. ABN also had questions regarding the counterparties to the OTC OEX options
transactions and the creditworthiness of the counterparties. The October 2006 email concluded
by saying that it might be difficult to access the high limits available for Madoff risk at RBS to
structure a 4x leveraged product, unless ABN could get more information concerning Madoff’s
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use of put options. In short, it is clear ABN identified significant issues and red flags of possible
fraud concerning Madoff, the BLMIS IA Business and the SSC Strategy.
168. Armed with specific knowledge of BLMIS’s conflict of interest, and
notwithstanding ABN’s unanswered questions concerning Madoff’s alleged securities and
options, ABN/RBS continued to explore opportunities for leveraged transactions involving
Tremont and Sentry.
169. Additionally, ABN/RBS also knew or should have known that accounts at BLMIS
were not segregated, and therefore not subject to independent verification. Adequate segregation
allows independent checks and balances throughout the trading cycle, the movement of cash and
the custody process, and is a fundamental area of inquiry for those performing independent and
reasonable due diligence on investment managers. The absence of such segregation was a red
flag of potential fraud.
E. ABN Knew BLMIS Utilized Outmoded Technology, Including Paper Confirmations
170. ABN/RBS knew by virtue of their relationship with Tremont, and their unique
access to monthly BLMIS account statements and trade information for Broad Market and
Portfolio Limited Fund that BLMIS issued paper trade confirmations mailed out days after trades
purportedly occurred. It was well known in the securities industry that Madoff was purportedly a
pioneer in electronic over-the-counter trading mechanisms, but in the IA Business, Madoff
provided his customers with only paper information. Madoff issued delayed paper tickets to hide
the fact that he was backdating his trades. Madoff forged these phony confirmations already
knowing the movements of the market.
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171. Madoff’s use of paper confirmation sent days after the trades took place should
have alerted ABN/RBS of the potential for fraud at BLMIS
F. ABN/RBS Had Access to BLMIS Customer Statements and Trade Confirmation Information Showing Significant Trading Anomalies
172. By virtue of its unique access to BLMIS account statements and trading activity,
ABN/RBS should have seen numerous trading anomalies that were red flags of potential fraud at
BLMIS.
173. Furthermore, correspondence between Tremont and ABN/RBS shows not only
did ABN/RBS receive monthly BLMIS customer statements and trade confirmation information,
but it actively monitored this information. Specifically, on September 13, 2006, an ABN
representative in the UK emailed Tremont’s Darren Johnston requesting the August BLMIS
brokerage statement for Portfolio Limited Fund, plus copies of any intervening transactions, “so
that we can start building our monitoring spreadsheet.” Upon information and belief, ABN/RBS
continued to receive copies of Portfolio Limited Fund’s monthly BLMIS brokerage account
statements through November 2008, as well as other information concerning Portfolio Limited
Fund’s alleged trading through BLMIS.
174. This monitoring should have revealed Portfolio Limited Fund’s BLMIS account
statements for August 2006 through November 2008 had the following irregular trading activity:
• 152 instances of purported option trades that exceed the daily market volume on the CBOE for identical option contracts;
• 76 purported option trades out of 82 total trades between August 2006 and November 2008 (or approximately 93%) settled outside the T+1 industry standard;
• 67 instances where the purported dividend transactions on BLMIS customer statements and ledgers have a dividend being paid on a different day than the payable date, which is the date the company mails out the dividend to the holder on record and the date when industry standards would dictate the dividend is paid;
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• 20 months in which multiple money market dividend payments occurred – whereas typically money markets declare dividends (interest) daily and pay them monthly. If an entity transacts in a money market multiple times a month, that activity is tracked, the proper dividend is accrued for the days invested and paid at one time. These are instances where BLMIS customer statements showed a dividend was paid upon each sale of the money market fund;
• 1 month of negative returns in the 28 month period from August 2006 to November 2008, compared with 12 months of negative returns experienced by the S&P 100;
• 5 instances where the put was purchased prior to the sale (writing) of the call, whereas under the Split Strike Conversion Strategy the hedging process was designed to be substantially cost neutral, whereby the sale of the call would provide the capital for the purchase of the put. Purchasing the put prior to the sale of the call increased the amount of capital necessary to execute the hedge; and
• 2 instances of purported gains resulting from speculative, one-sided, options transactions that are inconsistent with Madoff’s purported SSC strategy. These 2 transactions resulted in gains of approximately $10 million in 2008.
175. Furthermore, when ABN/RBS began receiving monthly BLMIS statements and
trade activity information for Broad Market, it should have identified the following activity
indicating red flags of potential fraud during the period from November 2007 through November
2008:
• 184 purported option trades out of 190 total trades between November 2007 and November 2008 (or approximately 97%) settled outside the T+1 industry standard;
• 78 instances of purported option trades that exceed the daily market volume on the CBOE for identical option contracts;
• 29 instances where the purported dividend transactions on BLMIS customer statements and ledgers have a dividend being paid on a different day than the payable date, which is the date the company mails out the dividend to the holder on record and the date when industry standards would dictate the dividend is paid;
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• 8 months in which multiple money market dividend payments occurred – whereas typically money markets declare dividends (interest) daily and pay them monthly. If an entity transacts in a money market multiple times a month, that activity is tracked, the proper dividend is accrued for the days invested and paid at one time. These are instances where BLMIS customer statements showed a dividend was paid upon each sale of the money market fund;
• 0 months of negative returns in the 13 month period from November 2007 to November 2008, compared with 9 months of negative returns experienced by the S&P 100;
• 5 instances where the put was purchased prior to the sale (writing) of the call, whereas under the Split Strike Conversion Strategy the hedging process was designed to be substantially cost neutral, whereby the sale of the call would provide the capital for the purchase of the put. Purchasing the put prior to the sale of the call increased the amount of capital necessary to execute the hedge; and
• 2 instances of purported gains resulting from speculative, one-sided, options transactions that are inconsistent with Madoff’s purported SSC strategy. These 2 transactions resulted in gains of over $20 million in 2008.
176. ABN/RBS knew or should have known of these trading anomalies, any one of
which was an indication of potential fraud at BLMIS.
G. ABN/RBS Knew or Should Have Known BLMIS’s Fee Structure Was Unusual
177. Additionally, ABN/RBS knew or should have known that the fee structure
between Madoff and the Feeder Funds was atypical of the hedge fund industry and was a red flag
of potential fraud at BLMIS. Unlike with most hedge fund managers—and for all practical
purposes the IA Business was run like a hedge fund—Madoff did not charge investors any
management or performance fees, which were standard in the hedge fund industry. Madoff
purported to be satisfied with simply earning the trading commissions of 4¢ per share of stock
and $1 per option traded. By not charging the typical hedge fund management and performance
fees, Madoff allowed the Feeder Funds to charge those fees to their investors. The Feeder Fund
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made hundreds of millions of dollars for essentially doing nothing more than bringing in new
money to feed Madoff’s Ponzi scheme.
178. Specifically, ABN was provided with the opportunity to visit Tremont’s offices in
Rye, New York on April 25, 2007, and review BLMIS related documents including, but not
limited to, BLMIS’s August 2006 Form ADV and BLMIS’s October 2006 audited financial
statements. These documents provided ABN/RBS with unique access to information identifying
this red flag of possible fraud of BLMIS, as well as others. Specifically, BLMIS’s August 2006
Form ADV showed that:
1. Madoff charged only commissions on executed transactions for his investment advisory services.
2. Madoff was not a registered investment advisor.
3. Madoff claimed in 2005 that he provided investment advisory services to zero clients.
4. BLMIS claimed it had $11,711,451,428 in assets under management for its advisory business, the entirety of which were in 23 discretionary accounts.
5. BLMIS executed, advised, and had custody of advisory clients’ cash, bank accounts and securities, and thus, specifically showed BLMIS’s conflict of interest and lack of independence.
179. Other industry professionals with less access to information on Madoff than the
Defendants realized that Madoff’s highly unusual fee structure was a serious red flag of possible
fraud. For example, London due diligence firm Albourne Partners (“Albourne”) recognized that
by not charging management or performance fees for his services, Madoff left hundreds of
millions of dollars of money on the table each year. Identifying this as a red flag of possible
fraud, Albourne urged its clients to avoid Madoff-related funds.
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H. ABN/RBS Knew or Should Have Known Madoff Employed a Strip Mall Auditor, Not Capable of the Necessary Auditing Functions for BLMIS
180. ABN/RBS knew or should have known that BLMIS was audited by Friehling &
Horowitz CPAs P.C. (“F&H”), as they specifically requested the right to review BLMIS’s
October 2006 audited financial statements during ABN’s April 25, 2007 visit to Tremont’s
offices in Rye, New York.
181. ABN/RBS also knew or should have known that Madoff's auditor was not
legitimate and independent, nor reasonably capable of performing the required domestic and
international auditing functions for Madoff. BLMIS, which had tens of billions of dollars under
management, was audited not by one of the major audit firms, but by F&H, an accounting “firm”
of three employees, including a secretary and a (semi-retired) certified public accountant living
in Florida.
182. Had ABN/RBS used publically available resources to inquire into F&H, it would
have found F&H’s offices were located in a strip mall in suburban Rockland County, New York.
The size and qualifications of F&H and the nature of the services they provided were also readily
accessible to RBS through publically available sources.
183. ABN/RBS knew or should have known that all accounting firms that perform
audit work must enroll in the American Institute of Certified Public Accountants’ (“AICPA”)
peer review program. This program involves having experienced auditors assess a firm’s audit
quality each year. The results of these peer reviews are on public file with the AICPA. F&H
never appeared on the public peer review list because Friehling had notified the AICPA he did
not perform audits. F&H’s absence on the list was another red flag of possible fraud at BLMIS.
184. A simple investigation would have confirmed F&H’s inability to properly audit
and certify BLMIS’s accounting records. Such a simple investigation is exactly what Aksia,
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LLC (“Aksia”), an independent hedge fund research and advisory firm, did when it sent an
investigator to F&H’s office. What Aksia discovered was a simple office with what appeared to
be a few chairs, a reception desk, one office and a conference table. Further, F&H’s neighbors
told Aksia’s investigator that the office did not have regular hours. Having determined that it
was hardly a facility from which one would expect the auditor of a multi-billion dollar fund to
operate, Aksia advised its clients against investing with BLMIS, Madoff or any of his feeder
funds.
I. ABN Knew or Should Have Known that Despite Trading Billions, BLMIS Showed No Market Impact
185. ABN/RBS also knew or should have known that Madoff’s alleged trades could
not be legitimately accomplished without any impact on the price of the securities bought and
sold and without anyone in the industry knowing or even hearing about Madoff’s alleged trading
activity.
186. The SSC Strategy marketed by Madoff involved moving money into the market
over the course of one or more days, and then selling off all of those securities over a similar
time span. Throughout the years, tens of billions of dollars would have moved into and then out
of the U.S. stock and options markets over the course of a few days, six-to-ten times a year.
Sales of tens of billions of dollars of stocks in a short period of time would have resulted in
decreased prices of those stocks, cutting into the alleged profits from the sales of such stock.
Further, when Madoff exited the market, he claimed to have placed his customers’ assets in
Treasurys or mutual funds invested in Treasurys. The movement of tens of billions of dollars in
and out of the market should have materially affected the price of Treasurys.
187. ABN/RBS knew based on documents ABN received from Fairfield that as of
April 2006, Fairfield Sentry had $4.7 billion in assets, of which at least 95%, or $4.465 billion,
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was invested with BLMIS. Additionally, Tremont specifically told ABN that as of 2007, it had
at least $3 billion invested in BLMIS. Together with the information reported on BLMIS’s Form
ADV, as discussed above, ABN/RBS knew BLMIS traded at least $7.465 billion for Tremont
and Fairfield, and had at least $11.7 billion in assets under management for the IA Business.
188. The lack of any impact on the markets by Madoff’s purported trading was yet
another red flag of fraudulent activity at BLMIS that ABN/RBS was in the unique position to
identify.
J. ABN/RBS Knew Madoff Would Not Identify His Options Counterparties
189. ABN/RBS also knew or should have known of other red flags of fraudulent
activity at BLMIS due to the absence of any of Madoff's purported OTC option counterparties
and the lack of any evidence in the marketplace of anyone trading options with Madoff.
190. Once some customers questioned Madoff whether or not the volume of this
options trading under the SSC Strategy was available on the CBOE, Madoff claimed he was
trading options in the OTC marketplace where each transaction requires a private contract
between the two parties. Madoff refused, however, to identify the options counterparties, and the
trade confirmations did not identify them. By not disclosing the counterparties, Madoff
prevented his clients from dealing directly with them. However, Madoff sometimes stated that
the counterparties were 8-12 large European financial institutions.
191. Even if Madoff had actually transacted billions of dollars worth of OTC options
trades with undisclosed European counterparties, those entities would have needed to hedge their
risks by entering into other offsetting options or futures contracts. The most likely place to enter
into such options contracts was the CBOE. ABN/RBS, however, never saw any evidence of
Madoff’s alleged options counterparties laying off their exposure to BLMIS’s customers by
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entering into opposite and offsetting options contracts on the CBOE because no such trades ever
occurred.
192. ABN/RBS knew the inability to identify Madoff’s alleged options counterparties
was an issue of concern during ABN’s 2006 due diligence to approve the offshore swap. ABN
explicitly raised Madoff’s refusal to identify his option counterparties as a concern to Tremont.
Following this request, internal Tremont emails indicate they were unable to provide any
information or answers with respect to who Madoff’s counterparties were, saying, “I don’t think
we have much to offer on our … administration process nor the option counterparty.” This
should have raised red flags of possible fraud.
K. ABN/RBS Knew or Should Have Known BLMIS’s Option Volume Exceeded the Total Options Available on the CBOE
193. ABN/RBS knew or should have known that BLMIS purported to allocate trades
to all IA Business customers on a pro-rata basis, and that Tremont alone was a significant
percentage of the total IA Business (in terms of assets under management). ABN/RBS also
knew that Fairfield Sentry was another large percentage of the IA Business. ABN/RBS could
estimate BLMIS’s options trading volumes for all customers based on its knowledge of
Tremont’s and Fairfield Sentry’s trading volumes.
194. Because Defendant ABN/RBS had special knowledge of Madoff’s trading
activity, ABN/RBS knew or should have known that the options trading volumes reported by
BLMIS were impossible if exchange-traded. To implement the SSC Strategy, BLMIS
purportedly purchased OEX options, which are traded on the CBOE. If ABN/RBS had
performed minimal due diligence and checked the number of listed options in the BLMIS
accounts for the Feeder Funds against the number of the same options actually traded on the
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CBOE, it would have been abundantly clear that Madoff’s claimed trading strategy was
impossible due to market volume alone.
195. The options volumes reported by BLMIS to have been traded for the Tremont
accounts alone would have exceeded the total options available on the CBOE nearly all of the
time.
196. A chart displaying the options needed to hedge just Tremont’s BLMIS investment
is illuminating.
The volume of OEX put options BLMIS purported to trade on behalf of Tremont (the red line)
completely dwarfs the volume of OEX put options traded on the entire CBOE (the black line).
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197. As shown below, the volumes of OEX put options BLMIS purportedly traded on
behalf of all its customers (the red line) reveals there was rarely, if ever, a time when BLMIS
traded fewer OEX put options than were actually traded on the CBOE (the black line).
198. As a part of a sophisticated financial institution, ABN/RBS also knew or should
have known that there is always less liquidity in OTC markets than on exchanges. Accordingly,
if Madoff’s reported options volumes exceeded the CBOE’s capacity, there was virtually no
chance that the OTC market could support the options trading volumes that Madoff reported.
199. ABN/RBS also knew or should have known that trading options in the OTC
market likely would have been more expensive than trading on the CBOE. A review of the
Feeder Funds’ BLMIS account statements would have revealed that these costs did not appear on
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the account statements. The absence of such costs, together with the impossible volumes of
options purportedly traded in the OTC market, were clear signs of fraudulent activity at BLMIS.
L. As a Sophisticated Financial Institution, Applying Basic Industry Customs and Practices, ABN/RBS Knew or Should Have Known Madoff Was Running a Fraudulent IA Business
200. Based on ABN/RBS being a sophisticated financial institution, based on a review
of documents available to it, minimal analysis, as well as application of the customs and
practices of the investment management industry that any sophisticated financial institution
would know, ABN/RBS should have identified numerous facts and circumstances that when
taken together were strong indicia of fraud at BLMIS, and should have prompted independent
due diligence and analysis by ABN/RBS. Such due diligence and analysis would have
confirmed in real time that Madoff was not engaged in the split strike conversion strategy he
purported to follow; that BLMIS’s role as custodian, investment advisor, and prime broker
allowed for a situation rife with opportunity for Madoff to commit fraud; and there were certain
facts and circumstances known to ABN/RBS that were virtual impossibilities where the only
rational or reasonable explanation was fraud. ABN/RBS had more than sufficient information to
determine Madoff running a fraudulent IA Business.
X. RYE XL LP HAD EXTRAORDINARY VISIBILITY INTO MADOFF AND BLMIS
201. Defendant Rye XL LP had extraordinary visibility into BLMIS through Tremont,
the entity that managed, operated and controlled Rye XL LP.
202. It was this extraordinary visibility into BLMIS and Madoff that exposed
Defendant Rye XL LP to facts indicating potential fraud at BLMIS. Armed with such
knowledge, rather than conduct further due diligence on BLMIS, Rye XL LP instead chose to
ignore the significant indicia of fraud.
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203. Defendant Rye XL LP identified numerous red flags of possible fraudulent
activity at BLMIS.
204. Defendant Rye XL LP was in the unique position of receiving information that,
either facially or upon standard industry due diligence, indicated possible fraud at BLMIS
through the information available to its General Partner and investment manager, Tremont.
205. Specifically, the Trustee incorporates by reference the allegations against Rye XL
LP contained in Picard v. Tremont Group Holdings, Inc. et al., Adv. Pro. No. 10-05310 (BRL),
as well as the allegations against Rye XL LP contained in Picard v. ABN AMRO Bank (Ireland)
Ltd. (f/k/a Fortis Prime Fund Solutions Bank (Ireland) Ltd.) et al., Adv. Pro. No. 10-05355
(BRL).
XI. THE TRANSFERS
206. The Tremont Feeders received initial transfers of BLMIS customer property. As
set forth herein, a portion of those initial transfers were subsequently transferred directly or
indirectly to the Defendants.
A. BROAD MARKET
1. Initial Transfers from BLMIS to Broad Market
207. The Trustee filed an adversary proceeding against Broad Market, Prime Fund and
other defendants in the Bankruptcy Court under the caption Picard v. Tremont Group Holdings,
Inc. et al., Adv. Pro. No. 10-05310 (BRL), in which, in part, the Trustee sought to avoid and
recover initial transfers of customer property from BLMIS to the Tremont Feeders in the amount
of approximately $1.9 billion (the “Tremont Complaint”). The Trustee incorporates by reference
the allegations contained in the Tremont Complaint as if fully set forth herein.
208. During the six years preceding the Filing Date, BLMIS made transfers to Broad
Market of approximately $252 million (the “Broad Market Six Year Initial Transfers”). The
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Broad Market Six Year Initial Transfers were and continue to be customer property within the
meaning of SIPA § 78lll(4), and are avoidable and recoverable under sections 544, 550, and 551
of the Bankruptcy Code, §§ 273-279 of the NYDCL, and applicable provisions of SIPA,
particularly SIPA § 78fff-2(c)(3).
209. The Broad Market Six Year Initial Transfers include approximately $60 million
which BLMIS transferred to Broad Market during the two years preceding the Filing Date (the
“Broad Market Two Year Initial Transfers”). The Broad Market Two Year Initial Transfers
were and continue to be customer property within the meaning of SIPA § 78lll(4), and are
avoidable and recoverable under sections 544, 548, 550, and 551 of the Bankruptcy Code,
§§ 273-279 of the NYDCL, and applicable provisions of SIPA, particularly SIPA § 78fff-2(c)(3).
210. The Broad Market Two Year Initial Transfers include approximately $30 million
which BLMIS transferred to Broad Market during the 90 days preceding the Filing Date (the
“Broad Market Preference Period Initial Transfers”). The Broad Market Preference Period
Initial Transfers were and continue to be customer property within the meaning of SIPA
§ 78lll(4), and are avoidable and recoverable under sections 547, 550, and 551 of the Bankruptcy
Code, and applicable provisions of SIPA, particularly SIPA § 78fff-2(c)(3).
211. The Broad Market Six Year Initial Transfers, the Broad Market Two Year Initial
Transfers, and the Broad Market Preference Period Initial Transfers are collectively defined as
the “Broad Market Initial Transfers.” Charts setting forth these transfers are attached as Exhibits
A and B.
212. On September 22, 2011, the Bankruptcy Court approved a settlement between the
Trustee and more than a dozen domestic and foreign investment funds, their affiliates, and a
former chief executive associated with Tremont Group Holdings, Inc. (collectively, the “Tremont
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Settling Defendants”) in the amount of $1.025 billion. Under the terms of the settlement
agreement, the Tremont Settling Defendants are obligated to pay $1.025 for the benefit of the
consolidated BLMIS estate. The Tremont settlement, as approved by the Bankruptcy Court,
specifically states that with the partial payment by the Tremont Settling Defendants, the transfers
to the Defendants were not recovered as part of the Tremont settlement. Following entry of this
Court’s Order Granting Trustee’s Motion for Entry of Order Approving Agreement (ECF No.
38), certain objectors filed an appeal of the settlement on September 30, 2011 (ECF No. 40). See
No. 11 Civ. 7330 (S.D.N.Y.) (GBD). On June 27, 2012, United States District Judge George B.
Daniels issued a Memorandum Decision and Order dismissing the appeal (Dist. Ct. ECF No. 35).
On July 30, 2012, the objectors filed a Notice of Appeal of the 6/28/12 Final Judgment
Dismissing the Tremont Appeal. See (ECF No.1) 12-3052bk (2d Cir.).
1. Subsequent Transfers Defendant ABN/RBS Received from Broad Market by Virtue of Redeeming its Proprietary Onshore Hedge Investment
213. As set forth in detail below a portion of the Broad Market Initial Transfers was
subsequently transferred either directly or indirectly to, or for the benefit of, Defendant
ABN/RBS and is recoverable from Defendant ABN/RBS pursuant to section 550 of the
Bankruptcy Code and § 278 of the NYDCL. Based on the Trustee’s investigation to date,
approximately $1,400,000 of the money transferred from BLMIS to Broad Market was
subsequently transferred by Broad Market to Defendant ABN/RBS (the “Broad Market–
ABN/RBS Subsequent Transfers”). A chart setting forth the presently known Broad Market–
ABN/RBS Subsequent Transfers is attached as Exhibit C.
214. The Trustee’s investigation is on-going, and the Trustee reserves the right to:
(i) supplement the information on the Broad Market Initial Transfers, Broad Market–ABN/RBS
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Subsequent Transfers, and any additional transfers, and (ii) seek recovery of such additional
transfers.
2. Subsequent Transfers from Broad Market to Rye XL LP
215. A portion of the Broad Market Initial Transfers was subsequently transferred
either directly or indirectly to, or for the benefit of, Defendant Rye XL LP and is recoverable
from Defendant Rye XL LP pursuant to section 550 of the Bankruptcy Code and § 278 of the
NYDCL. Based on the Trustee’s investigation to date, approximately $48,387,616 of the funds
transferred from BLMIS to Broad Market was subsequently transferred by Broad Market to
Defendant Rye XL LP (the “Broad Market–Rye XL LP Subsequent Transfers”). A chart setting
forth the presently known Broad Market–Rye XL LP Subsequent Transfers is attached as Exhibit
D.
216. The Trustee’s investigation is on-going, and the Trustee reserves the right to:
(i) supplement the information on the Broad Market Initial Transfers, Broad Market–Rye XL LP
Subsequent Transfers, and any additional transfers, and (ii) seek recovery of such additional
transfers.
217. The Broad Market–ABN/RBS Subsequent Transfers and the Broad Market–Rye
XL LP Subsequent Transfers are collectively defined as the “Broad Market Subsequent
Transfers.”
B. PRIME FUND
1. Initial Transfers from BLMIS to Prime Fund
218. During the six years preceding the Filing Date, BLMIS made transfers to Prime
Fund of approximately $945 million (the “Prime Fund Six Year Initial Transfers”). The Prime
Fund Six Year Initial Transfers were and continue to be customer property within the meaning of
SIPA § 78lll(4), and are avoidable and recoverable under sections 544, 550, and 551 of the
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Bankruptcy Code, §§ 273-279 of the NYDCL, and applicable provisions of SIPA, particularly
SIPA § 78fff-2(c)(3).
219. The Prime Fund Six Year Initial Transfers include approximately $495 million
which BLMIS transferred to Prime Fund during the two years preceding the Filing Date (the
“Prime Fund Two Year Initial Transfers”). The Prime Fund Two Year Initial Transfers were and
continue to be customer property within the meaning of SIPA § 78lll(4), and are avoidable and
recoverable under sections 544, 548, 550, and 551 of the Bankruptcy Code, §§ 273-279 of the
NYDCL, and applicable provisions of SIPA, particularly SIPA § 78fff-2(c)(3).
220. The Prime Fund Six Year Initial Transfers and the Prime Fund Two Year Initial
Transfers are collectively defined as the “Prime Fund Initial Transfers.” Charts setting forth
these transfers are attached as Exhibits E and F.
2. Prime Fund’s Investment of Customer Property in Rye XL LP
221. A portion of the Prime Fund Initial Transfers was subsequently transferred either
directly or indirectly to, or for the benefit of, Defendant Rye XL LP and is recoverable from
Defendant Rye XL LP pursuant to section 550 of the Bankruptcy Code and § 278 of the
NYDCL. Based on the Trustee’s investigation to date, approximately $285,317,636 of the
money transferred from BLMIS to Prime Fund was subsequently transferred by Prime Fund to
Defendant Rye XL LP (the “Prime Fund Subsequent Transfers”). A chart setting forth the
presently known Prime Fund Subsequent Transfers is attached as Exhibit G.
222. The Trustee’s investigation is ongoing, and the Trustee reserves the right to:
(i) supplement the information on the Prime Fund Initial Transfers, the Prime Fund Subsequent
Transfers, and any additional transfers, and (ii) seek recovery of such additional transfers.
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C. PORTFOLIO LIMITED FUND
1. Initial Transfers from BLMIS to Portfolio Limited Fund
223. During the six years preceding the Filing Date, BLMIS made transfers to
Portfolio Limited Fund of approximately $617 million (the “Portfolio Limited Fund Six Year
Initial Transfers”). The Portfolio Limited Fund Six Year Initial Transfers were and continue to
be customer property within the meaning of SIPA § 78lll(4), and are avoidable and recoverable
under sections 544, 550, and 551 of the Bankruptcy Code, §§ 273-279 of the NYDCL, and
applicable provisions of SIPA, particularly SIPA § 78fff-2(c)(3).
224. The Portfolio Limited Fund Six Year Initial Transfers include approximately $354
million which BLMIS transferred to Portfolio Limited Fund during the two years preceding the
Filing Date (the “Portfolio Limited Fund Two Year Initial Transfers”). The Portfolio Limited
Fund Two Year Initial Transfers were and continue to be customer property within the meaning
of SIPA § 78lll(4), and are avoidable and recoverable under sections 544, 548, 550, and 551 of
the Bankruptcy Code, §§ 273-279 of the NYDCL, and applicable provisions of SIPA,
particularly SIPA § 78fff-2(c)(3).
225. The Portfolio Limited Fund Two Year Initial Transfers include approximately
$275 million which BLMIS transferred to Portfolio Limited Fund during the 90 days preceding
the Filing Date (the “Portfolio Limited Fund Preference Period Initial Transfers”). Portfolio
Limited Fund Preference Period Initial Transfers were and continue to be customer property
within the meaning of SIPA § 78lll(4), and are avoidable and recoverable under sections 547,
550, and 551 of the Bankruptcy Code, and applicable provisions of SIPA, particularly SIPA
§ 78fff-2(c)(3).
226. The Portfolio Limited Fund Six Year Initial Transfers, the Portfolio Limited Fund
Two Year Initial Transfers, and the Portfolio Limited Fund Preference Period Initial Transfers
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are collectively defined as the “Portfolio Limited Fund Initial Transfers.” Charts setting forth
these transfers are attached as Exhibits H and I.
2. Subsequent Transfers Defendant ABN/RBS Received from Portfolio Limited Fund by Virtue of Redeeming its Offshore Hedge Investment
227. As set forth in detail below a portion of the Portfolio Limited Fund Initial
Transfers was subsequently transferred either directly or indirectly to, or for the benefit of,
Defendant ABN/RBS and is recoverable from Defendant ABN/RBS pursuant to section 550 of
the Bankruptcy Code and § 278 of the NYDCL. Based on the Trustee’s investigation to date,
approximately $74,464,000 of the money transferred from BLMIS to Portfolio Limited Fund was
subsequently transferred by Portfolio Limited Fund to Defendant ABN/RBS (the “Portfolio
Limited Fund–ABN/RBS Subsequent Transfers”). A chart setting forth the presently known
Portfolio Limited Fund–ABN/RBS Subsequent Transfers is attached as Exhibit J.
228. The Trustee’s investigation is on-going, and the Trustee reserves the right to:
(i) supplement the information on the Portfolio Limited Fund Initial Transfers, Portfolio Limited
Fund–ABN/RBS Subsequent Transfers, and any additional transfers, and (ii) seek recovery of
such additional transfers.
3. Subsequent Transfers from Portfolio Limited Fund to Rye XL Portfolio
229. A portion of the Portfolio Limited Fund Initial Transfers was subsequently
transferred either directly or indirectly to, or for the benefit of, Rye XL Portfolio. Based on the
Trustee’s investigation to date, approximately $74,298,573 of the funds transferred from BLMIS
to Portfolio Limited Fund was subsequently transferred by Portfolio Limited Fund to Rye XL
Portfolio (the “Portfolio Limited Fund–Rye XL Portfolio Subsequent Transfers”). A chart
setting forth the presently known Portfolio Limited Fund–Rye XL Portfolio Subsequent
Transfers is attached as Exhibit K.
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230. The Trustee’s investigation is on-going, and the Trustee reserves the right to:
(i) supplement the information on the Portfolio Limited Fund Initial Transfers, Portfolio Limited
Fund–Rye XL Portfolio Subsequent Transfers, and any additional transfers, and (ii) seek
recovery of such additional transfers.
D. INSURANCE PORTFOLIO FUND
1. Initial Transfers from BLMIS to Insurance Portfolio Fund
231. During the six years preceding the Filing Date, BLMIS made transfers to
Insurance Portfolio Fund of approximately $93.9 million (the “Insurance Portfolio Fund Six
Year Initial Transfers”). The Insurance Portfolio Fund Six Year Initial Transfers were and
continue to be customer property within the meaning of SIPA § 78lll(4), and are avoidable and
recoverable under sections 544, 550, and 551 of the Bankruptcy Code, §§ 273-279 of the
NYDCL, and applicable provisions of SIPA, particularly SIPA § 78fff-2(c)(3).
232. The Insurance Portfolio Fund Six Year Initial Transfers include approximately
$50 million which BLMIS transferred to Portfolio Limited Fund during the two years preceding
the Filing Date (the “Insurance Portfolio Fund Two Year Initial Transfers”). The Insurance
Portfolio Fund Two Year Initial Transfers were and continue to be customer property within the
meaning of SIPA § 78lll(4), and are avoidable and recoverable under sections 544, 548, 550, and
551 of the Bankruptcy Code, §§ 273-279 of the NYDCL, and applicable provisions of SIPA,
particularly SIPA § 78fff-2(c)(3).
233. The Insurance Portfolio Fund Two Year Initial Transfers include approximately
$8.9 million which BLMIS transferred to Portfolio Limited Fund during the 90 days preceding
the Filing Date (the “Insurance Portfolio Fund Preference Period Initial Transfers”). Insurance
Portfolio Fund Preference Period Initial Transfers were and continue to be customer property
within the meaning of SIPA § 78lll(4), and are avoidable and recoverable under sections 547,
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550, and 551 of the Bankruptcy Code, and applicable provisions of SIPA, particularly SIPA
§ 78fff-2(c)(3).
234. The Insurance Portfolio Fund Six Year Initial Transfers, the Insurance Portfolio
Fund Two Year Initial Transfers, and the Insurance Portfolio Fund Preference Period Initial
Transfers are collectively defined as the “Insurance Portfolio Fund Initial Transfers.” Charts
setting forth these transfers are attached as Exhibits L and M.
2. Subsequent Transfers from Insurance Portfolio Fund to Rye XL Portfolio
235. A portion of the Insurance Portfolio Fund Initial Transfers was subsequently
transferred either directly or indirectly to, or for the benefit of, Rye XL Portfolio. Based on the
Trustee’s investigation to date, approximately $318,000 of the funds transferred from BLMIS to
Insurance Portfolio Fund was subsequently transferred by Insurance Portfolio Fund to Rye XL
Portfolio (the “Insurance Portfolio Fund Subsequent Transfers”). A chart setting forth the
presently known Insurance Portfolio Fund Subsequent Transfers is attached as Exhibit N.
236. The Trustee’s investigation is on-going, and the Trustee reserves the right to:
(i) supplement the information on the Insurance Portfolio Fund Initial Transfers, Insurance
Portfolio Fund Subsequent Transfers, and any additional transfers, and (ii) seek recovery of such
additional transfers.
E. SUBSEQUENT TRANSFERS FROM DEFENDANT RYE XL LP TO DEFENDANTS ABN/RBS
237. A portion of the Prime Fund Initial Transfers and/or Broad Market Initial
Transfers was subsequently transferred either directly or indirectly to, or for the benefit of,
Defendants ABN/RBS by Rye XL LP and is recoverable from Defendant ABN/RBS pursuant to
section 550 of the Bankruptcy Code and § 278 of the NYDCL. Based on the Trustee’s
investigation to date, approximately $87,500,000 of the Broad Market-Rye XL LP Subsequent
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Transfers and/or Prime Subsequent Transfers was transferred by Defendant Rye XL LP to
Defendant ABN/RBS (the “Rye XL LP–ABN/RBS Subsequent Transfers”). A chart setting
forth the presently known Rye XL LP–Defendants Subsequent Transfers is attached as
Exhibit O.
238. The Trustee’s investigation is ongoing, and the Trustee reserves the right to:
(i) supplement the information on the Prime Fund Initial Transfers, the Broad Market Initial
Transfers, the Broad Market–Rye XL LP Subsequent Transfers, the Prime Fund Subsequent
Transfers, and the Rye XL LP–ABN/RBS Subsequent Transfers, and any additional transfers,
and (ii) seek recovery of such additional transfers.
F. SUBSEQUENT TRANSFERS FROM RYE XL PORTFOLIO TO DEFENDANTS ABN/RBS
239. A portion of the Portfolio Limited Fund Initial Transfers and/or Insurance
Portfolio Fund Initials Transfers was subsequently transferred either directly or indirectly to, or
for the benefit of, Defendant ABN/RBS by Rye XL Portfolio and is recoverable from Defendant
ABN/RBS pursuant to section 550 of the Bankruptcy Code and § 278 of the NYDCL. Rye XL
Portfolio transferred at least $141,000,000 to Defendant ABN/RBS. See Exhibit P. Based on the
Trustee’s limited investigation to date,12 a minimum of $74.6 million of the $141 million Rye
XL Portfolio transferred to ABN/RBS were subsequent transfers of the Portfolio Limited Fund–
(the “Rye XL Portfolio-ABN/RBS Subsequent Transfers”) and is recoverable from Defendant
ABN/RBS pursuant to section 550 of the Bankruptcy Code and § 278 of the NYDCL.
12 The Trustee’s investigation is ongoing. Upon complete discovery and review of comprehensive bank records of Rye XL Portfolio, which are not currently available to the Trustee, additional transfers of customer property from Rye XL Portfolio to Defendant ABN/RBS may be revealed.
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240. The Trustee’s investigation is ongoing, and the Trustee reserves the right to:
(i) supplement the information on the Portfolio Limited Fund Initial Transfers, the Insurance
Portfolio Fund Initial Transfers, the Portfolio Limited Fund–Rye XL Portfolio Subsequent
Transfers, the Insurance Portfolio Fund Subsequent Transfers, and the Rye XL Portfolio–
ABN/RBS Subsequent Transfers, and any additional transfers, and (ii) seek recovery of such
additional transfers.
COUNT ONE RECOVERY OF BROAD MARKET SUBSEQUENT TRANSFERS–
11 U.S.C. §§ 550 AND 551 AND NYDCL § 278
241. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Complaint as if fully rewritten herein.
242. Defendant ABN/RBS received the Broad Market–ABN/RBS Subsequent
Transfers, totaling approximately $1,400,000, and Rye XL LP received the Broad Market-Rye
XL LP Subsequent Transfers, totaling approximately $48,387,616 (collectively defined above as
the “Broad Market Subsequent Transfers”). The Broad Market Subsequent Transfers are
recoverable pursuant to section 550(a) of the Bankruptcy Code and § 278 of the NYDCL.
243. Each of the Broad Market Subsequent Transfers was made directly or indirectly
to, or for the benefit of, the Defendants.
244. Defendant ABN/RBS is an immediate or mediate transferee of the Broad Market
Initial Transfers.
245. Defendant Rye XL LP is an immediate or mediate transferee of the Broad Market
Initial Transfers.
246. As a result of the foregoing, pursuant to sections 550(a) and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
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judgment against the Defendants recovering the Broad Market Subsequent Transfers, or the value
thereof, for the benefit of the estate of BLMIS.
COUNT TWO RECOVERY OF PRIME FUND SUBSEQUENT TRANSFERS–
11 U.S.C. §§ 550 AND 551 AND NYDCL § 278
247. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Complaint as if fully rewritten herein.
248. Defendant Rye XL LP received the Prime Fund Subsequent Transfers, totaling
approximately $285,317,636. The Prime Fund Subsequent Transfers are recoverable pursuant to
section 550(a) of the Bankruptcy Code and § 278 of the NYDCL.
249. Each of the Prime Fund Subsequent Transfers was made directly or indirectly to,
or for the benefit of, Defendant Rye XL LP.
250. Defendant Rye XL LP is an immediate or mediate transferee of the Transfers.
251. As a result of the foregoing, pursuant to sections 550(a) and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant Rye XL LP recovering the Prime Fund Subsequent Transfers, or the
value thereof, for the benefit of the estate of BLMIS.
COUNT THREE RECOVERY OF PORTFOLIO LIMITED FUND SUBSEQUENT TRANSFERS–
11 U.S.C. §§ 550 AND 551 AND NYDCL § 278
252. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Complaint as if fully rewritten herein.
253. Defendant ABN/RBS received the Portfolio Limited Fund–ABN/RBS Subsequent
Transfers, totaling approximately $74,464,000. The Portfolio Limited Fund–ABN/RBS
Subsequent Transfers are recoverable pursuant to section 550(a) of the Bankruptcy Code and §
278 of the NYDCL.
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254. The Portfolio Limited Fund–ABN/RBS Subsequent Transfers were made directly
or indirectly to, or for the benefit of, ABN/RBS.
255. Defendant ABN/RBS is an immediate or mediate transferee of the Portfolio
Limited Fund Initial Transfers.
256. As a result of the foregoing, pursuant to sections 550(a) and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant ABN/RBS recovering the Portfolio Limited Fund–ABN/RBS
Subsequent Transfers, or the value thereof, for the benefit of the estate of BLMIS.
COUNT FOUR RECOVERY OF RYE XL LP SUBSEQUENT TRANSFERS–
11 U.S.C. §§ 550 AND 551 AND NYDCL § 278
257. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Complaint as if fully rewritten herein.
258. Defendant ABN/RBS received the Rye XL LP–ABN/RBS Subsequent Transfers,
totaling approximately $87,500,000. The Rye XL LP–ABN/RBS Subsequent Transfers are
recoverable pursuant to section 550(a) of the Bankruptcy Code and § 278 of the NYDCL.
259. Each of the Rye XL LP–ABN/RBS Subsequent Transfers was made directly or
indirectly to, or for the benefit of, Defendant ABN/RBS.
260. Defendant ABN/RBS is an immediate or mediate transferee of the Rye XL LP–
ABN/RBS Subsequent Transfers.
261. As a result of the foregoing, pursuant to sections 550(a) and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant ABN/RBS recovering the Rye XL LP–ABN/RBS Subsequent
Transfers, or the value thereof, for the benefit of the estate of BLMIS.
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COUNT FIVE RECOVERY OF RYE XL PORTFOLIO SUBSEQUENT TRANSFERS–
11 U.S.C. §§ 550 AND 551 AND NYDCL § 278
262. The Trustee incorporates by reference the allegations contained in the previous
paragraphs of this Complaint as if fully rewritten herein.
263. Defendant ABN/RBS received the Rye XL Portfolio–ABN/RBS Subsequent
Transfers, totaling approximately $74,616,573. The Rye XL Portfolio–ABN/RBS Subsequent
Transfers are recoverable pursuant to section 550(a) of the Bankruptcy Code and § 278 of the
NYDCL.
264. Each of the Rye XL Portfolio–ABN/RBS Subsequent Transfers was made directly
or indirectly to, or for the benefit of, Defendant ABN/RBS.
265. Defendant ABN/RBS is an immediate or mediate transferee of the Rye XL
Portfolio–ABN/RBS Subsequent Transfers.
266. As a result of the foregoing, pursuant to sections 550(a) and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant ABN/RBS recovering the Rye XL Portfolio–ABN/RBS Subsequent
Transfers, or the value thereof, for the benefit of the estate of BLMIS.
WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favor
of the Trustee and against Defendants as follows:
(a) On the First Claim for Relief, pursuant to sections 550 and 551 of the Bankruptcy
Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment
against Defendants recovering the Broad Market Subsequent Transfers, or the value thereof, in
an amount to be proven at trial, but no less than $49,787,616, for the benefit of the estate of
BLMIS;
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(b) On the Second Claim for Relief, pursuant to sections 550 and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Rye XL LP recovering the Prime Fund-Rye XL LP Subsequent Transfers, or
the value thereof, in an amount to be proven at trial, but no less than $285,317,636 from Rye XL
LP, for the benefit of the estate of BLMIS;
(c) On the Third Claim for Relief, pursuant to sections 550 and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant ABN/RBS recovering the Portfolio Limited Fund–ABN/RBS
Subsequent Transfers, or the value thereof, in an amount to be proven at trial, but no less than
$74,464,000, from Defendant ABN/RBS for the benefit of the estate of BLMIS;
(d) On the Fourth Claim for Relief, pursuant to sections 550 and 551 of the
Bankruptcy Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a
judgment against Defendant ABN/RBS recovering the Rye XL LP-ABN/RBS Subsequent
Transfers, or the value thereof, in an amount to be proven at trial, but no less than $87,500,000
from Defendant ABN/RBS, for the benefit of the estate of BLMIS;
(e) On the Fifth Claim for Relief, pursuant to sections 550 and 551 of the Bankruptcy
Code, § 278 of the NYDCL, and SIPA § 78fff-2(c)(3), the Trustee is entitled to a judgment
against Defendant ABN/RBS recovering the Rye XL Portfolio-ABN/RBS Subsequent Transfers,
or the value thereof, in an amount to be proven at trial, but no less than $74,616,573 from
Defendant ABN/RBS, for the benefit of the estate of BLMIS;
(f) Awarding the Trustee all applicable fees, interest, costs, and disbursements of this
action; and
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(g) Granting the Trustee such other, further, and different relief as the Court deems
just, proper, and equitable.
Dated: August 8, 2012 New York, New York
/s/ Regina L. Griffin Baker & Hostetler LLP 45 Rockefeller Plaza New York, New York 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 David J. Sheehan Regina L. Griffin Thomas L. Long Kathryn M. Zunno Baker & Hostetler LLP 65 East State Street, Suite 2100 Columbus, Ohio 43215 Telephone: (614) 228-1541 Facsimile: (614) 462-2616 Catherine E. Woltering Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff
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BLMIS Account Name BLMIS Account Number
RYE SELECT BROAD MKT FUND LP C/O TREMONT PARTNERS ATTN: HARRY HODGES SUITE C300 1T0027
Exhibit A
MADC1151_00000021
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