Case , Document , 05/08/2018, , Page1 of (L)

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1 Case , Document , 05/08/2018, , Page1 of (L) (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON), (CON) United States Court of Appeals FOR THE SECOND CIRCUIT IN RE: IRVING H. PICARD, TRUSTEE FOR THE LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES LLC On Appeal from a Final Judgment of the United States Bankruptcy Court for the Southern District of New York REPLY BRIEF OF STATUTORY INTERVENOR SECURITIES INVESTOR PROTECTION CORPORATION OF COUNSEL: KEVIN H. BELL Senior Associate General Counsel For Dispute Resolution JOSEPHINE WANG General Counsel SECURITIES INVESTOR PROTECTION CORPORATION 1667 K Street, N.W., Suite 1000 NATHANAEL S. KELLEY Washington, D.C Associate General Counsel Telephone: (202)

2 Case , Document , 05/08/2018, , Page2 of 46 TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES... iii PRELIMINARY STATEMENT... 1 REPLY ARGUMENT. 2 I. THE MONIES AT STAKE WERE MISAPPROPRIATED FROM SECURITIES CUSTOMERS... 2 II. APPELLEES ARE INCORRECT THAT WHEREVER LOCATED IS CONTAINED ONLY IN 11 U.S.C. SECTION 541(a). THE SAME PHRASE IN SIPA PROVIDES AN INDEPENDENT BASIS FOR RECOVERY EXTRATERRITORIALLY Extraterritorial Application Under the Bankruptcy Code Extraterritorial Application Under SIPA... 7 A. The Bankruptcy Court Has Exclusive Jurisdiction Over Debtor Property... 7 B. To Be Recoverable, A Transfer Need Only Be Voidable or Void Under Title C. Because Customer Property Means Unlawfully Converted Customer Property, the Converted Customer Property Remains Customer Property Even After It Is Transferred. Because the Converted Customer Property Is Deemed to Be Debtor Property for Avoidance Purposes, the Bankruptcy Court Has Exclusive Jurisdiction Over It D. The Legislative Intent i

3 Case , Document , 05/08/2018, , Page3 of 46 TABLE OF CONTENTS PAGE III. THE APPELLEES ATTEMPTS TO DIMINISH THE POWER OF THE SIPA TRUSTEE LACK FOUNDATION A. The Appellees Do Not Read Section 78fff-2(c)(3) In Its Entirety B. The Role of the SIPA Trustee C. Appellees Misconstrue the Meaning of The Laws of Any State to the Contrary Notwithstanding D. Appellees Misperceive the Purposes of SIPA IV. THE FOCUS IS ON THE INITIAL TRANSFERS OF MISAPPROPRIATED FUNDS WHICH INVOLVED DOMESTIC AND NOT FOREIGN CONDUCT. AS SUCH, THE SUBSEQUENT TRANSFERS ABROAD OF THE SAME STOLEN CUSTOMER MONEY DID NOT LAUNDER THE MONEY V. NO DEFERENCE IS DUE AS A MATTER OF COMITY VI. THE ASSERTED FOREIGN INTERESTS DO NOT TRUMP THOSE OF THE U.S CONCLUSION CERTIFICATE OF COMPLIANCE ii

4 Case , Document , 05/08/2018, , Page4 of 46 TABLE OF AUTHORITIES CASES: PAGE Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) Bank of New York v. Treco (In re Treco, 240 F.3d 148 (2d Cir. 2001) Clark v. Rameker, U.S., 134 S. Ct (2014) Corley v. United States, 556 U.S. 303 (2009) Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013) Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109 (Bank. D. Minn. 2002), aff d, 2003 WL (D. Minn. April 7, 2003), aff d, 371 F.3d 397 (8 th Cir. 2004) In re French, 440 F.3d 145 (4 th Cir. 2006), cert. den. sub nom., French v. Liebmann, 549 U.S. 815 (2006) In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013), Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d Cir. 2003) Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d 341 (2d Cir. 1992) Kunstsammlungen Zu Weimar v. Elicofon, 536 F. Supp. 829 (E.D.N.Y. 1981), aff'd, 678 F.2d 1150 (2d Cir. 1982) Mastan v. Salamon (In re Salamon), 854 F.3d 632 (9th Cir. 2017) Moore Capital Management, L. P., v. Giddens (In re Lehman Brothers, Inc.), 533 B.R. 362 (S.D.N.Y. 2015) iii

5 Case , Document , 05/08/2018, , Page5 of 46 TABLE OF AUTHORITIES (cont.) CASES: PAGE Morrison v. Nat l Australia Bank Ltd., 561 U.S. 247 (2010)... 6 Note Holders v. Large Private Beneficial Owners (In re Tribune Company Fraudulent Conveyance Litigation), 818 F.3d 98 (2d Cir. 2016), petition for cert. filed sub nom., Deutsche Bank Tr. Co. Ams. v. Robert R. McCormick Foundation (No ) Official Comm. Of Unsecured Creditors v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c), 575 B.R. 229 (Bankr. S.D.N.Y. 2017), reconsideration den., 2018 WL (Bankr. S.D.N.Y. 2018) Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, 763 F.3d 198 (2d Cir. 2014) Picard v. Bureau of Labor Insurance (In re Bernard L. Madoff), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014) Picard v. Maxam Absolute Return Fund, LP. (Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC), 460 B.R. 106 (Bankr. S.D.N.Y. 2011), aff d, 474 B.R. 76 (S.D.N.Y. 2012)... 13, 14 Richards v. United States, 369 U.S. 1 (1962)... 10, 13 RJR Nabisco, Inc. v. European Community, U.S., 136 S. Ct (2016)... 5, 20, 21, 22, 26 Sagor v. Picard (In re Bernard L. Madoff Inv. Sec., LLC), 697 F. App x. 708 (2d Cir. 2017)... 4 iv

6 Case , Document , 05/08/2018, , Page6 of 46 TABLE OF AUTHORITIES (cont.) CASES: PAGE SEC v. Albert & Maguire Sec. Co., 560 F.2d 569 (3d Cir. 1977)... 15, 16 SEC v. F. O. Baroff Co., 497 F.2d 280 (2d Cir. 1974) SIPC v. Barbour, 421 U.S. 412 (1975)... 8, 36 SIPC v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. 2014)... 6, 33 SIPC v. Charisma Sec. Corp., 506 F.2d 1191 (2d Cir. 1974) SIPC v. Christian-Paine & Co., 755 F.2d 359 (3d Cir. 1985) United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988) United States v. Dotterweich, 320 U.S. 277 (1943) United States v. Harris, 838 F.3d 98 (2d Cir. 2016), cert. den., U.S., 137 S. Ct. 840 (2017) United States v. Monasterski, 567 F.2d 677 (6 th Cir. 1977) United States v. Portrait of Wally, 105 F. Supp. 2d 288 (S.D.N.Y. 2000) United States v. Prevezon Holdings, Ltd., 251 F. Supp. 3d 685 (S.D.N.Y. 2017) v

7 Case , Document , 05/08/2018, , Page7 of 46 TABLE OF AUTHORITIES (cont.) STATUTES AND RULES : PAGE Securities Investor Protection Act, as amended, 15 U.S.C. 78eee(b)(2)(A)(i)... 5, 7, 10, 12 78eee(b)(4)... 5, 8, 10, 12 78fff(a)(1) fff(b) fff-1(a) fff-2(c)(1) fff-2(c)(3)... 5, 7-10, 12, 14-16, 18 78lll(2) lll(4)... 4, 5, 11, 12 Securities Investor Protection Act of 1970, 6(b)(1) (c)(2)(B) (d) United States Bankruptcy Code, as amended, 11 U.S.C , (a)... 6, 7, , 21, (a)(1) , 21, 23, (a) (a)(2) United States Bankruptcy Act (repealed 1978), 11 U.S.C. 96(e) vi

8 Case , Document , 05/08/2018, , Page8 of 46 TABLE OF AUTHORITIES (cont.) LEGISLATIVE MATERIALS: PAGE H. R. Rep. No (2005), reprinted in 2005 U.S.C.C.A.N PUBLICATIONS: Charles H. Meyer, The Law Of Stockbrokers and Stock Exchanges (1931) James Wm. Moore and Lawrence P. King, Collier on Bankruptcy (14 th ed. 1977) [2] Michael E. Don and Josephine Wang, Stockbroker Liquidations Under the Securities Investor Protection Act and Their Impact on Securities Transfers, 12 Cardozo Law Review 509 (1990) WEBSITES: 19 vii

9 Case , Document , 05/08/2018, , Page9 of 46 PRELIMINARY STATEMENT It is a sad day for investors when financial institutions and representatives of the securities industry join forces in defense of those who receive stolen customer money, profit from it, and refuse to return it to the rightful owners. The Securities Investor Protection Corporation ( SIPC ) submits this reply brief in support of the Trustee in these consolidated appeals. The appellees contend that it is improper for the Trustee in this liquidation proceeding to seek to recover for customers the funds that were misappropriated from them. The appellees support the decision of the Bankruptcy Court, guided by the District Court, under which a fraudster can steal billions of dollars from securities customers, transfer the money to entities that send it abroad, and once the money has passed through the hands of a couple of foreign entities, it no longer belongs to customers. Appropriately, according to the appellees, Jt. Br. at 61, 1 to try to recover the money and at great expense to the estate, the Trustee must chase the laundered customer funds worldwide, in foreign courts, under foreign law, while the applicable domestic law and the home court where such recoveries should proceed, are ignored and made powerless. To the appellees, the consequences in the U.S. of this outcome are insignificant. Yet, as the ability to recover stolen customer property is diminished, 1 Joint Brief for Defendants-Appellees, filed on April 18, 2018 (Doc. 935) ( Jt. Br. ).

10 Case , Document , 05/08/2018, , Page10 of 46 the demands upon the SIPC Fund and U.S. taxpayer money grow. Less stolen customer money recovered means larger advances from SIPC and as the SIPC Fund is depleted, the use of taxpayer monies, intended as a remedy of last resort, will become routine. Even worse, investor confidence, a key objective of SIPA, is eroded by a statutory construction that contradicts the plain meaning and language of SIPA, and undermines the legislative intent. With limited analysis, the domestic Court readily surrenders its jurisdiction and ignores where U.S. interests lie. This, perhaps most curiously in this liquidation proceeding, in spite of at least one of the foreign Courts allowing the suits in question by the Trustee to proceed. But all of that as described by the appellees, no more than a parade of horribles -- is appropriate according to them. Jt. Br. at 24. The decision of the lower Court should be reversed. REPLY ARGUMENT I. THE MONIES AT STAKE WERE MISAPPROPRIATED FROM SECURITIES CUSTOMERS The views of the appellees are consistent with Appellees characterization of the Securities Investor Protection Act 2 as a limited statute, with a modest purpose. Jt. Br. at 9. However modest Appellees believe SIPA may be, they ignore that it serves an important purpose. SIPA protects securities customers who 2 15 U.S.C. 78aaa et seq. ( SIPA ). For convenience, references hereinafter to provisions of SIPA will omit 15 U.S.C. 2

11 Case , Document , 05/08/2018, , Page11 of 46 are key to growth of the U.S. capital markets. Customer protection inspires confidence in the markets so that investors continue to invest and the capital markets continue to grow. Investor confidence is impaired when the misuse of customer monies is met with indifference or worse. The appellees do not dispute that the funds in question were misappropriated from customers investing through Bernard L. Madoff Investment Securities LLC ( BLMIS ). As the appellees concede, almost all of the assets of the main hedge funds or feeder funds at issue -- the Fairfield Funds ( Fairfield ), the Kingate Funds ( Kingate ), and Harley were invested with BLMIS. Jt. Br. at 6-8. See id. at 5 n.3. When BLMIS made the initial transfers of money, the transfers were of stolen monies belonging to BLMIS customers. Because they otherwise had few assets of their own, when Fairfield, Kingate, and Harley redistributed the money to subscribers, money managers, and others, the redistributions were of the same misappropriated customer funds. To the appellees, the initial fraudulent transfers are irrelevant. To them, each subsequent transfer is a new transfer to be judged on its own and without regard to how the transfers originated or their source. To the appellees, each subsequent transfer washes the money clean as if the thefts never occurred. Thus, the transfers become ones made in the ordinary course, and the appellees ignore that the funds were never the debtor s to transfer. But no matter how many times 3

12 Case , Document , 05/08/2018, , Page12 of 46 they are transferred, the funds remain customer property. In Sagor v. Picard (In re Bernard L. Madoff Inv. Sec., LLC), 697 F. App x. 708, 711 (2d Cir. 2017), in the context of calculating customers net equity or what customers are owed, this Court held that paper transfers of imaginary profit from one customer s account to another customer s account do not make the imaginary profit real. Similarly, the transfer of stolen customer property from one person to another does not undo the theft. The property remains what it was from the beginning: property belonging to customers. SIPA specifically so states. Under SIPA Section 78lll(4), customer property means not only cash and securities received, acquired, or held by or for the broker for securities accounts of customers, but it also means such property unlawfully converted [emphasis added]. In the Trustee s pursuit of stolen customer property, however, the appellees would have the Trustee stand in line in foreign proceedings. Jt. Br. at 20. But more than avoidance principles are implicated here. If the situation were reversed so that property was in the U.S. and a foreign debtor was seeking to take possession of it, the property would not be turned over to the foreign debtor unless the foreign debtor had an interest in it. As stated in Koreag, Controle et Revision S.A. v. Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d 341 (2d Cir. 1992): the estate of a foreign debtor is defined by the law of the jurisdiction in which the foreign proceeding is 4

13 Case , Document , 05/08/2018, , Page13 of 46 pending, with other applicable law serving to define the estate s interest in particular property. 961 F.2d at 348 (emphasis in original and citations omitted). SIPA establishes a complete program with regard to the identification, collection, and disposition of customer property. It defines what customer property is, how it is to be collected and retrieved, states by whom it is to be shared, how it is to be distributed, and identifies the court with exclusive jurisdiction over the property. See SIPA 78lll(2), 78lll(4), 78eee(b)(2)(A)(i), 78eee(b)(4), 78fff- 2(c)(1), and 78fff-2(c)(3). Congress has specified that the fact that customer property has been misappropriated does not change its nature. The Courts should not allow themselves to be used in attempts to do so. II. APPELLEES ARE INCORRECT THAT WHEREVER LOCATED IS CONTAINED ONLY IN 11 U.S.C. SECTION 541(a). THE SAME PHRASE IN SIPA PROVIDES AN INDEPENDENT BASIS FOR RECOVERY EXTRATERRITORIALLY 1. Extraterritorial Application Under the Bankruptcy Code Appellees rely upon RJR Nabisco, Inc. v. European Community, U.S., 136 S. Ct (2016), for the proposition that the legislative intent that a statute can be applied extraterritorially must be unmistakable. Jt. Br. at 30. They ignore that in the same decision, the Supreme Court held that an express statement of extraterritoriality is not essential[,] and that context can be consulted as well. Id., 136 S. Ct. at Context can include a consideration of other provisions 5

14 Case , Document , 05/08/2018, , Page14 of 46 within the same law. See Morrison v. National Australia Bank Ltd., 561 U.S. 247, 264 (2010). The District Court below agreed. See SIPC v. Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222, 228 (S.D.N.Y. 2014) (SPA-213) ( context includes consideration of surrounding provisions of the Bankruptcy Code, to determine whether Congress nevertheless intended extraterritorial application), supplemented by 2014 WL (S.D.N.Y. July 28, 2014). Appellees dispute that other related sections of the Bankruptcy Code (Title 11) provide the necessary context. Initially, 11 U.S.C. Section 550, entitled Liability of transferee of avoided transfer, is one of the grounds for recovery against the appellees as subsequent transferees. Section 550(a) allows recovery of property transferred if the transfer has been avoided, among other provisions and as sought in these cases, under 11 U.S.C. Section 548. Section 548(a)(1) refers to the avoidance of a transfer of an interest of the debtor in property. That same phrase, an interest of the debtor in property, appears in 11 U.S.C. Section 541(a) which defines such interests as property of the estate, wherever located and by whomever held. If the initial avoided transfer can be of property wherever located and by whomever held, then the subsequent transfer of the same property also is recoverable. 3 3 See Brief of Statutory Intervenor Securities Investor Protection Corporation, filed herein on January 10, 2018 (Doc. No. 496) ( SIPC Br. ), at

15 Case , Document , 05/08/2018, , Page15 of 46 Appellees assert that only Section 541(a) contains the phrase wherever located. Jt. Br. at 34. They are wrong. SIPA Section 78eee(b)(2)(A)(i) contains the same phrase, and SIPA Section 78fff-2(c)(3), in conjunction with Section 78eee(b)(2)(A)(i), provides a second, and the overarching, basis for recovery of these subsequent transfers of stolen customer property. 2. Extraterritorial Application Under SIPA A. The Bankruptcy Court Has Exclusive Jurisdiction Over Debtor Property A SIPA proceeding is initiated when SIPC files in federal District Court, an application seeking to have a firm placed in liquidation. Under SIPA Section 78eee(b)(2)(A)(i), upon the filing of the application, the District Court acquires exclusive jurisdiction of [the] debtor and its property wherever located. (emphasis added). Section 78eee(b)(2)(A)(i) provides: Upon the filing of an application with a court for a protective decree with respect to a debtor, such court (i) shall have exclusive jurisdiction of such debtor and its property wherever located (including property located outside the territorial limits of such court and property held by any other person as security for a debt or subject to a lien). The phrase wherever located in SIPA Section 78eee(b)(2)(A)(i) also appears in Section 541 of the Bankruptcy Code which defines property of the estate. There, no less than in SIPA Section 78eee(b)(2)(A)(i), wherever located 7

16 Case , Document , 05/08/2018, , Page16 of 46 refers to property worldwide. See H.R. Rep. No , pt. 1, at 118 (2005), as reprinted in 2005 U.S.C.C.A.N. 88, 180 (United States has worldwide jurisdiction over property of a domestic or foreign debtor in a full bankruptcy case ). See also SIPC Br. at 45. If the SIPA customer protective decree is entered, the liquidation proceeding is removed to the Bankruptcy Court which acquires the same exclusive jurisdiction over the debtor and its property wherever located. SIPA 78eee(b)(4). See SIPC v. Barbour, 421 U.S. 412, 414 (1975). B. To Be Recoverable, A Transfer Need Only Be Voidable or Void Under Title 11 A central purpose of the SIPA liquidation proceeding is to return customer property to customers. SIPA 78fff(a)(1). Where customer property is insufficient to satisfy customer and other specified claims in the proceeding, the trustee may seek to recover transferred customer property if the elements under Title 11 for avoidance of the transfer are met. The trustee s authority to do so is pursuant to SIPA Section 78fff-2(c)(3) which provides as follows: Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the 8

17 Case , Document , 05/08/2018, , Page17 of 46 property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding. Section 78fff-2(c)(3) does a number of things. First, it specifies that if customer property is insufficient to satisfy specified claims, customer property that has been transferred may be recovered if the transfer is void or voidable under Title 11. Second, it provides that once recovered, the property again is called customer property. Third, for purposes of recovery by avoidance, it deems the customer property that was transferred to have been property of the debtor. And fourth, if the transfer was to or for a customer, it deems the transferee to have been a creditor, even if the customer had a different status under state law. In sum, at its most basic under Section 78fff-2(c)(3), the claims of customers are to be satisfied from customer property that is on hand, but if it is insufficient, the trustee may recapture customer property transferred by the debtor. The avoidance provisions of Title 11 provide the means by which transfers may be avoided, and Section 78fff-2(c)(3) recharacterizes the property transferred and in some instances, recharacterizes the transferee, to bring the transfers within the avoidance provisions. However, in specifying that the trustee may recover any property transferred by the debtor if the transfer is voidable or void under title 11, SIPA Section 78fff-2(c)(3) itself, independent of the Bankruptcy Code, makes the void or voidable transfers recoverable. In short, a transfer of customer property 9

18 Case , Document , 05/08/2018, , Page18 of 46 need only be void or voidable under Title 11. Recovery of the transfer is then effectuated under SIPA Section 78fff-2(c)(3). C. Because Customer Property Means Unlawfully Converted Customer Property, the Converted Customer Property Remains Customer Property Even After It Is Transferred. Because the Converted Customer Property Is Deemed to Be Debtor Property for Avoidance Purposes, the Bankruptcy Court Has Exclusive Jurisdiction Over It Although the appellees give it short shrift, Jt. Br. at 48, Section 78fff-2(c)(3) is significant in another way for purposes of this matter. It is fundamental that a section of a statute should not be read in isolation from the context of the whole Act, and that in interpreting legislation, [a court should] look to the provisions of the whole law, and to its object and policy. Richards v. United States, 369 U.S. 1, 11 (1962). Moreover, it is a basic interpretive canon that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant. Corley v. United States, 556 U.S. 303, 314 (2009) (citation omitted); Clark v. Rameker, U.S., 134 S. Ct. 2242, 2248 (2014); United States v. Harris, 838 F.3d 98, 106 (2d Cir. 2016), cert. den., U.S., 137 S. Ct. 840 (2017). These principles apply here. Pursuant to SIPA Sections 78eee(b)(2)(A)(i) and 78eee(b)(4), the Bankruptcy Court in a SIPA proceeding has exclusive jurisdiction of the debtor and its property wherever located. If SIPA Section 78fff-2(c)(3), in recasting transferred customer property as property of the debtor for avoidance purposes, 10

19 Case , Document , 05/08/2018, , Page19 of 46 is read in the context of SIPA, giving effect to all of its provisions, then the Bankruptcy Court must be deemed to have had exclusive jurisdiction over the transferred customer property since, for avoidance purposes, it would have been property of the debtor. That exclusive jurisdiction over the property, wherever located, continues even after the property is transferred. As previously discussed, under SIPA Section 78lll(4), customer property means property unlawfully converted. The term refers to an ongoing unlawful conversion since if recovered, customer property would no longer be unlawfully converted. SIPA 78lll(4). Cf., United States v. Monasterski, 567 F.2d 677, 680 (6 th Cir. 1977) (stolen property recovered by the owner or his agent loses its character as stolen property and is no longer stolen ); United States v. Portrait of Wally, 105 F. Supp. 2d 288, 290 (S.D.N.Y. 2000) ( well-established federal law that stolen property recovered by owner or agent is no longer stolen). Appellees interpretation that converted customer property is customer property only after it is recovered makes the term meaningless. Jt. Br. at Re-labeling customer property as property of the debtor makes the transfer avoidable. But the significance of Congress defining unlawfully converted property as customer property is that the nature of the property does not change upon a conversion. The property remains customer property throughout, and notwithstanding, the conversion. Because the property is customer property 11

20 Case , Document , 05/08/2018, , Page20 of 46 throughout the conversion, then when it is re-labeled as debtor property for avoidance purposes, it remains debtor property qua customer property throughout the conversion. As the property is debtor property, the Bankruptcy Court has exclusive jurisdiction over it wherever located. SIPA 78eee(b)(2)(A)(i). Once the transfer is avoided, the recovered property is no longer deemed to be debtor property and again, it is called customer property. In this manner, the provisions of SIPA that are relevant here, Sections 78eee(b)(2)(A)(i), 78eee(b)(4), 78fff-2(c)(3), and 78lll(4), all are given effect, and none is made inoperative or meaningless. 4 4 Appellees contend that upon transfer, the transferee becomes the owner of the converted property. But, as in the case of stolen property, a transferor cannot convey title to property that it does not own. As stated in Kunstsammlungen Zu Weimar v. Elicofon, 536 F. Supp. 829, 833 (E.D.N.Y. 1981), aff'd, 678 F.2d 1150 (2d Cir. 1982): It is a fundamental rule of law in New York that a thief or someone who acquires possession of stolen property after a theft cannot transfer a good title even to a bona fide purchaser for value [because] [o]nly the true owner's own conduct, or the operation of law... can act to divest that true owner of title in his property... [citation omitted]. The fact that customer cash is misappropriated instead of customer securities does not alter the analysis. The definition of customer property to mean unlawfully converted property was derived from Section 60(e) of the Bankruptcy Act, 11 U.S.C. 96(e) (repealed 1978). In pertinent part, Section 60(e) defined the single and separate fund, the predecessor to customer property under SIPA, as follows: All property at any time received, acquired, or held by a stockbroker from or for the account of customers, except 12

21 Case , Document , 05/08/2018, , Page21 of 46 D. The Legislative Intent As mentioned above, in interpreting legislation, [a court should] look to the provisions of the whole law, and to its object and policy. Richards v. United States, 369 U.S. at 11. The legislative intent is to keep the disposition of customer property under the supervision of one court. The reasons for doing so were discussed by Bankruptcy Judge Lifland in Picard v. Maxam Absolute Return Fund, LP. (Sec. Inv r Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC), 460 B.R. 106 (Bankr. S.D.N.Y. 2011), aff d, 474 B.R. 76 (S.D.N.Y. 2012). There, the Trustee sought an injunction prohibiting Maxam Absolute Return Fund, LTD from pursuing an action against the Trustee in the Cayman Islands ( Cayman ). The Trustee had sued several related Maxam Funds in avoidance, and seeking to put an end to the actions, Maxam brought an action in a Cayman Court for declaratory relief that Maxam did not owe the Estate the money sought. In finding that the action violated various stays, in pertinent part, Bankruptcy Judge Lifland stated the following: cash customers who are able to identify specifically their property... and the proceeds of all customers property rightfully transferred or unlawfully converted by the stockbroker, shall constitute a single and separate fund... See James Wm. Moore and Lawrence P. King, Collier on Bankruptcy, 60.73[2] at 1171 (14 th ed. 1977). Thus, even if securities have been reduced to cash and misappropriated, the proceeds still would be part of the then single and separate fund, and now, customer property. In 1970, the single and separate fund was defined at SIPA Section 6(c)(2)(B), 15 U.S.C. 78fff(c)(2)(B) (1970). 13

22 Case , Document , 05/08/2018, , Page22 of 46 The Cayman Action is a clear attack on this Court s exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination. It is a thinly-veiled effort to forumshop and ultimately wrest control over the Trustee s claims from this Court. * * * * While courts recognize a potential burden given a location abroad, often the interests of the plaintiff and the forum in the exercise of jurisdiction will justify even the serious burdens placed on the alien defendant. [T]he United States has a strong interest in applying the fraudulent transfer provisions of its Bankruptcy Code since the Trustee s claims arise under it, and Defendants transfers have allegedly deprived United States creditors of distributions to which they are entitled in the BLMIS liquidation. 460 B. R. at 106, 113, 119 (citations omitted). III. THE APPELLEES ATTEMPTS TO DIMINISH THE POWER OF THE SIPA TRUSTEE LACK FOUNDATION A. The Appellees Do Not Read Section 78fff-2(c)(3) In Its Entirety In an effort to limit the ability of a SIPA trustee to recover customer property, the appellees portray the Trustee as having no greater role or responsibility than a trustee in a Title 11 case absent an express grant of authority in SIPA. With regard to the recovery of customer property, Appellees argue that pursuant to SIPA, Title 11 provides the only source. But in order to support their argument, they omit from their reading of SIPA Section 78fff-2(c)(3), the words 14

23 Case , Document , 05/08/2018, , Page23 of 46 the trustee may recover any property transferred by the debtor [emphasis added] if the transfer is void or voidable under Title 11. Moreover, instead of to the extent such transfer is voidable or void under the provisions of title 11, they incorrectly read Section 78fff-2(c)(3) to provide to the extent such transfer is recovered under the provisions of title 11 [emphasis added]. See Jt. Br. at 48 ( SIPA merely incorporates certain Bankruptcy Code provisions, including those that enable the recovery of property. Since those recovery provisions do not reach extraterritorially, neither do the sections of SIPA that incorporate those provisions. ). For the reasons discussed above, the appellees fail to give effect to Section 78fff-2(c)(3) in its entirety and to the proper construction of the provision in the context of SIPA as a whole. B. The Role of the SIPA Trustee The appellees attempts to minimize the powers of the SIPA trustee also are to no avail. While the SIPA trustee indeed has the powers and title of a Title 11 trustee under SIPA Section 78fff-1(a), those powers are in addition to others that enable him to perform the special functions of a SIPA liquidation. See SIPC v. Christian-Paine & Co., 755 F.2d 359, 361 (3d Cir. 1985). As the Court observed in SEC v. Albert & Maguire Sec. Co., 560 F.2d 569, 574 (3d Cir. 1977), in commenting on the authority of the SIPA trustee who, under SIPA as enacted, had 15

24 Case , Document , 05/08/2018, , Page24 of 46 the powers of a trustee in a case under Chapter X of the Bankruptcy Act, see SIPA 6(b)(1), 15 U.S.C. 78fff(b)(1) (1970): Thus, the SIPA trustee, upon order of the court, will have the combined powers of a trustee in ordinary bankruptcy, a Chapter X trustee and a federal equity receiver. In making available the additional rights and powers of a receiver in equity, it was the Congressional purpose to arm the trustee with even greater powers than those of a trustee in bankruptcy. [footnotes omitted]. 3A Collier on Bankruptcy 60.85[2]. Albert & Maguire, 560 F.2d at 574. Most significantly, for purposes of these cases, the functions of the SIPA trustee include the recovery of customer property. See Moore Capital Management, L. P., v. Giddens (In re Lehman Brothers, Inc.), 533 B.R. 362, 364 (S.D.N.Y. 2015) (the SIPA trustee is charged with recovering customer property. ). The trustee s ability to do so must be commensurate with the scope of his duty to recover customer property, even when converted. C. Appellees Misconstrue the Meaning of The Laws of Any State to the Contrary Notwithstanding The appellees also err in asserting that the portion of Section 78fff-2(c)(3) that deems a transferee to be a general creditor instead of a customer, the laws of any State to the contrary notwithstanding, demonstrates a legislative intent that the powers of the SIPA trustee be exercised only domestically. Jt. Br. at The language reflects no such intent. Historically, different states characterized the relationship between broker and customer differently. As stated in James Wm. 16

25 Case , Document , 05/08/2018, , Page25 of 46 Moore and Lawrence P. King, Collier on Bankruptcy, at (14 th ed. 1977): Although the Massachusetts rule treated the relationship between customer and broker as debtor and creditor, in practice it approached the so-called New York rule, which was the prevailing view. Under the latter doctrine the broker was the agent for the customer in purchasing or selling securities. Moreover, as discussed in Charles H. Meyer, The Law of Stockbrokers and Stock Exchanges (1931), in executing an order for the purchase or sale of a security, the relationship of broker to customer was that of agent to principal. Id. at 249. In the purchase or sale of securities on margin, however, in which the broker would advance all or a portion of the purchase price and receive in return a deposit of the security as collateral, the broker would be deemed a creditor of the customer to the extent of funds provided, and in holding the security as collateral, the relationship between broker and customer would be one of pledger and pledgee. Id. at 254. Finally, as discussed in Michael E. Don and Josephine Wang, Stockbroker Liquidations Under The Securities Investor Protection Act and Their Impact on Securities Transfers, 12 Cardozo Law Review 509 (1990): In states following the lead of New York, the customer would play one of a few roles depending upon the transaction in question. When the customer left securities with the broker for safekeeping, he was a bailor. The same customer who deposited securities as 17

26 Case , Document , 05/08/2018, , Page26 of 46 collateral with his broker was a pledger. Likewise, a pledge relationship existed when the broker bought securities for the customer on margin. When the customer left the securities with the broker for sale, he was principal to his broker agent. In all circumstances, under New York law, the customer was deemed to own the securities whether the securities had been fully paid for or bought on margin. In contrast under the minority rule followed by the Massachusetts courts, the relation of broker and customer, at least with respect to securities bought on margin, was one of debtor to creditor, and not a fiduciary one. Legal title of securities bought on margin was in the broker, and consequently, the margin customer ordinarily could do no better than a general creditor. Id. at (citations omitted). The language of Section 78fff-2(c)(3), relied upon by the appellees, merely established uniformity in the nature of the customer/broker relationship for avoidance purposes, and nothing more. D. Appellees Misperceive the Purposes of SIPA Appellees advance other grounds in arguing that the nature of SIPA is domestic. These include that the goal of SIPA is to protect domestic investors; its purpose is to safeguard the domestic economy; and it regulates domestic brokerdealers. Jt. Br. at 51. Appellees characterization of SIPA not only is wrong, but it is myopic. The objective of SIPA is to protect all customers who invest through the SIPC member broker-dealer, wherever the customers may reside and whatever 18

27 Case , Document , 05/08/2018, , Page27 of 46 their citizenship. 5 It is true that the national economy is served by reinforcing investor confidence, but those investments may be by foreign, as well as domestic, investors, and in foreign, as well as domestic, investments. SIPC has no regulatory authority, and while a brokerage must be a registered broker-dealer to be a SIPC member, securities held in custody by the brokerage may be kept abroad, at a foreign depository, foreign clearing agency, or foreign custodian bank. See SIPC Br. at Particularly in light of the global nature of today s markets, the notion that SIPA is U.S.-centric has no basis in reality. IV. THE FOCUS IS ON THE INITIAL TRANSFERS OF MISAPPROPRIATED FUNDS WHICH INVOLVED DOMESTIC AND NOT FOREIGN CONDUCT. AS SUCH, THE SUBSEQUENT TRANSFERS ABROAD OF THE SAME STOLEN CUSTOMER MONEY DID NOT LAUNDER THE MONEY 5 Indeed, SIPC s web site provides: Are non-residents of the U.S protected by SIPC? What about non-u.s. citizens? Non-residents and non-u.s. citizens are eligible for the same protections from SIPC as all other customers. There is no requirement that a customer reside in or be a citizen of the United States. An individual residing in a foreign country with an account at a brokerage firm that is a member of SIPC is treated the same as a resident or citizen of the United States with an account at a brokerage firm that is a SIPC member. 19

28 Case , Document , 05/08/2018, , Page28 of 46 Consistent with their attempt to wash the stolen customer money clean, the appellees argue that the focus here is on the subsequent transfers, and not on the initial transfers. Jt. Br. at 45. Appellees are wrong. The nature of the property as stolen customer property was determined by the initial transfers when BLMIS converted the property to its own use and transferred it. The objective under SIPA is to recover that property. The fact that the property subsequently travelled through multiple hands abroad does not change the nature of the property and is irrelevant. Although support exists in these cases for extraterritorial application, if this was not the case, as it is, the Court would consider whether the statute in question was being applied domestically and not extraterritorially. Toward that end, the Court would consider the focus of the statute and where the conduct occurred relative to the statute s focus. RJR Nabisco, U.S., 136 S. Ct. at 2101 ( RJR ). As the Court stated in RJR: If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute s focus. If the conduct relevant to the statute s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory. 20

29 Case , Document , 05/08/2018, , Page29 of 46 RJR Nabisco, U.S., 136 S.Ct. at The appellees contend that the focus of Bankruptcy Code Section 550(a)(2) is on the subsequent transfers. Although recovery is made possible under Section 550 only if a transfer is avoided under Section 548, among other sections of Title 11, Appellees argue that avoidance and recovery are governed by separate provisions and therefore, must be analyzed separately. Jt. Br. at 46. In support of their position, Appellees erroneously rely upon RJR. 6 In RJR, the Court held that, in order for RICO to apply extraterritorially, the predicate statutory provision at issue must apply extraterritorially. RJR, 136 S. Ct. at While recognizing that an extraterritoriality analysis must be conducted for each provision, the Court also noted that RICO required that each predicate offense be indictable. Id. In other words, RICO s explicit terms require a provision-by-provision analysis of predicate offenses, and those that are not 6 In their attempt to sever Sections 548 and 550 from the Bankruptcy Code s understanding of property of the estate and of the debtor, Appellees also rely heavily upon this Court s decision in Picard v. Fairfield Greenwich Ltd., 762 F.3d 199 (2d Cir. 2014). In Fairfield Greenwich, the Court upheld denial of the Trustee s request to enjoin third party actions to the extent that they laid claim to the same pool of funds that the Trustee sought to avoid and recover as a fraudulent transfer from BLMIS. Id. at 212. The Court, however, did not determine that the lower courts could not have jurisdiction over the property at issue, and it did not address extraterritoriality at all. Instead, its analysis focused on whether the Trustee had satisfied the requirements for a preliminary injunction amidst the uncertainty of ongoing litigation far from resolution. Id. The Court, however, recognized that the Trustee could have, at least, contingent interests in the property at issue and that the third party actions could possibly harm the BLMIS estate by preventing the Trustee from collecting on a judgment. Id. at

30 Case , Document , 05/08/2018, , Page30 of 46 indictable based upon extraterritorial activity cannot be used as predicates for extraterritorial application of RICO. When the Court later found that RICO s private cause of action did not apply to foreign injuries, it noted that the private cause of action was more limited by its own terms than RICO s substantive law and that such a private cause of action raises separate extraterritoriality concerns. Id. at Importantly, as previously noted, the Court still held that an express statement of extraterritorial effect is not necessary and that context matters. In contrast with RICO, the Bankruptcy Code is more unified, and the sections must be read together in order to give them full effect. See Note Holders v. Large Private Beneficial Owners (In re Tribune Company Fraudulent Conveyance Litigation), 818 F.3d 98, 120 (2d Cir. 2016) ( A search for legislative purpose is heavily informed by language, and analyzing all the language of a provision and its relationship to the [Bankruptcy] Code as a whole is preferable to using literalness here and perceived legislative purpose (without regard to language) there as needed to reach particular results. ), petition for cert. filed sub nom., Deutsche Bank Tr. Co. Ams. v. Robert R. McCormick Foundation (No ); Mastan v. Salamon (In re Salamon), 854 F.3d 632, 636 (9th Cir. 2017) ( When interpreting a provision of the bankruptcy code, we look to its context and... place in the overall statutory scheme. (quoting Danielson v. Flores (In re Flores), 735 F.3d 855, 859 (9th Cir. 22

31 Case , Document , 05/08/2018, , Page31 of )). [C]ourts must be mindful, particularly when examining the Bankruptcy Code, that statutory interpretation is a holistic endeavor. Consequently, courts must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy. In re KB Toys Inc., 736 F.3d 247, 251 (3d Cir. 2013) (quoting Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d Cir. 2003) (en banc)). Identification of the focus of Section 550 necessarily requires consideration of the avoidance sections, including Section 548. Section 548 must look to Section 541 in order to determine what an interest of the debtor in property is, and in turn, how such an interest is part of the Estate wherever located and by whomever held. 11 U.S.C. 541(a). As the Supreme Court held in interpreting the Bankruptcy Code, Statutory construction is a holistic endeavor. A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme-because the same terminology is used elsewhere in a context that makes its meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law. United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988) (internal citations omitted). Section 550 cannot be read in a vacuum but 23

32 Case , Document , 05/08/2018, , Page32 of 46 rather must be read together with other provisions for it to have meaning and purpose. While the focus of Section 550 cannot be analyzed without reference to the applicable avoidance provisions, equally critical is that the focus of the statute be done through the lens of the charging statute. United States v. Prevezon Holdings, Ltd., 251 F. Supp. 3d 685, 692 (S.D.N.Y. 2017). In these cases, SIPA is the charging statute, and as such, it is an indispensable part of the analysis. Section 550 would not apply but for SIPA Section 78fff(b). Section 78fff(b) makes specified provisions of Title 11, including those in Chapter 5 of Title 11, applicable, but only to the extent consistent with SIPA. To be consistent with SIPA, Section 550 must be construed so that it does not substantially impede the fair and effective operation of SIPA without providing significant countervailing benefits. SIPC v. Charisma Sec. Corp., 506 F.2d 1191, 1195 (2d Cir. 1974). See Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 286 B.R. 109, 129 (Bankr. D. Minn. 2002) ( While many provisions of the Bankruptcy Code generally apply, where SIPA is inconsistent with the Bankruptcy Code, it is the specific provisions of SIPA that control. ), aff d, 2003 WL (D. Minn. Apr. 7, 2003), aff d, 371 F.3d 397 (8 th Cir. 2004); and SIPC Br. at 42. Construing the focus of Section 550 to place stolen customer property beyond the reach of the Trustee because the property has been sent abroad clearly 24

33 Case , Document , 05/08/2018, , Page33 of 46 is contrary to the purposes of SIPA and the avoidance provisions available to further those purposes. SIPA seeks to recover customer property for customers, not to be a means for further misuse. As the Bankruptcy Court stated in Official Comm. Of Unsecured Creditors v. Bahrain Islamic Bank (In re Arcapita Bank B.S.C.(c), 575 B.R. 229, 245 (Bankr. S.D.N.Y. 2017), reconsideration den., 2018 WL (Bankr. S.D.N.Y. Feb. 5, 2018), with regard to the focus generally of the avoidance and recovery provisions under Title 11: The Supreme Court has instructed courts to target [their] inquiry on the focus of congressional concern, or, in other words, the transactions that the statute seeks to regulate. Courts in this jurisdiction have held that the focus of the [Bankruptcy Code s] avoidance and recovery provisions is the initial transfer that depletes the property that would have become property of the estate. ; accord, Begier v. Internal Revenue Serv., 496 U.S. 53, 58 (1990) ( [T]he purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate the property available for distribution to creditors. ); French v. Liebmann (In re French), 440 F.3d 145, 154 (4 th Cir. 2006) ( [T]he Code s avoidance provisions protect creditors by preserving the bankruptcy estate against illegitimate depletions. ) That analysis is even more meaningful in a SIPA context. The focus of the avoidance and recovery provisions at issue, against the background of SIPA, its provisions and purposes, must be on the initial transfers that deplete the bankruptcy estate and not on the recipient of the transfers or the subsequent transfers. Picard v. Bureau of Labor Insurance (In re Bernard L. Madoff),

34 Case , Document , 05/08/2018, , Page34 of 46 B.R. 501, 524 (Bankr. S.D.N.Y. 2012) (SPA-895). See SIPA Br. at 40-41, 48-54, The Ponzi scheme occurred in the U.S., and the initial transfers from the Debtor were in the U.S. Because the conduct relevant to the focus of the Title 11 provisions took place in the U.S., the application of the provisions was domestic, notwithstanding that the subsequent conduct took place abroad. RJR, U.S., 136 S. Ct. at See Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012) (that a buyer and seller in a securities transaction are both foreign entities does not establish that the transaction cannot be considered domestic). As this Court aptly observed, to conclude otherwise, would allow unscrupulous securities dealers to design their transactions with their victims so as to stay on the side of the line that is outside the reach of the statute. Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, 763 F.3d 198, 221 (2d Cir. 2014) (Leval, J., concurring). V. NO DEFERENCE IS DUE AS A MATTER OF COMITY The appellees contend that the District Court and the Bankruptcy Court engaged in an exhaustive analysis in concluding, as a matter of comity, that the appellees were more entitled to the stolen customer monies than the customers from whom the monies were stolen. Jt. Br. at 65. Not only was the analysis of the record unsupported, but the decision to defer to a foreign court was baffling when, 26