In Re Bernard L. Madoff Inv. SEC. LLC

• Court: Court of Appeals for the Second Circuit
• Decided: August 10, 2023
• Docket: 22-1107
• Status: Unpublished

Opinion

22-1107(L) In re Bernard L. Madoff Inv. Sec. LLC

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the 2 Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 3 10th day of August, two thousand twenty-three. 4 5 Present: 6 EUNICE C. LEE, 7 MYRNA PÉREZ, 8 SARAH A. L. MERRIAM, 9 Circuit Judges. 10 _____________________________________ 11 12 IN RE: BERNARD L. MADOFF INVESTMENT 13 SECURITIES LLC, 14 15 Debtor. 16 17 ************************************* 18 19 IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION 20 OF BERNARD L. MADOFF INVESTMENT SECURITIES 21 LLC, 22 23 Plaintiff-Appellee, 24 25 v. 22-1107(L), 26 22-1110-bk(CON) 27 28 MALCOLM H. SAGE, IN HIS CAPACITY AS PARTNER OR 29 JOINT VENTURER OF SAGE ASSOCIATES AND SAGE 30 REALTY, INDIVIDUALLY AS BENEFICIARY OF SAGE 1 ASSOCIATES AND SAGE REALTY, AND AS THE 2 PERSONAL REPRESENTATIVE OF THE ESTATE OF 3 LILLIAN M. SAGE, 4 5 Defendant-Appellant, 6 7 SAGE ASSOCIATES, MARTIN A. SAGE, IN HIS 8 CAPACITY AS PARTNER OR JOINT VENTURER OF SAGE 9 ASSOCIATES AND SAGE REALTY, AND INDIVIDUALLY 10 AS BENEFICIARY OF SAGE ASSOCIATES AND SAGE 11 REALTY, ANN M. SAGE PASSER, IN HER CAPACITY AS 12 PARTNER OR JOINT VENTURER OF SAGE ASSOCIATES 13 AND SAGE REALTY, AND INDIVIDUALLY AS 14 BENEFICIARY OF SAGE ASSOCIATES AND SAGE 15 REALTY, 16 Defendants, 17 18 SIPC, 19 20 Intervenor. 21 22 _____________________________________ 23 24 25 For Plaintiff-Appellee: SEANNA R. BROWN (David J. Sheehan, Amy E. 26 Vanderwal, James H. Rollinson, and Lan Hoang, on the 27 brief), Baker & Hostetler LLP, New York, NY. 28 29 For Defendant-Appellant: TIMOTHY MACHT (Daniel A. Cohen and Peter A. 30 Devlin, on the brief), Walden Macht & Haran LLP, 31 New York, NY. 32 33 For Intervenor: NICHOLAS G. HALLENBECK (Kevin H. Bell and 34 Nathanael S. Kelley, on the brief), for Michael L. Post, 35 Securities Investor Protection Corporation, 36 Washington, DC. 37 38 Appeal from a judgment of the United States District Court for the Southern District of

39 New York (Keenan, J.).

40 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

41 DECREED that the judgment of the district court is AFFIRMED.

42 Defendant-Appellant Malcolm Sage (“Sage”), appearing individually and in his capacity

2 1 as partner or joint venturer of Sage Associates and Sage Realty, appeals from a judgment entered

2 by the district court finding him, Sage Associates, Sage Realty, Martin Sage, and Ann Sage Passer

3 (“Defendants”) jointly and severally liable for an award of $16,880,000 to Plaintiff-Appellee

4 Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

5 (“the Trustee”), as money owed for recoverable transfers from Bernard L. Madoff’s investment

6 firm to Sage Associates and Sage Realty’s respective investment accounts (the “Sage Accounts”).

7 On appeal, Sage advances two main arguments: first, that the district court selected an erroneous

8 calculation method, called the Net Investment Method, for determining Defendants’ net equity,

9 and second, that the court erroneously found Defendants jointly and severally liable by incorrectly

10 characterizing Sage Associates and Sage Realty as de facto partnerships. We assume the parties’

11 familiarity with the underlying facts, procedural history, and arguments on appeal, which we

12 recount only as necessary to explain our decision.

13 The present litigation results from the Ponzi scheme carried out by Madoff via his

14 investment firm Bernard L. Madoff Investment Securities LLC (“BLMIS”). After Madoff’s

15 arrest and BLMIS’s collapse, the Trustee was appointed under the Securities Investor Protection

16 Act of 1970 (“SIPA”), 15 U.S.C. §§ 78aaa–78lll, 1 and purposed with recovering and fairly

17 redistributing investor property that Madoff had misappropriated. To determine the Sage

18 Accounts’ net equity, the Trustee advocated for, and the district court applied, the “Net Investment

19 Method,” under which “the ‘net equity’ of a given BLMIS account is determined by calculating

20 the total amount of money that was invested in the account minus the total amount of money that

1 “SIPA establishes procedures for liquidating failed broker-dealers and provides their customers with special protections.” In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir. 2011). A customer’s share of the liquidation fund is determined by that customer’s “net equity,” which is generally defined as “the dollar amount of the account or accounts of a customer.” 15 U.S.C. § 78lll(11).

3 1 was withdrawn over the account’s lifetime.” Picard v. Sage Realty, Nos. 20CV10109(JFK),

2 20CV10057(JFK), 2022 WL 1125643, at *2 (S.D.N.Y. Apr. 15, 2022). Sage objected to the use

3 of the Net Investment Method and instead sought to be credited with certain sums reflected in the

4 Sage Accounts’ statements, despite the fact that those sums, like those reported in the account

5 statements of all BLMIS investors, were fraudulent and largely based on fictitious trades that did

6 not actually occur. The court also found that the entities that held the Sage Accounts were de

7 facto partnerships, with the Sage siblings (Malcolm, Martin, and Anne) as the general partners,

8 because—despite not entering into a partnership agreement—the Sages shared in the accounts’

9 profits and losses, financially contributed to the accounts, and identified the accounts as general

10 partnerships on federal, state, and local tax returns. As a result of these findings, the district court

11 concluded that Defendants were jointly and severally liable to the Trustee for $16,880,000.

12 The district court issued its judgment following a multiweek bench trial. “After a bench

13 trial, we review the district court’s finding[s] of fact for clear error and its conclusions of law de

14 novo. Mixed questions of law and fact are also reviewed de novo.” Citibank, N.A. v. Brigade

15 Cap. Mgmt., LP, 49 F.4th 42, 58 (2d Cir. 2022) (alteration adopted) (quoting Kreisler v. Second

16 Ave. Diner Corp., 731 F.3d 184, 187 n.2 (2d Cir. 2013)). On appeal, Sage challenges both the

17 district court’s use of the Net Investment Method and its conclusion that the Sage Accounts were

18 held by partnerships.

19 I. The District Court Properly Applied the Net Investment Method

20 The central question on appeal is whether the district court applied the correct calculation

21 method for determining the amount of net equity in the Sage Accounts. The Trustee argues that

22 because BLMIS perpetrated the fraud by fabricating all customer account statements and

23 comingling customer funds, the district court appropriately applied the Net Investment Method.

4 1 Sage, by contrast, claims that he oversaw Madoff’s management of the Sage Accounts by directing

2 and authorizing transactions, and argues that the district court therefore should have applied the

3 “Last Statement Method,” under which net equity would be calculated by “credit[ing] the

4 securities reported in [the Sage Accounts’] final account statements.” Sage Realty, 2022 WL

5 1125643, at *17.

6 In In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229 (2d Cir. 2011) (the

7 “Net Equity” decision), this Court found the Net Investment Method to be a legally sound

8 technique for determining net equity under SIPA. Net Equity, like this appeal, arose from the

9 Madoff Ponzi scheme, with the parties disputing the appropriate calculation method for

10 determining defrauded customers’ net equity. There—as is the case here—the Trustee, Irving

11 Picard, determined “that each customer’s ‘net equity’ should be calculated by the ‘Net Investment

12 Method,’” but some former BLMIS customers instead argued for the application of the Last

13 Statement Method. Net Equity, 654 F.3d at 233. We ultimately sided with the Trustee,

14 reasoning that the Net Investment Method was the most reasonable calculation method because,

15 under Madoff’s scheme, “the profits recorded over time on the customer statements were after-

16 the-fact constructs that were based on stock movements that had already taken place, were rigged

17 to reflect a steady and upward trajectory in good times and bad, and were arbitrarily and unequally

18 distributed among customers.” Id. at 238. We also found that using the Last Statement Method

19 would limit the total customer property fund pool and mean “that those who had already withdrawn

20 cash deriving from imaginary profits in excess of their initial investment would derive additional

21 benefit at the expense of those customers who had not withdrawn funds before the fraud was

22 exposed.” Id. But we noted that the Last Statement Method “may be appropriate when

23 securities were actually purchased by the debtor, but then converted by the debtor” or “where . . .

5 1 customers authorize or direct purchases of specific stocks.” Id. With that said, we concluded

2 that the Net Investment Method was “superior to the Last Statement Method as a matter of law,”

3 id. at 238 n.7, due to the “extraordinary facts” presented by the Madoff scheme—chief among

4 them being that Madoff reported only fictitious returns to his customers. Id. at 238.

5 While recognizing that the Net Investment Method is appropriate for most BLMIS

6 customers, Sage argues that the Last Statement Method is superior here because he, unlike other

7 investors, “authorized or directed the securities purchases reflected in the Sage Associates account

8 statements,” which he argues is the dispositive factor under Net Equity, “regardless of whether

9 those trades actually occurred or are fictitious.” Appellant’s Br. at 30. Sage effectively argues

10 that the facts of his case satisfy Net Equity’s dicta regarding the kind of case in which the Last

11 Statement Method would be appropriate because he is a customer that authorized or directed

12 Madoff’s purchase of specific stocks.

13 We are unpersuaded. Returning to Net Equity, a key element to this Court’s reasoning

14 there was the fact that the amounts reflected in BLMIS account statements were completely

15 fictitious. The dispositive factor was that, in perpetrating a Ponzi scheme, Madoff never engaged

16 in the represented market activity, and—like here—he authored after-the-fact account statements

17 in furtherance of the scheme. Indeed, Sage concedes this very point in Footnote 3 of his opening

18 brief, where he states:

19 Appellant does not, to be clear, contend that Madoff in fact purchased or sold the 20 securities in Sage Associates account, or any account—only that Malcolm 21 authorized or directed purchases of securities, as well as sales and trading strategy, 22 and those authorizations and directions appeared to Malcolm and the Sages to have 23 been followed by Madoff on the account statements reported to them. 24 25 Appellant’s Br. at 11 n.3 (emphasis in the original). Thus, regardless of how detailed Sage’s

26 instructions to Madoff may have been, it is undisputed that those instructions never materialized

6 1 into actual trades.

2 Even assuming that the Last Statement Method would be more appropriate in a case where

3 no trades were executed, but the customer statements “mirrored what would have happened” had

4 the customer’s trading directions been followed, Net Equity, 654 F.3d at 242 (quoting In re New

5 Times Sec. Servs., Inc., 371 F.3d 68, 74 (2d Cir. 2004)), the district court found that this was not

6 such a case. In particular, the district court credited the testimony of Annette Bongiorno,

7 Madoff’s longtime assistant, that she personally entered backdated, fictitious trades in the Sage

8 Accounts using historical pricing information. 2 Relying on this and other evidence, the district

9 court found that the transactions in the Sage Accounts “were the product of Madoff’s after-the-

10 fact fabrications, not the directions and authorizations of Malcolm Sage.” Sage Realty, 2022 WL

11 1125643, at *15. This finding was not clearly erroneous.

12 As a result, the essential facts of this appeal are the same as those presented in Net Equity:

13 it is the same Ponzi scheme, the same perpetrator, and the same method of generating fictitious

14 account statements. In other words, these are the same “extraordinary facts” that we found

15 warranted the Net Investment Method in the first instance. Under such clear precedent, the Net

16 Investment Method should apply here as well. To find otherwise would permit the Sages to

17 benefit at the literal expense of other defrauded BLMIS customers.

18 II. The Sage Accounts Are De Facto Partnerships

19 Sage next argues that the district court erred in finding that the Sage Accounts were general

2 Sage contends that he authorized or directed the trading in the Sage Associates account, not the Sage Realty account. He argues that the district court erroneously relied on evidence specific to the Sage Realty account in concluding that he did not authorize or direct trading in the Sage Associates account. See Appellant’s Br. at 47–49. We disagree. The district court made ample findings regarding backdated trading in the Sage Associates account. See Sage Realty, 2022 WL 1125643, at *8–11.

7 1 partnerships, and—as a result—that Sage “was jointly and severally liable for his siblings’ and

2 other family members’ withdrawals,” because “[t]he evidence at trial established that the accounts

3 were styled as partnerships because that ill-fitting description was the only one available” and

4 “necessary for tax compliance.” Appellant’s Br. at 30–31. More importantly, Sage maintains

5 that he and his siblings did not intend to form partnerships in the Sage Accounts, and that this fact

6 is evidenced by the lack of a written partnership agreement, a traditional hallmark of a general

7 partnership. Thus, while the Sage siblings used “account names under a common EIN,” they did

8 so “simply to provide a vehicle to report taxes on the account to the IRS . . . while permitting the

9 individual investors in each account to invest separate capital in the account, and report and pay,

10 their corresponding federal, state, and local taxes.” Id. at 65. 3

11 Under New York law, “[w]hen there is no written partnership agreement between the

12 parties, the court must determine whether a partnership in fact existed from the conduct, intention,

13 and relationship between the parties.” Czernicki v. Lawniczak, 74 A.D.3d 1121, 1124 (N.Y. App.

14 Div. 2d Dep’t 2010) (internal citations omitted). To do so, while courts consider the intentions

15 of the parties, they also look to other factors, including the sharing of profits and losses, as well as

16 the ownership, joint management, and control of partnership assets. See Brodsky v. Stadlen, 138

17 A.D.2d 662, 663 (N.Y. App. Div. 2d Dep’t 1988).

18 The Sages’ conduct weighs in favor of finding that they constructively formed partnerships

19 in the entities that held the Sage Accounts. First, the Sage siblings shared in the Sage Accounts’

20 profits and losses. See Sage Realty, 2022 WL 1125643, at *16. Under New York Partnership

3 While Sage disputes the legal conclusions reached by the district court, he does not argue on appeal that the district court clearly erred in reaching its findings of fact. See Appellant’s Reply Br. at 25 n.12 (“The question is one of application of law to fact . . . . Here, there is no factual dispute regarding the operation of Sage Associates, its tax filings, or distributions.”).

8 1 Law, “[t]he receipt by a person of a share of the profits of a business is prima facie evidence that

2 he is a partner in the business.” N.Y. P’ship Law § 11(4); see Yador v. Mowatt, No. 19-CV-

3 04128 (EK) (RML), 2021 WL 4502442, at *2 (E.D.N.Y. Sept. 30, 2021) (“Profit sharing . . .

4 constitutes prima facie evidence of the existence of a partnership.”). The sharing of losses is also

5 considered an “essential element” of a partnership. Chanler v. Roberts, 200 A.D.2d 489, 491

6 (N.Y. App. Div. 1st Dep’t 1994). Moreover, each Sage sibling held an interest in the Sage

7 Accounts and participated in managing them. See Brodsky, 138 A.D.2d at 663 (listing joint

8 management and control as a feature of a partnership); see also Sage Realty, 2022 WL 1125643,

9 at *30. Finally, it is undisputed that the Sages presented themselves to be partners via their tax

10 returns, see Sage Realty, 2022 WL 1125643, at *29, and in New York, “parties are bound by the

11 representations made in . . . partnership tax returns.” Czernicki, 74 A.D.3d at 1125. The district

12 court did not err in concluding that the entities that held the Sage Accounts were de facto

13 partnerships, and that Defendants are jointly and severally liable for the judgment entered in the

14 Trustee’s favor.

15 We have considered Sage’s other arguments and find them to be without merit.

16 Accordingly, we AFFIRM the judgment of the district court. Pursuant to Rule 39 of the Federal

17 Rules of Appellate Procedure, the costs of this appeal are taxed against the Defendant-Appellant. 4

18 FOR THE COURT: 19 Catherine O’Hagan Wolfe, Clerk

4 Rule 39 of the Federal Rules of Appellate Procedure states, in relevant part, “if a judgment is affirmed, costs are taxed against the appellant.” Fed. R. App. P. 39(a)(2).