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Baker dkHostetler LLP Hearing Date: December 21, 2011 at 10:00 a.m.
45 Rockefeller Plaza Objection Deadline: December 15, 2011
New York, New York 10111
Telephone: (212) 589-4200Facsimile: (212) 589-4201
David J. SheehanEmail: dsheehan bakerlaw,comMare E. Hirschfield
Email: mhirschfield bakerlaw,com
Elizabeth A. Smith
I: :~ i
Elyssa S, Katesb l
Amy E, Vanderwal
Email: avanderwal bakerlaw.com
Attorneys for Irving H. Picard, Trustee forthe Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff
Investment Securities LLC and Bernard L .
Ma doff
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION Adv. Pro. No. 08-1789 (BRL)
CORPORATION,SIPA Liquidation
Plaintiff-Applicant,(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L. MADOFF,
Debtor,
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NOTICE OF MOTION FOR ENTRY OF AN ORDER PURSUANT TO SECTION
105(a) OF THE BANKRUPTCY CODE AND RULES 2002 AND 9019 OF THKFEDERAL RULES OF BANKRUPTCY PROCEDURE APPROVING AN
AGREEMENT BY AND BETWEEN THK TRUSTEE AND UNITED STATES OFAMERICA ON BEHALF OF THK INTERNAL REVENUE SERVICE
PLEASE TAKE NOTICE that Irving H. Picard (the "Trustee" ), as trustee for the
liquidation of the business of Bernard L. Madoff Investment Securities LLC under the
Securities Investor Protection Act , 15 U .S.C . $$ 78 aaa et seq. ("SIPA"), and the
substantively consolidated estate of Bernard L. Madoff, by and through his undersigned
counsel, will move (the "Motion" ) before the Honorable Burton R. Lifland, United States
Bankruptcy Judge, at the United States Bankruptcy Court, the Alexander Hamilton Customs
House, One Bowling Green, New York, New York 10004-1408, on December 21, 2011 at
10:00 a.m., or as soon thereafter as counsel may be heard, seeking entry of an order (the
"Order" ), pursuant to section 105(a) of the United States Bankruptcy Code, 11 U.S.C. $$ 101
etseq., and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure (the
"Bankruptcy Rules" ), approving that certain agreement (the "Agreement" ) by and between
the Trustee and the United States of America, on behalf of the Internal Revenue Service, as
more particularly set forth in the Motion.
PLEASE TAKE FURTHER NOTICE that objections, if any, to the Motion must (i)
be in writing; (ii) conform to the Banlauptcy Rules, Local Bankruptcy Rules and General
Orders (which Lo cal B ankruptcy Rule s and Ge neral Ord ers may b e f o un d a t
http: //www.nysb.uscourts,gov/); (iii) specify the name of the objecting party and state with
specificity the basis of the objection(s) and the specific grounds therefor; (iv) be filed in
accordance with the electronic filing procedures for the United States Bankruptcy Court for
the Southern District of New York, with a proof of service, and a courtesy copy delivered to
the Chambers of the Honorable Burton R. L if land, United States Banlauptcy Court, the
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Alexander Hamilton Customs House, One Bowling Green, New York, New York 10004
1408; and (v) be served upon Baker k H ostetler LLP, counsel for the Trustee, 45
Rockefeller Plaza, New York, New York 10111, Attn: Elizabeth A. Smith, Esq. and Elyssa
S. Kates, Esq., so as to be received no later than4:00 .m. On December 15 2011.
Dated: New York, New York Respectfully submitted,
November 22, 2011
Is/Elyssa S. Kates
Baker & Hostetler LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201David J. Sheehan
Email: dsheehan bakerlaw.com
Mare E, Hirschfield
Email: mhirschfield c bakerlaw.com
Elizabeth A. Smithi : ~ b
Elyssa S. Kates
il: ~ b IAmy E. VanderwalEmail; avanderwal c bakerlaw.com
Attorneys for Irving H, Picard,
Trustee for the Substantively Consolidated
SIPA Liquidation of Bernard L MadoffInvestment Securities LLC and Bernard L.
Madoff
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[PAGE INTENTIONALLY LEFT BLANK]
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Baker dkHostetler LLP Hearing Date: December21, 2011 at 10:00 a.m.
45 Rockefeller Plaza Objection Deadline: December 15, 2011
New York, New York 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201
David J, SheehanEmail: dsheehan bakerlaw.comMare E. Hirschfield
Email: mhirschfield bakerlaw,com
Elizabeth A. Smith'! ~ i h b I
Elyssa S. Kates4 I
Amy E. Vanderwal
Email: avanderwal c bakerlaw.com
Attorneys for Irving H. Picard, Trustee forthe Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff
Investment Securities LLC and Bernard L.
Ma doff
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK
SECURITIES INVESTOR PROTECTION Adv. Pro. No. 08-1789 (BRL)
CORPORATION,SIPA Liquidation
Plaintiff-Applicant,(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant,
In re:
BERNARD L. MADOFF,
Debtor.
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TRUSTEE'S MOTION FOR ENTRY OF AN ORDER PURSUANT TO
SECTION 105(a)OF THK BANKRUPTCY CODE AND RULES 2002 AND 9019
OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE APPROVING
AN AGREEMENT BY AND BETWEEN THK TRUSTEE AND UNITED STATESOF AMERICA ON BEHALF OF THK INTERNAL REVENUE SERVICE
TO: T H E HO NORABLE BURTON R. LIFLAND
UNITED STATES BANKRUPTCY JUDGE
Irving H, Picard (the "Trustee" ), as trustee for the liquidation of the business of
Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor
Protection Act, 15 U.S.C. $) 78aaa etseq. ("SIPA"), and the substantively consolidated
estate of Bernard L. Madoff ("Madoff," and together with BLMIS, collectively, the
"Debtors" ), by and through his undersigned counsel, respectfully submits this motion (the
"Motion" ) seeking entry of an order (substantially in the form annexed hereto as Exhibit
"A"), pursuant to section 105(a) of the United States Bankruptcy Code, 11 U.S.C. $$ 101 et
seq. (the "Bankruptcy Code" ), and Rules 2002 and 9019 of the Federal Rules of Bankruptcy
Procedure (the "Bankruptcy Rules" ), seeking approval of an agreement (the "Agreement" )'
by and between the Trustee and the United States of America, on behalf of the Internal
Revenue Service (referred to herein as the " IRS"), and, in support thereof, the Trustee
respectfully represents as follows:
PRELIMINARY STATEMENT
The Trustee has reached an agreement with the IRS that allows for the
recovery of transfers made by BLMIS and/or Madoff to the IRS purportedly on behalf of
foreign account ho lders (the "F oreign Accountholders") al legedly pursuant to th e
requirements of sections 1441 and 1442 of the Internal Revenue Code of 1986 (the "Code" ).
This settlement (the "IRS Settlement" ) will b ri ng approximately $326 mi ll ion (t he
' The form of Agreement is annexed hereto as Exhibit "B."
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"Settlement Payment" ) into the BLMIS estate for eventual distribution to customers with
valid claims. The Settlement Payment represents a significant recovery by the Trustee for
the benefit of the fund of customer property (the "Customer Fund" ). Thus, the Trustee
submits that the IRS Settlement falls well within the range of reasonableness mandated by
the relevant legal standard and therefore, the Trustee respectfully requests that the Court
approve the settlement.
BACKGROUND
2, On D ec em ber 11, 2008 (the "F il ing Date" ), th e U.S . Securities and
Exchange Commission ("SEC") filed a complaint in the United States District Court for the
Southern District of New York (the "District Court" ) against the Debtors (Case No. 08 CV
10791). The complaint alleged that the Debtors engaged in fraud through investment
advisory activities of BLMIS.
3. On De cember 15, 2008, pursuant to section 78eee (a)(4)(A) of SIPA, the SEC
consented to a combination of its own action with an application of the Securities Investor
Protection Corporation ("SIPC"). Thereafter, pursuant to section 78eee(a)(3) of SIPA, SIPC
filed an application in the Distr ict Court alleging, inter alia, that BLMIS was not able to
meet its obligations to securities customers as they came due, and accordingly, its customers
needed the protection afforded by SIPA.
4, On th a t date, the District Court entered the Protective Decree, to which
BLMIS consented, which, in pertinent part:
(i) appo inted the Trustee for the liquidation of the business ofBLMIS pursuant to section 78eee(b)(3) of SIPA;
' In this case, the Filing Date is the date on which the SEC commenced its suit against BLMIS,
December 11, 2008, which resulted in the appointment of a receiver for the firm. See section
78lll(7)(B) of SIPA.
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(ii) appo inted Baker & Hostetler LLP as counsel to the Trusteepursuant to section 78eee(b)(3) of SIPA; and
(iii) re m oved the case to this Court pursuant to section 78eee(b)(4)of SIPA.
At a plea hearing (the "Plea Hearing" ) on March 12, 2009, in the criminal
action filed against him by the United States Attorney's Office for the Southern District of
New York, Madoff pled guilty to an 11-count criminal information, which counts included
securities fraud, money laundering, theft and embezzlement. At the Plea Hearing, Madoff
admitted that he "operated a Ponzi scheme through the investment advisory side of
[BLMIS]." (P lea Hr'g Tr. at 23:14-17). On June 29, 2009, Madoff was sentenced to a term
of imprisonment of 150 years.
6. On Apr i l 13 , 2009, an involuntary bankruptcy petition was filed against
Madoff. On Ju ne 9, 2009, this Court entered an order substantively consolidating the
Chapter 7 estate of Madoff into the BLMIS SIPA proceeding.
7. Purs uant to section 78fff-1(a) of SIPA, the Trustee has the general powers of
a bankruptcy trustee in a case under Chapter 7 of the United States Bankruptcy Code, as
amended from time to time (the "Bankruptcy Code" ), as well as the powers granted pursuant
to SIPA. Chapters 1, 3, 5 and subchapters I and II of Chapter 7 of the Bankruptcy Code
apply to the SIPA Proceeding to the extent consistent with SIPA, Under SIPA, the Trustee
is charged with the responsibility of marshaling and liquidating the assets of BLMIS, and
recovering customer property for distribution to BLMIS' customers in satisfaction of
allowed customer claims, including through the recovery of avoidable transfers.
TRANSFERS MADE PURPORTEDLY ON ACCOUNT OF WITHHOLDING
8. The T r ustee, in the course of his investigation, identified certain payments
(the "Payments" ) made by BLMIS or Madoff to the IRS, purportedly on behalf of the
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Foreign Accountholders, allegedly pursuant to the requirements of sections 1441 and 1442
of the Code, which requires persons who pay income to non-resident aliens and foreign
corporations to withhold tax equal to thirty percent (30%) of that income.
9. Sinc e January 1, 2003, BLMIS made Payments on behalf of 145 Foreign
Accountholders (identified on Exh ibi t "C" hereto) wh ich tota led approximately $330
mill ion. The Payments were reported to the IRS as federal income tax withholding relating
to dividends paid to the accounts of the Foreign Accountholders, With respect to three of
these Foreign Accountholders, the IRS erroneously paid certain refunds pursuant to claims
made against the IR S r el ating to t h e P ayments (the "E rroneously Paid Foreign
Accountholders"). The total amount paid to the Erroneously Paid Foreign Accountholders is
$4,224,884. 10.
10, Th e Trus tee's investigation has revealed that there is no record of BLMIS
having purchased or sold any securities for the benefit of the Foreign Accountholders, and in
addition, there is no record of any dividends actually having been paid with respect to
accounts held by the Foreign Accountholders. See Affidavit in Support of Trustee's Motion
for Entry of an Order Pursuant to Section 105(a) of the Banluuptcy Code and Rules 2002
and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and
Between the Trustee and United States of America on Behalf of the Internal Revenue
' The Code imposes an income tax withholding on certain categories of income paid to foreign investors
including dividends, derived from U.S. sources. The wi thholding tax is payable to the United States Treasury.
Pursuant to section 871 of the Code, a tax of 30 percent (30%) is imposed on the amount received from sourcesin the United States by a nonresident alien indiv idual as dividends, S imi lar ly, pursuant to section 881 of the
Code, a tax of 30 percent is imposed on the amount received from sources within the United States by a foreigncorporation as dividends. W ith respect to non-resident alien individuals or a foreign partnership, section 1441of the Code requires a withholding tax from dividends equal to 30 percent (30%) thereof; similarly, with
respect to foreign corporations, section 1442 of the Code requires a withholding tax from dividends equal to 30percent (30%) thereof. See Treas. Reg, sections 1,1441-1 and 1.1442-1, The obligation to withhold applies to
the payor of the dividend, whether it pays the dividend annually or at other intervals. See Treas. Reg. section1.1441-2(b)(i) and (ii).
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Service (the "Trustee's Affidavit" ) at $ 6. Thus, the Payments made to the IRS falsely
identified the funds as income tax withholding, presumably to give the investment advisory
arm of BLMIS an air of legitimacy and to avoid any inquiries from the IRS; by making the
"withholding" payments, it would appear to the outside world that real stock was held in the
accounts at BLMIS and real dividends had been paid, In furtherance of his Ponzi scheme,
Madoff annually filed Forms 1042, "Annual Withholding Tax Return for the United States
Source Income of Foreign Persons" falsely reporting millions of dollars as "taxes" withheld
and paid to the IRS for the years prior to 2008. Id. at) 6 and Exhibit "A".
11. Up o n learning of the fraudulent payment and reporting of the Payments by
Madoff, the Trustee made a claim against the IRS for return to the Trustee of the value of
the Payments made to the IRS since January 1, 2003, for eventual distribution to customers
with allowed claims. The IRS Settlement, as described below, involves the repayment of the
vast majority of the Payments. This represents a significant recovery for the victims of the
Ponzi scheme,
THK AGRKKMKNT AND CHANNELING IN JUNCTION
12. Th e p r inc ipal terms and conditions of the Agreement are contained in the
form of Agreement attached as Exhibit "B" and should be reviewed for a complete account
of its terms,4
13, TheAgreement provides, in part, that:
The IR S wi l l pay $326 million to the Trustee in complete satisfactionand settlement of all claims by the Trustee against the IRS with
respect to payments made by BLMI S and/or Madoff allegedly
pursuant to the requirements of Code sections 1441 and 1442 with
Terms not otherwise defined in this Motion shall have the meaning ascribed in the Agreement. Inthe event of any inconsistency between the terms provided in this Motion and the terms of the
Agreement, the Agreement shall prevail.
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respect to the Foreign Accountholders. The Settlement Payment is
being made for the benefit of BLMIS' customers with valid claims;
Interest will accrue on the Settlement Payment if the SettlementPayment is not received by the Trustee within 180 days of the date the
IRS Settlement is approved;
The Trustee will continue any pending actions against certain ForeignAccountholders, To the extent the Trustee has commenced actions
against the Erroneously Paid Foreign Accountholders, the Trustee
s hall continue those actions wi thout an y a dj ustment of t h e
Erroneously Paid Foreign Accountholders' account balances. The
Trustee shall adjust all o ther Foreign Accountholders' BL MI S
account balances for purposes of any claims allowance or otherpending proceedings and will credit all Payments out of the accounts
for alleged withholding payments made to the IRS to the extent of
those payments;
The Trustee will release the IRS and its employees, attorneys,representatives, advisors and agents from any and all past, present and
future claims or causes of action and from any and all allegations of
liability or damages of whatever kind, nature or description, direct or
indirect, in law, equity or arbitration, absolute or contingent, known
or unknown, that are, have been, could have been or might in thefuture be asserted by the Trustee against the IRS and that are based
on, arise out of or relate in any way to any of the Payments allegedly
made on behalf of Foreign Accountholders by BLMIS pursuant to the
requirements of sections 1441 and 1442 of the Code;
T he Trustee wil l r eserve approximately $103 mi ll ion o f t h e
Settlement Payment (the "Reserve" ) for the purpose of satisfying any
potential administrative decisions, settlements or judgments against
the IRS or the Trustee that have been or may hereafter be entered withrespect to the Payments. The Reserve shall not be available to satisfy
certain excepted claims (the "Excepted Claims" ) which are defined
below and in paragraph 5 of the Agreement. The Trustee may release
the balance of the Reserve for distribution on the day that is two years
and sixty days from the Settlement Approval Date (defined below),but shall retain a sufficient amount in the Reserve to satisfy any
claims or actions that are still pending;
The Trustee shall seek, and the Agreement shall be contingent upon,
the issuance of a final and non-appealable Order by the Court that:
(i) approves the Agreement; and (ii) contains a provision permanentlyenjoining (the "Channeling Injunction" ) any person, including any
Foreign Accountholder (and including Erroneously Paid ForeignAccountholders), and anyone acting on his/her/its behalf or in concert
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of participation with such Foreign Accountholder, from asserting any
claim or action against the IRS or the Trustee which arises from or
relates to any Payments allegedly made on behalf of a Foreign
Accountholder and Erroneously Paid Foreign Accountholder by
BLMIS pursuant to the requirements of Code sections 1441 and 1442,
provided however, that such Channeling Injunction shall not barclaims or actions brought against the BLMIS estate by creditors or
against the SIPA customer fund as customers so long as such creditors
or customers filed claims in th e SIPA Pr oceeding prior to th e
statutorily mandated cla ims bar date (the "Ex cepted Cla ims" ).Additionally, the injunction will not affect the rights and defenses of
any Foreign A ccountholders and E r ro neously Pai d F o re ign
Accountholder presently engaged in litigation with the Trustee;
If the Channeling Injunction provision in the Order is held to be
invalid, i na pplicable o r un enforceable ag ainst an y F o reig n
Accountholder and Erroneously Paid Foreign Accountholder and acourt permits an action to proceed with respect to the Payments other
than an Excepted Claim, any such accountholder seeking to assert a
claim shall assert such claim in the Bankruptcy Court against theTrustee and not the IRS;
The Or d er shall provide that if the IRS is rendered or adjudged liable
to any person or entity, including any Foreign Accountholder and
Erroneously Paid Foreign Accountholder, in respect of any claims oractions arising from or relating to the Payments, such liability will be
satisfied by the Trustee from the Reserve; and
The A gr e ement is subject to the entry of the Order and the Order
becoming final and non-appealable (such date, the "SettlementApproval Date" ).
1 4. A s s e t forth above, as part of the Agreement, the Trustee is seeking a
Channeling Injunction from this Court, pursuant to Section 105(a) of the Bankruptcy Code.
The Trustee is seeking such relief because the IRS will turn over the Settlement Payment to
the Trustee. Therefore, the Trustee will obtain control over the funds that could be the
subject of any future refund action by a Foreign Accountholder.
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ARGUMENT
THE AGREEMENT IS FAIR AND EQUITABLE
AND IN THE BEST INTERESTS OF THE BLMIS ESTATE
I. The T e rms of the Agreement Are Fair and Reasonable and Will Confer aSignificant Benefit on the Customer Fund.
15. Ba n kruptcy Rule 9019(a) provides, in pertinent part, that "[o]n motion by the
trustee and after notice and a hearing, the court may approve a compromise or settlement."
Courts have held that in order to approve a settlement or compromise under Bankruptcy
Rule 9019(a), a bankruptcy court should f ind that the compromise proposed is fair and
equitable, reasonable, and in the best interests of a debtor's estate. In re Ionosphere Clubs,
Inc,, 156 BR 414, 426 (S.D.N, Y. 1993),aff'd, 17 F.3d 600 (2d Cir. 1994) (citingProtective
Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424
(1968)),
16. The Second Circuit has stated that a bankruptcy court, in determining
whether to approve a compromise, should not decide the numerous questions of law and fact
raised by the compromise, but rather should "canvass the issues and see whether the
settlement 'fal l[s] below the lowest point in the range of reasonableness.'" In re W. T. Grant
Co., 699 F.2d 599, 608 (2d Cir.), cert. denied sub nom. Cosoff v, Rodman, 464 U,S. 822
(1983) (quoting Newmanv. Stein, 464 F.2d 689, 693 (2d Cir.), cert. denied sub nom, Benson
v. Newman, 409 U.S. 1039 (1972)); accord Nellisv, Shugrue, 165 B,R. 115, 121-22
(S.D.N.Y. 1994); In re Ionosphere Clubs, 156 B.R. at 426; In re Purofied Down Prods,
Corp,, 150 B.R. 519, 522 (S.D,N.Y. 1993) (" [T]he court need not conduct a 'mini-trial' to
determine the merits of the underlying l itigation" ); In re Drexel Burnham Lambert Group,
Inc., 134 B,R. 499, 505 (Bankr. S,D.N.Y. 1991).
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17. In d e c id ing whether a particular compromise falls within the "range of
reasonableness," courts consider the following factors:
a. the p robabil ity of success in the litigation;
b. the d i f f icu lties associated with collection;
c. the complexity of the litigation, and the attendant expense,
inconvenience, and delay; and
the paramount interests of the creditors (or in this case,
customers).Nellisv. Shugrue, 165 B.R. at 122 (citing In re Drexel
Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir.
1992), cert. dismissed, 506 U.S, 1088 (1993)).
18. Th e bankruptcy court may credit and consider the opinions of the trustee or
debtor and their counsel in determining whether a settlement is fair and equitable, See In re
Purofied Doivn Prods., 150 B,R, at 522; In re Drexel Burnham Lambert Group, Inc., 134
B.R. at 505. The competency and experience of counsel supporting the settlement may also
be considered. Nellisv. Shugrue, 165 B.R, at 122, Finally, the court should be mindful of
the principle that "the law favors compromise." In re Drexel Burnham Lambert Group, Inc.,
134 B.R. at 505 (quoting In re Blair, 538 F.2d 849, 851 (9th Cir. 1976)),
19. Th e Trustee believes that the terms of the IRS Settlement fall well above the
lowest point in the range of reasonableness and, accordingly, the Agreement should be
approved by this Court. The Agreement resolves all issues regarding the Payments (the
"Claims" ) without the need for lit igation. O the r than a small deduction for amounts
erroneously paid by the IRS to the Erroneously Paid Foreign Accountholders, the IRS
Settlement provides for the return of the vast majority of transfers made by Madoff since
January 1, 2003, purportedly as income tax withholding with respect to foreign accounts.
SeeTrustee's Affidavit at $ 7.
10
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20. The A greement also furthers the interests of the customers of BLMIS by
adding a substantial amount of money to the Customer Fund, Id. Specifically, as a result of
the IRS Settlement, approximately $326 million should be available for distribution to
customers. Id.
21. A s n o te d above, for purposes of any claims allowance or other pending
adversary proceedings involving the Foreign Accountholders, the Trustee will adjust the
Foreign Accountholders' BLMIS account(s) balance(s) by crediting back all recovered
transfers comprising the IRS Settlement out of the accounts for the alleged withholding
payments made, to the extent of those payments. The Trustee will credit each Foreign
Accountholders' account (wi th t h e e x ception o f t h e E r roneously Pai d F or eign
Accountholders) for each Payment that was made and will adjust the account balance as of
the date of the specific payment. Utilizing this methodology, five Foreign Accountholders
which were "net w inners" previously become break-even accounts, O n e F ore ign
Accountholder changes from a "net winner" to a "net loser". The Foreign Accountholders
(with the exception of the Erroneously Paid Foreign Accountholders) will receive credit for
the monies recovered by the Trustee.
22. Gi v en the time, cost and complexities involved in proceeding with lit igation,
the Trustee has determined that the proposed settlement with the IRS represents a fair
compromise of the Claims. The Trustee's analysis of the proposed settlement shows that the
BLMIS estate will recover the significant majority of the funds owed to the estate by the
IRS. The IRS will have returned more than ninety-eight percent of the Payments that it
received from BLMIS since January 1, 2003, for distribution to BLMIS' customers with
allowed claims, without the Trustee having to incur the time and costs of litigation, an
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unquestionably positive result. In light of those facts, the Trustee submits that it is in the
best interests of the estate to settle with the IRS according to the terms set forth in the
Agreement.
23, The Trustee maintains that he would have prevailed at trial in recovering all
Payments to the IRS. Yet, there is always a litigation risk. The Agreement allows the
Trustee to avoid potentially protracted litigation, The abi lity to avoid the time and expense
associated with litigating this matter, combined with the fact that the Agreement will result
in a very substantial recovery, makes the settlement embodied by the Agreement extremely
beneficial to BLMIS' customers.
II. An I n j unct ion under Section 105(a) Is Warranted and Necessary.
24. The T rustee seeks a narrowly tailored injunction, which, given the unique
circumstances of the BLMIS liquidation in general and the IRS Settlement in particular, is
both appropriate and necessary.
25. The Agreement requires the Trustee to use his best efforts to obtain approval
of the Order as promptly as practicable, which shall contain a permanent injunction from the
Banluuptcy Court, pursuant to Section 105(a) of the Bankruptcy Code "permanently
enjoining any person, including any Foreign Accountholder (including for the avoidance of
doubt, any Erroneously Paid Foreign Accountholder), and anyone acting on its behalf or in
concert or participation with such Foreign Accountholder, from asserting any claim or action
against the IRS, the United States or the Trustee which arises from or relates to any
Payments allegedly made on behalf of a Foreign Accountholder by BLMIS pursuant to the
requirements of Code sections 1441 and 1442... " subject to certain exceptions. Agreement,
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a. The I n j unction Is Narrowly Tailored and All Claims Subject to theInjunction Are Derivative of the Trustee's Claims.
26. Thi s Court has subject matter jurisdiction to grant the injunction because the
claims that the Trustee seeks to enjoin are direct claims over which the Trustee has
"exclusive standing" to assert.
27, Pur suant to 28 U.S.C. ) 1334(b), district courts (and therefore bankruptcy
courts) have original jurisdiction over civil proceedings "arising under" and "arising in" and
"related to" cases under title 11. 28 U.S.C. $ 1334(b), See also In re Adelphia Comme'ns
Corp., 2006 WL 1529357, at ~6 (Bankr. S.D.N.Y. June 5, 2006). "Related to" jurisdiction
to enjoin a third party dispute exists where the subject of the third party dispute is property
of the estate or the dispute would have an effect on the estate, In re Johns Manville Corp.,
517 F.3d 52, 65 (2d Cir. 2008), acatedck remanded on other grounds, -U,S, -, 129
S,Ct, 2195, 174 L.Ed.2d 99 (2009), crffg in partck rev'g in part, 600 F,3d 135 (2d Cir.
2010); In re Delta Airlines, Inc., 374 B.R. 516, 525 (S,D.N, Y. 2007).
28. ThisCourt's recent decision inIn re Dreier LIP,
2010 WL 1707737 (Bankr.
S.D.N.Y. April 28, 2010), is instructive on the issue of subject-matter jurisdiction in a
situation similar to that created by Madoff s Ponzi scheme. Mare S, Dreier ("Dreier"), who
was the sole equity partner of Dreier LLP ( "Dreier LLP"), committed an extensive fraud
against his clients by sell ing them sham promissory notes (the "Notes" ) from 2004 to 2008,
Id. at ~1. GSO, an investment manager for certain purchasers of Notes, transferred over a
hundred million dollars to Dreier LLP accounts. Id . at ~3. When the fraud was revealed,
Dreier and Dreier LLP filed bankruptcy cases. In an effort to settle potential avoidance
actions against GSO, the Chapter 11 Trustee and Chapter 7 Trustee, along with GSO,
entered into a settlement agreement, whereby GSO would contribute approximately $10
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million, plus artwork with an approximate value of $3 million, to the debtors' estates in
exchange for a release and injunction against third-party claims. Id, at ~4.
29. In con sidering subject-matter jurisdiction, the Court fi rst found that it
"plainly" had jurisdiction to bar general creditors of the estates from seeking to recover their
claims from the funds at issue the funds transferred by Dreier LLP to GSO, Id . at ~15.
The Court explained that principles stated in Hirschv, FDIC (In re Colonial Realty Co,),
980 F,2d 125 (2d Cir. 1992), which recognized that the automatic stay barred an action by
the FDIC to recover property that the debtor had transferred before bankruptcy, and Keene
Corp. v. Coleman (In re Keene Corp.), 164 B,R. 844, 850 (Banla. S,D,N.Y. 1994), which
held that a bankruptcy trustee alone has standing to maintain avoidance actions, supported
the Dreier holding. Id . at ~1 5-16. B a sed on these principles, the Court reasoned, the
bankruptcy court could permanently enjoin "derivative" creditor claims on avoidance funds
because "[a]bsent that power, the Trustees will be hampered in their ability to pursue and
ultimately settle fraudulent transfer claims from a transferee fearful of paying twice for the
same transfer once on the Trustees' claim and a second time on the derivative claim," Id.
at ~16 (citing SECv, Drexel Burnham Lambert Group, Inc. (In re Drexel Lambert Group,
Inc,), 960 F,2d 285, 293 (2d Cir. 1992).
' The Court in Dreierwent on to determine that the injunction sought exceeded the Court's
jurisdiction for reasons not applicable in this case. Specifically, the Court found that the Dreiei
injunction did not sufficiently identify the entities being released and was not limited to claimsaffecting the property of the estate or the administration of the estate. In re Dreier LLP, 2010 WL
1707737, at *16-17. Fol lowing this decision, the Dreier trustee filed a renewed motion for approval
of the settlement agreement with a more tailored injunction. By order dated June 8, 2010, the Courtapproved the settlement and entered the injunction sought by the Dreie>trustee [Case No. 08-15051
(SMB) ECF No. 610]. The injunction entered enjoined all creditors and parties in interest in the casefrom commencing or continuing any action against any of the released parties where the action is
based on Mare Dreier's or Dreier LLP's misconduct and for which there is no independent basis to
bring suit. The order granting the modified injunction was recently upheld by the District Court. SeeIn re Dreier LLP, 2010 WL 3835179, at *4-5 (S.D.N.Y. Sept. 10, 2010).
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30. Here , the Trustee has "exclusive standing" to assert the causes of action
because they belong to the Debtors' estate. Picked v. Fox,2010 WL 1740885, at ~5 (Bankr.
S.D.N, Y. May 3, 2010); McHalev.Alvarez (In re The103I Tax Group, LLC), 397 B,R. 670,
679 (Bankr. S.D.N.Y. 2008); Goldinv, Primavera Familienstiftung, Tag Assocs, Ltd. (In re
Granite Partners L.P,), 194 B.R. 318, 324-25 (Bankr. S.D.N.Y. 1996). The Second Circuit
has stated that "[i]f a claim is a general one, with no particularized injury arising from it, and
if that claim could be brought by any creditor of the debtor, the trustee is the proper person
to assert the claim, and the creditors are bound by the outcome of the trustee's action."
Picard v. Fox, 2010 WL 1740885, at *5 (quoting St. Paul Fireck Marine Ins. Co. v.
PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir. 1989)).
31. In addition to the above authorities, the proposed injunction is consistent with
the injunction recently entered by the Court in Dreier, which excluded from the scope of the
injunction actions where there is an independent basis on which to bring suit. In re Dreier
LLP, 2010 WL 1707737, at ~16-17, aff'd, 2010 WL 3835179, at *4-5 (S.D.N.Y. Sept. 10,
2010) (upholding injunction and endorsing pro rata distribution for similarly situated
victims of a Ponzi scheme). The Trustee, in exercising his exclusive jurisdiction, has
reached an agreement regarding the settlement of certain claims that belong to the Debtors'
estate. An injunction is appropriate to avoid the re-litigation of claims asserted on behalf of
all customers and creditors that have been resolved by the Trustee, particularly where the
Trustee has resolved those claims in a manner enormously beneficial to the Estate.
32. Fur t her , the claims that the Trustee seeks to enjoin are those that would
impact the administration of the liquidation. Courts have repeatedly enjoined suits against
non-debtor third parties to protect the administration of the estate. See, e.g., In re Adelphia,
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2006 WL 1529357, at *4 (" The Bankruptcy Court's injunctive powers. . . i n cl ude 'the
power to enjoin the Defendants from proceeding against non-debtor third parties .. . where,
as here, the actions against such third parties have at least a conceivable effect upon the
Debtors or implicate the interpretation or enforcement of this Court's orders,'") (internal
citation omitted); In re AP Indus., 117 B,R. at 801 02 (" The large majority of the courts
which have considered the question have held that the bankruptcy courts have the power to
restrain legal action by creditors of the debtor against non-debtor third parties, in certain
circumstances...,") (quoting In re Monroe8'ell Serv., Inc., 67 B.R. 746, 751 (Bankr, E.D.
Pa. 1986)); In re Calpine Corp., 365 B.R, at 409 n,20. Enjoining such claims is necessary to
protect the proper administration of this liquidation.
33. If t h ese claims were allowed to be asserted, claimants would be permitted to
side-step the jurisdiction of this Court, the claims processes this Court has put into place, the
SIPA distribution scheme mandated by Congress, and the statutory bar date as determined
by section 78fff-2(a)(3) of SIPA, See generally SIPCv. BLMIS, 424 B.R. 122 (Bankr.
S,D.N, Y. 2010). In essence, those claimants would be inequitably obtaining property that
should not be available to them based on the previous decisions of this Court regarding the
claims administration process and the net equity calculation, to the detriment of other
' The standard for a Rule 7065 injunction is inapplicable when an injunction is sought under section
105 of the Bankruptcy Code. See In re Lyondejl Chem. Co., 402 B.R. 571, 588 n.37 (Bankr.
S.D.N.Y. 2009). The Court may enjoin actions against the IRS if (i) a third pa>ty suit would impairthe couit's jurisdiction with respect to a case before it or (ii) the third party suits threaten to thwaite or
frustrate the debtor's reorganization effotts and the injunction is necessary to preserve or protect thedebtor's estate. See In re Keene Corp., 162 B.R. 935, 944 (Bankr. S.D.N.Y. 1994); In re Calpine
Corp., 354 B.R. 45, 48 (Bankr. S.D.N.Y. 2006); Garri~ v. Lefflev (In re Newnan), 71 B.R. 567, 571
(S.D.N.Y. 1987), The Second Circuit recently upheld an anti-litigation injunction in the receivershipcontext, finding tha t the in junction assisted the receiver in managing the receivership and
maintaining control over receivership assets. SECv, Byers, 609 F.3d 87, 92-93 (2d Cir. 2010).
Similarly, in th e i nstant case, the in junction sought wo uld pr event in terference with theadministration of the BLMIS estate,
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claimants who follow the Court's rules. See SIPCv. BJMIS, 424 B.R. 122 (Bankr. S.D,N.Y.
2010); Order on Application for an Entry of an Order Approving Form and Manner of
Publication and Mailing of Notices, Specifying Procedures For Filing, Determination, and
Adjudication of Claims; and Providing Other Relief entered on December 23, 2008 [ECF
No, 12]. As this Court noted with respect to the defendants in Picard v, Fox, "any judgment
awarded to the fFor defendants] would exceed their entitlement to BLMIS distribution
under SIPA and this Court's Net Equity Decision," Picardv. Fox, 2010 WL 1740885, at
~10. Indeed, permitting those with allowable customer claims to pursue the IRS outside of
the liquidation would create the potential for double recovery. Thus, in the absence of an
injunction, potential claimants would be able to eviscerate the equitable distribution
architecture that lies at the core of both SIPA and the Bankruptcy Code to their own
individual benefit.
34, M or eover, the Trustee is recovering the significant majority of the amount of
the Payments made by BLMIS or Madoff to the IRS. It would be pointless to bring suit
against the IRS when the IRS, by making the Settlement Payment, will have already
returned the vast majority of the Payments to the Trustee. Once the Settlement Payment is
made, the IRS will have relinquished control over the funds. It would be unjust to subject
the IRS to the possibility of double exposure and protracted lit igation with va rious
claimants, particularly when the Order provides a mechanism for claimants to fairly enjoy
the benefits of the Settlement Payment.
35. Fin a l ly, the injunction is narrowly tailored, protecting the IRS only in relation
to the Payments. The injunction and release are "narrowly drawn and are necessary to
prevent relitigation of p recisely the claims that were negotiated and resolved by the
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Settlement Agreement," In re Delta Airlines, Inc., 374 B,R. at 526, Accordingly, this Court
has the authority to grant the injunction sought.
b. The C ustomer Fund Will Receive Substantial Benefit from the IRS
Settlement and the Unique Circumstances of the Case Make theInjunction Appropriate.
36. The IRS Settlement will bring approximately $326 million into the Customer
Fund for dist ribution to customers with allowed claims. T h i s amount represents a
significant recovery for the benefit of customers. As such, the principles set forth in the
controlling Second Circuit case,Deutsche Bank AGv, Metromedia Fiber Net>ork Inc. (In re
Metromedia Fiber Netivork, Inc.), 416 F.3d 136 (2d Cir. 2005), are satisfied. In
Metromedia, the Second Circuit held that nonconsensual nondebtor releases and injunctions
are proper "in truly unusual circumstances" where, among other things, the debtor's estate
has received substantial consideration. 416 F.3d at 141-143; see also SECv. Drexel
Burnham Lambert Group, Inc. (In re Drexel Lambert Group, Inc.), 960 F.2d 285, 293 (2d
Cir. 1992); Class Five Nev. Claimantsv. Doe> Corning Corp, (In re Dovi Corning Corp.),
280 F.3d 648, 657-58 (6' Cir. 2002).
37. The IRS Settlement represents a significant milestone in this liquidation
proceeding. The Settlement Payment constitutes a significant recovery of the Trustee's
demand amount against the IRS for the recovery of amounts paid by BLMIS to the IRS as
backup withholding on behalf of Foreign Accountholders since January 1, 2003. The
' Al though certain of the cited case law addresses injunctions in the context of a p la n of
reorganization, it is clear that injunctions pursuant to section 105 are not limited to reorganization
proceedings. See, e,g., Apostolou, 155 F.3d at 882 (section 105 injunction applicable in liquidation
proceeding); In re AP Indus., 117 B.R. at 201 (" The court will have ample power to enjoin actionsexcepted fiom the automatic stay which might interfere in the rehabilitative process whether in a
liquidation or in a reorganization case."). The same principles apply to injunctions required insettlement agreements. See In re Dreier LLP, 2010 WL 1707737 (Bankr. S.D.N.Y. April 28, 2010);
see also In re Mrs. steinberg 's Kosher Foods, Inc.,278 B.R. 358 (Bankr. S.D.N.Y. 2002),
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increase in customer property by virtue of the IRS Settlement is dramatic and would
constitute a significant increase in the amounts available for future pro rata distributions that
will be made to BLM IS customers with allowed claims. A s t h is Court has already
recognized in the Picardv. Foxproceedings, the IRS Settlement would provide a unique
benefit to the estate that is certainly worthy of the protection of a carefully tailored
injunction. As the Court observed, an injunction pursuant to section 105(a) "is appropriate
and necessary to preserve the integrity of the SIPA proceedings and the Trustee's settlement
negotiations for the benefit of the BLMIS estate and all of its customer claimants." Picard
v, Fox, 2010 WL 1740885, at *9.
38. The re is no doubt that the injunction is necessary and fair. The IRS has made
it clear to the Trustee that the in order to achieve a settlement, and as a precondition to such
a settlement, the IRS and the U.S, Treasury must be protected from paying out the same
claims more than once. The proposed injunction is, therefore, an essential part of the
settlement. Given the value of the proposed settlement, and that the Settlement Payment
represents virtually all of the amount of the Payments, it is not surprising that the IRS wishes
to have finality and be certain that it will not be required to satisfy the same claims twice.
As this Court noted in Picardv. Fox, without an injunction, the IRS would be "fearful of
paying twice for the same transfer." Picardv. Fox, 2010 WL 1740885, at ~9 (quoting In re
Dreier I IP, 2010 WL 1707737, at ~16). The Second Circuit has held that an injunction is
appropriate in a situation where, but for the injunction, the settlement would be less likely to
occur. See e,g., SECv. Drexel Bzvnham Lambert Group, Inc,, 960 F.2d at 293. In such
circumstances, the Court may use its powers to enjoin in order to foster the conclusion of a
settlement by providing the f inality sought by the IRS, See, e,g., In re Johns-Mansville
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Corp., 68 B.R. 618, 626 (Bankr, S.D.N.Y. 1986) (Lifland, J.) (enjoining further actions
against settling defendants under ) 105(a) in order to "preserve the rights of all asbestos
claimants by establishing a corpus of funds from which all can collect" and to "prevent[] the
inequitable, piece-meal dismemberment of the debtor's estate... "), aff'd, 78 B.R. 407
(S.D.N.Y. 1987), aff'd sub nom Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir.
1988).
39. A cc ordingly the terms of the injunction seek to satisfy the requirements set
forth in Metromedia:the opportunity offered to the estate by the IRS Settlement must be
considered "unusual circumstances" and the IRS Settlement will provide a substantial
benefit to the BLM IS estate and in turn, BLMI S's customers. As su ch, the narrow
injunction sought by the Trustee should be granted.
CONCLUSION
40. The T r ustee submits that the Agreement should be approved for tw o
overarching reasons: (a) to avoid lengthy and burdensome litigation, and (b) and because it
represents a reasonable compromise of the claims that benefits the estate and the customers
of BLMIS. Accordingly, since the Agreement is well within the "range of reasonableness"
and confers a substantial benefit on the estate, the Trustee respectfully requests that the
Court enter an Order (i) approving the Agreement, and (ii) issuing the permanent injunction.
NOTICE
41. In accordance with Bankruptcy Rules 2002 and 9019, notice of this Motion
has been given to (i) SIPC; (ii) the SEC; (iii) the IRS; (iv) the United States Attorney for the
Southern District of Ne w Y ork ; and (v ) th e Foreign Accountholders (including the
Erroneously Paid Foreign Accountholders), The Trustee shall notify, by way of the ECF
filing that wi ll be made, each person or entity that has fi led a notice of appearance in this
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case. Additionally, the Trustee will post this Motion, proposed order and Settlement
Agreement on the Trustee's website, www.madofftrustee,com. The Trustee submits that no
other or further notice need be given and respectfully requests that the Court find that such
notice is proper and sufficient.
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WHEREFORE, the Trustee respectfully requests entry of an Order (i) approving the
settlement agreement between the Trustee on the one hand and the United States of
America, on behalf of the IRS, on the other and (ii) enjoining customers and creditors of
BLMIS who filed or could have filed claims in the liquidation from pursuing claims against
the IRS, substantially in the form of Exhibit "A".
Dated; New York, New York Respectfully submitted,
November 22, 2011
/s/Elyssa S. I atesBaker & Hostetler LLP
45 Rockefeller PlazaNew York, New York 10111
Telephone: (212) 589-4200Facsimile: (212) 589-4201
David J, Sheehan
Email: dsheehan bakerlaw.comMare E, Hirschfield
Email: mhirschfield bakerlaw,com
Elizabeth A. Smith
b lElyssa S. Kates
b kAmy E. Vanderwal
Email: avanderwal r bakerlaw.com
Attorneys for Irving H, Picard, Trustee for theSubstantively Consolidated SIPA Liquidation
of Bernard L. Madoff Investment SecuritiesLLC and Bernard L. Madoff
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EXHIBIT A
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UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NKW YORK
SECURITIES INVESTOR PROTECTION Adv. Pro. No. 08-1789 (BRL)
CORPORATION,SIPA Liquidation
Plaintiff-Applicant,
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Defendant.
In re:
BERNARD L, MADOFF,
Debtor.
ORDER PURSUANT TO SECTION 105(a)OF
THK BANKRUPTCY CODE AND RULES 2002 AND 9019 OF
THE FEDERAL RULES OF BANKRUPTCY PROCEDURE APPROVING ANAGREEMENT BY AND BETWEEN THE TRUSTEE AND THE UNITED
STATES OF AMERICA ON BEHALF OF THK INTERNAL REVENUE SERVICE
Upon the motion dated November 22, 2011 (the "Motion" ) of Irving H. Picard (the
"Trustee" ), as trustee for the liquidation of the business of Bernard L. Madoff Investment
Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S,C. ($ 78aaa et
seq. ("SIPA"), and the substantively consolidated estate of Bernard L. Madoff ("Madoff," and
together with BLMIS, collectively, the "Debtors" ), seeking entry of an order, pursuant to
sections 105(a) of the United States Bankruptcy Code, 11 U.S.C, $) 101 et sece. (the "Bankruptcy
Code" ) and Rules 2002 and 9019 of the Federal Rules of B an kruptcy Procedure (the
"Bankruptcy Rules" ), approving the agreement dated as of November 21, 2011, by and among
the Trustee on the one hand, and the United States of America (collectively with its agencies,
offices and employees, the "United States" ), on behalf of the Internal Revenue Service (the
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"IRS"), on the other hand, (the "Agreement" )' [at ECF No. , at Ex hi bit " "] ; and the Court
having considered the Affidavi t of Irving H, Picard executed on November 22, 2011 in support
of the Motion [ECF No. ; al l ob jections to the Motion and responses thereto (collectively, the
"Objections" ); and it further appearing that the relief sought in the Motion is appropriate based
upon the record of the hearing held before this Court on December 21, 2011, to consider the
Motion; and after due deliberation and sufficient cause appearing therefor; the Court hereby
makes the following findings of fact and conclusions of law. The f indings and conclusions set
forth herein constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy
Rule 7052, made applicable to this proceeding pursuant to Bankruptcy Rule 9014, To the extent
any of the following findings of fact constitute conclusions of law, they are adopted as such. To
the extent that any of the following conclusions of law constitute findings of fact, they are
adopted as such.
FINDINGS OF FACT
A. The U n i ted States is a sovereign nation that exists pursuant to the Constitution of
the United States of America.
B. The IRS is a bureau of the Department of the Treasury of the United States and is
authorized to carry out the responsibilities of the Secretary of the Department of the Treasury
pursuant to section 7801 of the Internal Revenue Code (the "IRC").
C. Pur suant to an order (the "Protective Order" ) entered by the Honorable Louis L,
Stanton, U,S.D.J., in the matter captionedSecurities and Exchange Commissionv, Madoff, etal,,
Case No. 08 CV 10791 (LLS) (the "District Court Matter" ) [Docket No. 4], the Trustee was
'All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement.'References herein to "ECF No. " s hall refer to docket entry numbers in the above-captioned matter, 08-1789
(BRL),
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"appointed trustee for the liquidation of the business of [BLMIS] with all the duties and powers
of a trustee as prescribed in SIPA.".
D. Pri o r to December 11, 2008 (the "Filing Date" ), BLMIS and/or Madoff made
payments (the "Payments" ) to the IRS, purportedly on behalf of the foreign accountholders (the
"Foreign Accountholders") set forth on Exhibit "C" to the Motion, allegedly pursuant to the
requirements of sections 1441 and 1442 of the IRC as a withholding tax on income allegedly
earned by the Foreign Accountholders. However, there is no known record of BLMIS having
purchased or sold any securities for the benefit of the Foreign Accountholders, and in addition,
there is no record of any dividends actually having been paid with respect to accounts held by the
Foreign Accountholders. Therefore, the Foreign Accountholders did not earn any income
through their accounts with BLMIS (the "Accounts" ) and the Payments made to the IRS falsely
identified the funds as income tax withholding.
E. The I R S has previously paid certain refund claims relating to the Payments to
certain Foreign Accountholders.
F. The T rustee believes that all of the Payments are recoverable. The United States
disputes that it is liable for the return of all the Payments. After a review of the relevant records
and extensive discussions with counsel for the United States concerning the factual background
and certain legal arguments, and a consideration of the costs and uncertainty inherent in any
litigation, the Trustee, in the exercise of his business judgment, and the United States have
determined that it is appropriate to resolve this matter rather than litigate the avoidance or refund
of the Payments.
G. The sett lement (the "IRS Settlement" ) involves the repayment of approximately
Three Hundred and Twenty-Six Mi l li on Un ite d States Do llars ($326,000,000.00) (the
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"Settlement Payment" ) to the Trustee for the benefit of BLMIS customers with allowed claims.
This represents a significant recovery for the victims of the Ponzi scheme, while at the same time
avoiding the potentially significant costs of protracted litigation.
H. The T r ustee believes that the terms of the IRS Settlement fall wel l above the
lowest point in the range of reasonableness and, accordingly has stated that the Agreement
should be approved by this Court.
CONCLUSIONS OF LAW
1. This Cour t has subject matter jurisdiction to consider the Motion and the relief
requested therein, including granting the permanent injunction sought, in accordance with 28
U.S.C. $$ 157 and 1334 and the Standing Order of Referral of Cases to Bankruptcy Judges of the
United States District Court for the Southern District of New York dated July 10, 1984 (Ward,
Acting C,J,).
2. Venu e of this case in this district is proper pursuant to 28 U,S.C. ) 1409.
3. Prop er, timely, adequate and sufficient notice of the Motion, the hearing thereon,
and the related objection deadline has been given in accordance with Bankruptcy Rules 2002 and
9019. Such notice constitutes good, appropriate and sufficient notice, and no other or further
notice need be given.
4. The Co ur t ha s considered the probability of s uccess in any li ti gation, the
complexity of any li ti gation, and the attendant expense, inconvenience, and delay, and the
paramount interest of the customers and other creditors. In addition, the Court may credit and
consider the opinion of the Trustee and his counsel in determining whether a settlement is fair
and equitable.
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5. The C ourt concludes that the IRS Settlement falls well above the lowest point in
the range of reasonableness, and is fair, reasonable, equitable and in the best interests of the
BLMIS estate.
6, The A g r eement wil l confer a significant benefit on BL MI S customers with
allowed claims,
7. A n inj u nct ion under Sections 105(a) and 362(a) of the Bankruptcy Code is
warranted and necessary. I ssuance of the permanent injunction, precluding prosecution of
actions by third parties against the IRS or the United States that are duplicative or derivative of
claims belonging to the Trustee, is necessary and appropriate to carry out provisions of the
Bankruptcy Code, to prevent any entity from exercising control or possession over property of
the estate, to preclude actions that would have a conceivable effect or adverse impact upon the
Debtors' estate or on the administration of the liquidation proceeding, and/or to avoid relitigation
or li tigation of cla ims that were or could have been asserted by the Trustee on behalf of al l
customers and creditors.
For all of the foregoing reasons, it is hereby
ORDERED, that the Motion is granted in its entirety; and it is further
ORDERED, that the Agreement between the Trustee on the one hand and the United
States on the other hand is hereby approved, and the parties to the Agreement are authorized and
directed to take such action as is necessary to effectuate the terms of the Agreement; and it is
further
ORDERED, that any BLMIS customer or creditor of the BLMIS estate who filed or
could have filed a claim in the liquidation proceeding (including, but not limited to, the Foreign
Accountholders and the Erroneously Paid Foreign Accountholders), or anyone acting on their
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behalf or in concert or participation with them, or anyone whose claim in any way arises from or
is related to BL MI S or the Madof f Ponzi scheme (the "Enjoined Entities" ), is hereby
permanently enjoined from asserting any claim against the IRS, the United States or the Trustee
which arises from or relates to payments allegedly made by BLMIS pursuant to IRC sections
1441 and 1442, or that is duplicative or derivative of the claims that have or could have been
brought by the Trustee against the United States or the IRS (collectively, the "Enjoined Claims" ),
rovided however, that the foregoing shall not bar claims or actions brought against the BLMIS
estate by creditors or against the customer fund by customers, provided that such creditors or
customers filed claims in the SIPA Proceeding prior to the statutorily mandated claims bar date
(the "Excepted Claims" ); and it is further
ORDERED, that if notwi thstanding the foregoing provisions of the Order, the United
States or the IRS is nonetheless rendered or adjudged liable to any person or entity, including
any Foreign Accountholder, in respect of any claims or actions arising from or relating to
payments allegedly made by BLMIS pursuant to IRC sections 1441 and 1442, whether by a final
and non-appealable order, judgment, settlement agreement or otherwise, such liability shall be
satisfied by the Trustee from the Reserve (as that term is defined in the Agreement); and it is
further
ORDERED, that to the extent that the injunction set forth in this Order is held to be
invalid or inapplicable or unenforceable against any Enjoined Entity, and/or a court permits an
action to proceed with respect to Payments other than an Excepted Claim, any such Enjoined
Entity seeking to assert an Enjoined Claim shall assert any such Enjoined Claim in the
Bankruptcy Court against the Trustee, and not against the United States or the IRS; and i t i s
further
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ORDERED, that this Court shall retain exclusive jurisdiction over any and all disputes
arising under or otherwise relating to this Order and the Settlement Agreement.
Dated: New York, New York
, 2011
HONORABLE BURTON R. LIFLANDUNITED STATES BANKRUPTCY JUDGE
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EXHIBIT B
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SKTTLKMKNT AGRKKMK%T
This SETTLEMENT A GREEMBNT (t he "A gr eement"}, d a ted as of
November 21, 2011, is made by and between Irving H. Picard, in his capacity as the trustee (the
"Testee") for the substantively consolidated liquidation proceedings of Bernard L, MadoffInvestment Securities LLC ("BLMIS"} under the Securities Investor Protection Act of 1970, asamended from time to time ("SIPA"), and estate of Bernard L. Madoff ("Madoff"}, on the one
hand, and the United States of America {the "United States" ), on behalF of the Internal RevenueService {the "IRS"), on the other hand (each of the Trustee and the IRS shall be referred to
individually as a "~Part ", and collectively as the "Parties" ),
BACKGROUND
A. BLM IS and its predecessor were registered broker-dealers and members of the
Securities Investor Protection Corporation ("SIP C"),
B, O n December 11, 2008, Madoff was arrested by federal agents for criminaloffenses including securities fraud, investinent adviser &aud, and mail and wire fraud. OnDecember 11, 2008, the United States Secunties and Exchange Commission {the"Commission")filed a complaint in the United States District Court for the Southern District of New York (the"District Court" ) against, among others, BLMIS and Madoff captioned SEC v, BLMIS et al.,
No, 08-CV-10791(LLS).
C. O n December 15, 2008, pursuant to section 78eee{a){4)(A) of SIPA, the
Commission consented to a combination of its own action with the application of SIPC.Thereafter, SIPC filed an application in the District Court under section 78eee(a)(3) of SIPAalleging, interah'a, that BLMIS was not able to meet its obligations to securities customers as
they caine due and, accordingly, its customers needed the protections afforded by SIPA. On
December 15, 2008, the District Coint granted the SIPC application and entered an order underSIVA, which, in pertinent pait, appointed the Trustee for the liquidation of the business ofBLMIS under section 78eee{b){3) of SIPA and removed the case to the United States BankruptcyCourt for the Southern District of New York (the "Bankru tc Court" ) under section 78eee(b}(4)
a 1 " i i I' " . -07 o ) ( " d'The Trustee is duly qualified to serve and act on behalf of the estate of BLMIS.
D. O n M arch 12, 2009, in connection with his scheme to conduct a massive
Ponzi scheme through BLMIS, Madoff pleaded guilty to an 11 count information filed by theUnited States Attorney's Office for the Southern District of New York, which charged him withsecurities fraud, investment advisor fraud, mail fraud, wire fraud, two counts of international
money laundering, money laundering, false statements, perjury, false filings with the SEC, andtheft from an employee benefit plan, On June 12, 2009, Madoff was sentenced principally to150 years' imprisonment,
E, P ursuant to section 78fff-1{a) of SIPA, the Trustee has the general powers of a
bankruptcy trustee in a case under Chapter 7 of the United States Bankruptcy Code, as amendedRom time to time (the "Bankru tc Code" ), as well as the powers granted pursuant to SIPA.
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Chapters 1, 3, 5 and subchapters I and II of Chapter 7 of the Bankruptcy Code apply to the SIPAProceeding to the extent consistent with SIPA,
F. U n der SIPA, the Trustee is charged with the responsibility to marshal and
liquidate the assets of BLMIS, and to recover customer property for distribution to BLMIScustomers in satisfaction of allowed customer claims, including through the recovery fromBLMIS customers of preference payments and fraudulent transfers made to them by BLMIS.
6. P r io r t o D ecember 15, 2008, BLMIS and/or Madoff made payments("~pa cuts") to the IRS, purportedly on behalf of foreign entities or persons which had accounts
with BLMIS (the "Forei A c countholders"), allegedly pursuant to the requirements of sections1441 and 1442 of the Internal Revenue Code of 1986, as amended and in effect (the "Code*'),which require persons who pay income to nonresident aliens and foreign corporations to
withhold tax equal to 30% of the income.
H. T h ere is no known record of BLMIS having purchased or sold any securities
for the benefit of the Foreign Accountholders, and in addition, there is no record of anydividends actually having been paid wi th respect to accounts held by t he ForeignAccountholders. Thus, the Payments made to the IRS falsely identified the funds as income taxwithholding to give the investment advisory arm of BLMIS an air of legitimacy and to avoid anyinquiries from the IRS.
I, T h e IRS has erroneously paid certain refimd claims relating to Payments to
certain Foreign Accountholders ("Erroneousl Paid Forei n Accountholders").
.J. B a sed on the foregoing, the Trustee and the United States wish to resolve thematters described above without the expense, delay, and uncertainty of litigation.
NO%, THKRKIt'ORK, in consideration of the foregoing, of the mutualcovenants, promises and undertakings set forth herein, and for good and valuable consideration,the mutual receipt and sufficiency of which are hereby acknowledged, the Trustee and the United
States agree as follow.
AGREEMENT
1, Pa ment to Trustee. Wi th respect to payments made by BLMIS and/or
Madoff allegedly pursuant to the requirements of Code sections 1441 and 1442, which requirepersons who pay income to nonresident aliens and foreign corporations to withhold tax equal to
30% of the income, in complete satisfaction and settlement of all claims by the Trustee againstthe United States, whether brought as a claim or suit for refmd under the Code or an avoidanceor other action under the Bankruptcy Code, or any other action which could be brought, theTrustee and the United States agree that the United States will make a payment of ThreeHundred and Twenty-Six Mill ion United States Dollars ($326,000,000.00) (the "Settlement
~Pa ment" ) to the Trustee for the benefit of BLMIS customers with valid claims. The SettlementPayment shall be paid to the Trustee by the United States in a reasonable period of time after theSettlement Approval Date, as defined in paragraph 6 herein. If the Settlement Payment is not
received by the Trustee within 180 days of the Settlement Approval Date, then interest willaccrue on the Settlement Payment beginning on the 181" day following the Settlement Approval
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Date, at the applicable Federal rate published for short-term debt instruments bearing annualinterest for the calendar month in which such interest begins to accrue, as set forth in section
1274 of the Code.
2. For ei n Accountholders Account Balances.To the extent the Trustee hascommenced actions in the Bankruptcy Cour t against the Erroneously Paid Foreign
Accountholders seeking, among other things, recovery of Payments which ultimately resulted inthe refund claims eironeously paid by the IRS, the Trustee shall continue those actions withoutany adjustment of the account balance. For pinposes of any claims allowance or other pending
adversary proceedings involving all other Foreign Accountholders, the Trustee shall adjust theForeign Accountholders' BLMIS account balance by crediting all Payments out of the accountsfor alleged withholding payments made to the IRS to the extent of those payments.
3, Rel ease b Trustee. In consideration for the covenants and agreements set
forth in this Agreement and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, except with respect to any rights arising under
this Agreement, the Trustee shall release, remit and forever discharge the United States and itsagencies {including the IRS), and its employees, attorneys, representatives, advisors and agentsfrom any and all past, present and future claims or causes of action (including any suit, petition,demand, or other claim in law, equity or arbitration) and fiom any and all allegations of liabilityor damages (including any allegation of duties, debts, reckonings, contracts, controversies,agreements, promises, damages, responsibilities, covenants, or accounts), of whatever kind,
nature or description, direct or indirect, in law, equity or arbitration, absolute or contingent, intort, contract, statutory liability or otherwise, based on strict liability, negligence, grossnegligence, fraud, breach of fiduciary duty or otherwise (including attorneys' fees, costs or
disbursements), known or unknown, that are, have been, could have been or might in the futurebe asserted by the Trustee against the United States or the IRS and that are based on, arise out of
or relate in any way to any Payments allegedly made on behalf of Foreign Accountholders byBLMIS pursuant to the requirements of sections 1441 and 1442 of the Code, The release
contained herein shall become effective upon the Trustee's actual receipt of the SettlementPayment without any further action by any of the Parties or the Bankruptcy Court.
4, Reserve of Settlement Pa ment b Trustee.Upon payment of the SettlementPayment by the United States to the Trustee, OneHundred and Two Million, Nine Hundred and
Ninety-Three Thousand, Seven Hundred and Twenty-Nine United States Dollars and TwentyOneCents ($102,993,729.21) of the Settlement Payment {the "Reserve" ) shall be set aside by theTrustee for the purpose of satisfying any potential administrative decisions, settlements or
judgments against the IRS, the United States or the Trustee that have been or may hereaAer beentered with respect to any Payments; provided however, that the Reserve shall not be available
to satisfy any Excepted Claims, as defined in paragraph 5 hereof, On the date that is two yearsand sixty days from the Settlement Approval Date, the Trustee may release for distribution toBLMIS customers the balance of the Reserve, provided however, that to the extent that on suchdate there exists any pending claim(s) or actions(s) with respect to the Payments, eitheradministratively or judicially, an amount sufficient to satisfy such pending claims or actions shallcontinue to be maintained in the Reserve. At such tune, the Trustee will confer with the UnitedStates to determine the appropriate amount, if any, for any continuing Reserve. The remaining
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balance of the Reserve, if any, will be available for distribution to BLMIS customers only afterthe final resolution of all such pending claims and actions with respect to the Payments.
5. Cha nnelin In 'unction,The Trustee shall seek, and this Agreement shall be
contingent upon, the issuance of a final and non-appealable order by the Bankmptcy Court thatapproves this Agreement (the "Order" ) and meets the conditions set forth in this paragraph,Specifically, such Order shall contain a provision permanently enjoining any person, including
any Foreign Accountholder (including for the avoidance of doubt any Erroneously Paid ForeignAccountholder), and anyone acting on its behalf or in concert or participation with such ForeignAccountholder, from asserting any claim or action against the IRS, the United States or the
Trustee which arises from or relates to any Payments allegedly made on behalf of a ForeignAccountholder by BLMIS pursuant to the requirements of Code sections 1441 and 1442;tsrovide1 however, that such injunction shall not bar claims or actions brought against theBLMIS estate by creditors or against the SIPA customer fund as customers, provided that such
creditors or customers filed claims in the SIPA Proceeding prior to the statutorily mandatedclaims bai. date (the "Exce ted Claims" ). Mor eover, nothing herein affects the H.ghts anddefenses of any of the Foreign Accountholders, including the Erroneously Paid ForeignAccountholders, presently engaged in litigation with the Trustee. The Order shall furtherprovide that, to the extent that the foregoing provisions of the Order are held to be invalid or
inapplicable or unenforceable against any Foreign Accountholder, including the ErroneouslyPaid Foreign Accountholders, and a court permits an action to proceed with respect to Paymentsother than an Excepted Claim, any such Foreign Accountholder seeking to assert a claim arisingfiom or relating to Payments shall assert any such claim in the Bankruptcy Court against the
Trustee, and not against the United States or the IRS because pursuant to this Agreement theUnited States is remitting funds to the Trustee (with the exception of the amounts paidpreviously to Erroneously Paid Foreign Accoimtholders). Further, the Order shall provide that if,notwithstanding the foregoing provisions of the Order, the United States or the IRS is
nonetheless rendered or adjudged liable to any person or entity, including any ForeignAccountholder, in respect of any claims or actions arising from or relating to Payments allegedly
made on behalf of a Foreign Accountholder by BLMIS pursuant to Code sections 1441 and1442, whether by a final and non-appealable order, judgment, settlement agreement or otherwise,such liability shall be satisfied by the Trustee from the Reserve, provided however, that the
United States will not accept an offer to settle any claim that will then be payable from theReserve without first meeting and conferring with the Trustee. The Trustee shall provide theUnited States with a proposed form of the Order, which shall be subject to the United States'reasonable approval.
6. Ban kr u tc C o u rt A roy a l E f f ec tive Date' Termination Reversal on
Appeal. This Agreement is subject to, and shall become effective and binding on the Parties
upon the Order becoming final and non-appealable. The date that the Order becomes final andnon-appealable shall be referred to herein as the "Settlement Approval Date." For purposes ofthis Agreement, the Order shall be considered "final and non-appealable" when (a) the time toappeal the Order has expired, or (b) if any appeal has been taken, any and all such appeals have
been fully and finally resolved without material modification of the Order, The Trustee shall usehis reasonable best efforts to obtain approval of such Order as promptly as practicable after fhedate of this Agreement. The Trustee shall provide the United States with a draft of any motion to
the Bankruptcy Court for approval of this Agreement, which shall be subject to the United
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States' reasonable approval, I f this Agreement does not become effective {a) this Agreement(other than this paragraph) shall terminate and be null and void for all purposes, (b) all of thestatements, consents and agreements contained in fhe Agreement {other than this paragraph)shall terminate and be null and void, and (c) neither the Trustee nor the United States may use or
rely on any such statement, consent, or agreement in any public statement or litigation involvingthe SIPA Proceeding, any case or proceeding relating to the SIPA Proceeding or any case orproceeding relating to BLMIS or Madoff.
7. ~Coo eration.The Trustee and the United States agree to reasonably cooperate
in connectioii with enforcing this Agreement and the Order to extinguish any claims that may beasserted in violation of the Order,
8. Authority.The Department of Justice signatory represents and warrants to the
Trustee as of the date hereof that she has the full power, authority and legal right to execute anddeliver, and to perform the obligations under, this Agreement and has taken all necessary action
to authorize the execution and delivery of, and the performance of the obligations under, thisAgreement,
9. Fur ther Assurances.The Trustee and the United States shall execute and
deliver any docmnent or instrument reasonably requested by any of them after the date of thisAgreement to effectuate the intent of this Agreement.
10. Ent i re A reement. Th is Agreement constitutes the entire agreement and
understanding between the Parties concerning the subject matter hereof, and supersedes all prioragreements, representations and understandings concerning the subject matter hereof.
11. Ame ndments Waiver.This Agreement may not be terminated, amended or
modified in any way except in a writing signed by the Parties, No waiver of any provision ofthis Agreement shall be deemed to constitute a waiver of any other provision hereof, whether ornot similar, nor shall such waiver constitute a continuing waiver.
12. ~Assi abi lit. No Par ty hereto may assign its rights under this Agreementwithout the prior written consent of the other Party hereto,
13. Successors Bound.This Agreement shall be binding upon and inure to thebenefit of each of the Parties and to the Trustee's successors and permitted assigns.
14, No Thi rd P B enef ic i . T h eParties do not intend to confer any benefit
by or under this Agreement upon any person or entity other than the Parties hereto and theirrespective successors and permitted assigns.
d i ' i ' d'
to this Agreement shall be governed and construed in accordance with federal common law, theCode, the Bankruptcy Code and SIPA, to the extent state law applies, then in accordance withthe laws of the State of New York {without regard to the principles of conflicts of law thereof).Each Patty hereby waives on behalf of itself and its successors and assigns any and all right toargue that the choice of New York law provision is or has become unreasonable in any legalproceeding.
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16. Ex c lus ive Jurisdiction.The Parties agree that any action relating in any way
to this Agreement must be brought only in the Bankruptcy Cont, to the extent that Court hasjurisdiction. No one shall bring, institute, prosecute or maintain any action pertaining in any wayto this Agreement in any court other than the Bankruptcy Court, To the extent that any one
maintains that the Banlvuptcy Court lacks jurisdiction, that dispute must be heard, in the firstinstance, by the Bankruptcy Court.
17. Ca t ions and Rules of Construction. The captions in this Agreement are
inserted only as a matter of convenience and for reference and do not define, limit or describe thescope of this Agreement or the scope or content of any of its provisions. Any reference in thisAgreement to a paragraph is to a paragraph of this Agreement. "Includes" and "including" arenot limiting,
18. Co unte ar ts E l ec tronic Co of Si na tures. Thi s A g reement andattachments may be executed and delivered in any number of counterparts, each of which so
executed and delivered shall be deemed to be an original and all of which shall constitute oneand the same document. The Parties may evidence their execution of this Agreement by deliveryto the other Patties of scanned or faxed copies of their signatures, with the same effect as thedelivery of an original signature.
19. Not ices. Any n ot ices under this Agreement shall be in writ ing, shall be
effective when received and may be delivered only by hand, by overnight delivery service, byfax or by electronic transmission to:
If to the Trustee: If to the IRS:
Irving H. Picard Jeannette Vargas
Baker k Hostetler LLP Chief, Tax k, Bankruptcy Unit
45 Rockefeller Center, Suite 1100 Office of the United States AttorneyNew York, NY 10111 for the Southern District of New York
Fax: (212) 589-4201 86 Chambers Street, Third Floor
Email: ipicard@bakerlaw,corn New York, NY 10007Fax: (212) 637-2686Email: Jeannette. Var gas@usdoj. gov
with a copy to:
Elizabeth A, SmithBaker k Hostetler LLP45 Rockefeller Center, Suite 1100New York, NY 10111
Fax: (212} 589-4201Email; esmith@bakerlaw,corn
fSignature page foltows]
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed as of the date first above written,
The Trustee for the liquidation proceedings of
Bernard L. Nadoff Investment Securities LLCand the substantively consolidated bankruptcycase of Bernard L, Madoff
By: IRVING H. PICARD Trustee
Sworn and subscribed before me this
Not llc
SPtAYA M.GRAHAMH.~ta;; '"ioiio, Stateof New York
'>. otGR65832$4Q>ga',ilia;!ir< Aaatchaatar
QA1llll'iSiofl EX@i%a: 9It2I20~
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PREET BHA1V~United States Attorney '
Attorney for the United States of America
JE TTE A , VARGASAssistant United States Attorney86 Chamber's Street, Third Flo'orNew York, NY 10007Tel: (212) 637-2678Fax', (212) 637-2686E-mail:[email protected]
Sworn and subscribed before me thisg2nh dayof .: 0 be/ , 2011,
Notary Public
DAVID FARBER,
BIOTA'RY PUBLIC, State of New YorkNo. 01 FA6214554
Quelled in New York CountyCornrnission Expires Deo. 14, 2OS3.
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EXHIBIT C
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ASCOT FUND LTD
CITCO GLOBAL CUSTODY N V FBO FAIRFIELD SENTRY LTD
PHYLLIS GUENZBURGER & FABIAN GUENZBURGER J/T WROSHSBC SECURITIES SERVICES (LUXEMBOURG) SA SPEC CUST ACCT LAGOON INVSMNT
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ROBERT PINCHOU & FABIAN GUENZBURGER J/T WROS
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JORGE BESSOUDO & KAREN BESSOUDO