Irving H. Picard v. Sage Associates

Background

The opinion resolves two consolidated proceedings arising from the liquidation of Bernard L. Madoff Investment Securities LLC. Trustee Irving H. Picard was appointed under the Securities Investor Protection Act to recover and distribute customer property after Madoff’s investment-advisory business was found to have operated as a Ponzi scheme.

The trustee sought to avoid and recover approximately $16,880,000 transferred by the investment firm to Sage Associates and Sage Realty during the two years before the filing date. He also denied customer claims filed by the Sages seeking compensation based on securities listed in their final account statements. The Sages objected to the claim determinations and contested the recovery action. The district court held a five-day bench trial from January 9 through February 2, 2022.

Findings About the Sage Accounts

The court found that the investment-advisory business did not actually purchase securities for its customers. Instead, Madoff and other employees created account statements showing fictitious trades, often using historical prices and entering transactions after the dates on which they supposedly occurred. The court found that the same practices were used in the Sage Accounts.

The Sages presented evidence that Malcolm Sage sometimes discussed trading strategies with Madoff and occasionally instructed him to execute particular transactions. The court credited some of Malcolm’s testimony but found that the evidence did not establish that he directed or authorized all of the more than 5,200 transactions reported in the accounts. The court found that Madoff and his employees fabricated those transactions to keep the accounts aligned with predetermined returns.

The court also found that Sage Associates and Sage Realty were partnerships under New York law. The Sages shared profits and losses, made financial contributions, filed partnership tax returns, identified the entities as partnerships, and held themselves out as general partners. The court concluded that Malcolm Sage, Martin Sage, and Ann Sage Prasser were general partners of both entities.

Net Equity Calculation

The trustee used the Net Investment Method to calculate the accounts’ “net equity.” That method credits actual cash and principal deposited into an account and subtracts amounts withdrawn. The Sages argued that the trustee instead had to use the Last Statement Method, which would value the securities shown on their final statements, because Malcolm had directed or authorized some purchases.

The court rejected that argument. It held that the statements did not establish real obligations of the investment firm because the securities positions were fictitious and the reported trades were fabricated after the fact. The court concluded that the Net Investment Method was consistent with the Securities Investor Protection Act and controlling Second Circuit decisions because it relied on actual deposits and withdrawals rather than fictitious profits.

The court found that the Sages had deposited $1,005,549 in cash and principal but had withdrawn $28,811,737 over the accounts’ lifetimes. It therefore concluded that the relevant accounts had negative net equity under the Net Investment Method. The court affirmed the trustee’s denial of the Sage Associates customer claim and overruled the objection filed by Sage Associates.

Avoidance and Recovery of Transfers

Under Bankruptcy Code § 548(a)(1)(A), a trustee may avoid and recover a transfer if it involved the debtor’s property, occurred within two years before bankruptcy, and was made with actual intent to hinder, delay, or defraud creditors. The parties stipulated that the transfers at issue occurred within the required two-year period.

The court found that the relevant funds belonged to the investment firm, not Madoff personally. It relied in part on evidence that Madoff transferred the assets and liabilities of his sole proprietorship to the limited liability company in 2001. The court also applied the Second Circuit’s Ponzi-scheme presumption of fraudulent intent, finding that the investment-advisory business operated as a Ponzi scheme and that the transfers furthered it.

The Sages argued that they gave value for the transfers and could retain amounts representing principal. The court rejected that defense because the Sages were not entitled to principal credit for the fictitious transactions. It concluded that a transferee in a Ponzi scheme does not give value beyond the principal deposited, and that the Sages had not established a defense for the disputed transfers.

Partnership Liability

The court held that Sage Associates and Sage Realty were de facto partnerships even though the Sages had no written partnership agreement. Because the individual Sages were general partners, the court held Malcolm Sage, Martin Sage, and Ann Sage Prasser jointly and severally liable for the judgment against the entities.

Prejudgment Interest and Disposition

The trustee requested prejudgment interest at a four-percent rate. The court denied that request, finding that the Sages had raised novel legal arguments in good faith and that the dispute over liability was legitimate.

The court entered judgment for the trustee and against Sage Associates, Sage Realty, Malcolm Sage, Martin Sage, and Ann Sage Prasser, jointly and severally, in the amount of $16,880,000. It affirmed the denial of the Sage Associates customer claim, overruled the customer-claim objection, denied prejudgment interest, and directed the clerk to enter judgment for the trustee and close both cases.