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`UNITED STATES BANKRUPTCY COURT
`SOUTHERN DISTRICT OF NEW YORK
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`In re:
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`BERNARD L. MADOFF INVESTMENT
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`SECURITIES LLC,
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`Debtor.
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`IRVING H. PICARD, Trustee for the Liquidation
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`of Bernard L. Madoff Investment Securities LLC,
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`Plaintiff,
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`STANLEY SHAPIRO, et al.,
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`Defendants.
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`Case No. 08-99000 (SMB)
`Adv. Proc. No. 08-01789 (SMB)
`SIPA LIQUIDATION
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`Adv. Proc. No. 10-05383 (SMB)
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`MEMORANDUM DECISION GRANTING IN PART AND
`DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
`THE TRUSTEE’S SECOND AMENDED COMPLAINT
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`A P P E A R A N C E S:
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`BAKER & HOSTETLER LLP
`Attorneys for Plaintiff, Irving H. Picard,
` Trustee for the Liquidation of
` Bernard L. Madoff Investment Securities LLC
` and the Estate of Bernard L. Madoff
`45 Rockefeller Plaza
`New York, NY 10111
`
`
`David J. Sheehan, Esq.
`Fernando A. Bohorquez, Jr., Esq.
`Torello H. Calvani, Esq.
`Marc E. Hirschfield, Esq.
`Ona T. Wang, Esq.
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`Of Counsel
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`LAX & NEVILLE LLP
`Attorneys for Defendants Stanley Shapiro, Renee Shapiro
` S&R Investment Co., LAD Trust, David Shapiro,
` Rachel Shapiro, David Shapiro 1989 Trust,
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` Leslie Shapiro Citron, Leslie Shapiro 1985 Trust,
` Trust F/B/O [A.J.C.], [K.F.C.], and [L.L.C.],
` Kenneth Citron, Trust F/B/O [W.P.S.] & [J.G.S.]
`1450 Broadway, 35th Floor
`New York, NY 10018
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`Barry R. Lax, Esq.
`Brian J. Neville, Esq.
`Gabrielle J. Pretto, Esq.
`Raquel Terrigno, Esq.
`Of Counsel
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`STUART M. BERNSTEIN
`United States Bankruptcy Judge:
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`Defendant Stanley Shapiro and members of his family owned and/or controlled multiple
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`accounts with Bernard L. Madoff Investment Securities LLC (“BLMIS”). For nearly thirty years
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`before it collapsed, BLMIS made numerous transfers to the owners of these accounts. The
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`BLMIS trustee, Irving H. Picard (the “Trustee”), has sued Stanley Shapiro, his family and their
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`trusts (collectively, the “Defendants”) as initial transferees and subsequent transferees to avoid
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`and recover these transfers. (See Second Amended Complaint, dated July 8, 2014 (“SAC”) (ECF
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`Doc. # 33).)
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`The Defendants have moved to dismiss the SAC. For the reasons that follow, the
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`Defendants’ motion is denied with respect to Count I, granted in part and denied in part with
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`respect to Counts II through VII and granted with respect to Counts VIII through XI.
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`BACKGROUND
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`The Ponzi Scheme1
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`The background information is taken from the well-pleaded factual allegations of the
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`I.
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`SAC and other information that the Court may consider on a motion to dismiss for failure to state
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`a claim. Bernard L. Madoff, through BLMIS, operated a Ponzi scheme inducing investors to
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`open discretionary trading accounts with BLMIS for the ostensible purpose of buying and selling
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`securities. Madoff purported to invest in a basket of stocks within the Standard & Poor’s 100
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`Index (“S&P 100 Index”) that was intended to mimic the S&P 100 Index. (¶ 22.)2 As a hedge,
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`BLMIS would sell call options and buy put options on the S&P 100 Index. (Id.) Madoff
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`supposedly timed the purchases and sales to maximize the strategic timing of trades, and at
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`times, the funds would be out of the market and completely invested in U.S. Treasury securities.
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`(¶ 23.) None of this actually happened. No securities were purchased, and instead, BLMIS used
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`the money invested by BLMIS customers to make distributions to other BLMIS customers. (¶
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`24.)
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`Madoff was arrested on December 11, 2008 (the “Filing Date”). (¶ 11.)
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`Contemporaneously, the Securities and Exchange Commission initiated a fraud action against
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`him. (Id.) Upon application by the Securities Investor Protection Corporation (“SIPC”) made
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`pursuant to the Securities Investor Protection Act of 1970 (“SIPA”), 15 U.S.C. §§ 78aaa, et seq.,
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`the District Court appointed the Trustee, and removed the case to this Court. (¶ 12.) Madoff
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`
`1
`Headings are derived from the SAC. They are descriptive only, and do not necessarily imply the Court’s
`view of the allegations.
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`The parenthetical citations to paragraph numbers refer to the paragraphs in the SAC.
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`3
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`2
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`pleaded guilty on March 12, 2009 to an 11-count criminal information, admitting he “operated a
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`Ponzi scheme through the investment advisory side of [BLMIS].” (¶ 16.)
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`II.
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`The Defendants
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`
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`Stanley Shapiro (“Stanley”) and his wife Renee Shapiro (“Renee,” and together with
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`Stanley, the “Shapiros”) are New York City residents. (¶ 30.) Leslie Shapiro Citron (“Leslie”)
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`and David Shapiro (“David”) are the Shapiros’ daughter and son, respectively. (¶¶ 32-33.)
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`Rachel Shapiro (“Rachel”) is David’s wife, (¶ 32), and Kenneth Citron (“Kenneth”) is Leslie’s
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`husband. Kenneth and Leslie are sometimes referred to collectively as “Citrons”. (¶ 33.)
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`The Shapiros are general partners of S&R Investment Co. (“S&R”), a New York
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`partnership, (¶ 31), and the trustees of (i) the LAD Trust, established for the benefit of their
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`children, (¶ 34), (ii) the David Shapiro 1989 Trust (the “David Trust”) and (iii) the Leslie
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`Shapiro 1985 Trust (the “Leslie Trust”). (¶ 35.) David is the sole trustee of Trust f/b/o [J.G.S.]
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`and [W.P.S.], David’s and Rachel’s children (the “Shapiro Children’s Trust”), (¶ 36), and
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`Kenneth is the trustee of the Trust f/b/o [A.J.C.], [K.F.C.], [L.C.C.], Kenneth’s and Leslie’s
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`children (the “Citron Children’s Trust” and together with the “Shapiro Children’s Trust,” the
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`“Children’s Trusts”). (¶ 37.)
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`S&R, the David Trust, the Leslie Trust, David, Leslie and Kenneth received transfers
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`from BLMIS within the six years preceding the Filing Date, and are sometimes referred to
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`collectively as the “Initial Transferees.” According to the SAC, Stanley, Renee and LAD Trust
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`also received initial transfers from BLMIS, (see ¶ 106), presumably more than six years before
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`the Filing Date, and the Trustee seeks to recover those transfers pursuant to Count VII of the
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`SAC. These three are sometimes referred to collectively in this context as the “Other Initial
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`Transferees.”
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`The Defendant subsequent transferees include Stanley, Renee, the LAD Trust, David,
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`Rachel, Leslie, Kenneth, the Leslie Trust, the David Trust and the Children’s Trusts.
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`III.
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`The BLMIS Accounts
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`The SAC lists twenty-four accounts that the Defendants held over the years with BLMIS
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`(collectively, the “Accounts”). (SAC, Ex. A.) The following accounts received initial transfers
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`aggregating approximately $41 million within six years of the Filing Date (the “Six Year
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`Period”), of which $39,939,486 constituted fictitious profits (¶ 108):
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`BLMIS Account
`No.
`1C1251
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`1S0306
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`1SH014
`(formerly 103013)
`1SH028
`(formerly 103065)
`1SH030
`(formerly 103066)
`1SH171
`1SH172
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`Defendants’ Accounts Table
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`Description3
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`Addressed to:
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`6-year transfers
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`Leslie Shapiro Citron Kenneth
`Citron J/T WROS
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`Citrons’ address
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`$270,000
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`David Shapiro
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`S&R Investment Co. Stanley
`Shapiro
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`David Shapiro Trust
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`Leslie Shapiro Citron Trust
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`Leslie S. Citron
`S&R Investment and Co c/o
`Stanley Shapiro
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`David’s address with
`copies of statements
`sent to Stanley’s home
`address
`Stanley’s home address
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`Stanley’s home address
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`Stanley’s home address
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`Not specified
`Stanley’s home address
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`$5,088,989
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`$17,350,000
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`$1,420,000
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`$2,170,000
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`$4,527,497
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`$10,240,000
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`3
`The names of the accounts are listed exactly as they appear in the SAC, Exhibit A.
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` (Id. at ¶¶ 39-45, Ex. B.) The SAC refers to the Accounts 1SH014, 1SH028, and 1SH030
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`together with Account 1SH079 (which was held in the name of S&R (¶ 40) and did not receive
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`any initial transfers within six years of the Filing Date) as the Core Accounts. (¶ 41.)
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`The balance of the approximately $54 million transferred by BLMIS to the Defendants
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`was presumably transferred more than six years before the Filing Date.
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`IV.
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`Stanley Knew of Fraud at BLMIS
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`A. Stanley Enjoyed Unusual Access to Madoff and Others Involved in the
`Investment Advisory Business
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`Stanley enjoyed a close relationship with Madoff. Stanley worked in the garment
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`industry, eventually serving as president of Kay Windsor, Inc. (¶ 50.) Kay Windsor, Inc. was
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`owned by Carl Shapiro (no relation), who recommended that Stanley invest with BLMIS.
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`(¶¶ 50-51.) Madoff hired Stanley in 1995 as a salaried, part-time consultant and proprietary
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`trader at BLMIS with a 19th floor office adjacent to Madoff’s. (¶ 52.) Stanley was not a
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`registered trader, but traded fashion industry stocks with BLMIS capital to varying results.
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`(¶ 53.)
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`At Madoff’s direction, Stanley hired Paul Konigsberg in 1996 to provide tax and other
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`advice relating to the Accounts. (¶ 54.) Konigsberg pleaded guilty in 2014 to a three-count
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`superseding criminal information for, among other things, falsifying BLMIS’s books and
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`records, and admitted at his plea hearing that he conspired with others to falsify the books and
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`records of BLMIS and to obstruct the administration of federal tax law. (Id.) Konigsberg
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`regularly provided Stanley with schedules of the purported gains and losses in the Core
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`Accounts. (¶ 55.) Stanley met frequently with Madoff and spoke with him by telephone “dozens
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`of times.” (¶ 56.) The Shapiros travelled with Madoff and his wife on a private jet more than
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`twenty-five times between 2002 and 2008. (Id.)
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`Annette Bongiorno, a BLMIS employee who was later convicted of fraud and other
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`crimes in connection with Madoff’s Ponzi scheme, (¶ 19), worked on BLMIS’s 17th floor from
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`where she personally managed the Core Accounts and worked closely with Stanley. (¶¶ 4, 57.)
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`Stanley visited the 17th floor more than 150 times between 2005 to 2008. (¶ 57.)
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`B. The Accounts Earned Implausible Rates of Return
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`The Accounts reported impossible rates of return. The Accounts aggregated $1.75
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`million as of March 1981. (¶ 59.) The family deposited less than $2 million into the Accounts
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`during the subsequent 27 years. Yet more than $37 million was thereafter withdrawn (most often
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`entirely on margin) from several accounts held by S&R (Nos. 1-03069-1-8, 1-03058-1-1, 1-
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`03009-1-1, 1-03013-3-0 (which was renumbered 1SH014), 1SH079, and 1SH172), and the
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`accounts still held $50 million in equity in November 2008. (Id.) Similarly Leslie and David
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`withdrew $13 million from their accounts (Nos. 1SH028, 1SH030, 1SH171, and 1S0306) that
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`Stanley and Renee established for them. (Id.)
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`The rates of return were consistently and implausibly high. For many years, BLMIS
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`reported to Stanley that its “benchmark rate of return” for each of the Core Accounts was
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`29.00% (later lowered to 20% in 2003). (¶ 61.) Nevertheless, BLMIS reported rates of return
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`higher than the benchmark rate. S&R Account 1SH014 reportedly achieved a positive rate of
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`return every year from 1999 through 2008. In 1999, BLMIS reported that the account achieved
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`an “annualized return” of more than 68%. (Id.)
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`C. Stanley Closely Monitored and Managed His Family’s Accounts and Regularly
`Directed BLMIS to Generate Specific Gains and Losses
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`i. Stanley Could “Cancel” Trades Reported in the Core Accounts
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`Stanley directed BLMIS and Bongiorno to cancel purported trades previously reported on
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`the Core Accounts’ monthly statements. (¶ 63.) He faxed Konigsberg on February 25, 2000,
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`pointing him to the January statements “indicating trades covering short positions and I believe
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`creating losses.” (Id. fig.1, n.1) (emphasis in original).) Even though he was referring to past
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`trades reflected in the previous month’s account statements, he asked, “Why should we do
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`these?” (Id.) In the next sentence, he indicated his “thinking that we would like to cancel these
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`trades. . . . Annette gave me a ‘deadline’ of today.” (Id. (emphasis in original).) Bongiorno told
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`Stanley he could cancel all the trades. (¶ 64.) Stanley cancelled one of the January 2000 trades,
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`and the cancellation appeared on the face of the February 2000 account statement for the S&R
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`account numbered 1SH079. (Id.)
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`ii. Stanley Directed BLMIS to Generate Short-term “Gains” and “Losses” in
`the Core Accounts
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`Near the end of every year, Stanley reviewed his and his family’s purported realized and
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`unrealized gains and losses in the Core Accounts, conveyed through schedules prepared first by
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`his bookkeeper and then by Konigsberg Wolf & Co., to gauge their projected tax liability.
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`(¶ 65.) On numerous occasions, Stanley directed BLMIS to arrange, for tax purposes, that
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`particular “gains” or “losses” be realized in one or more of the Core Accounts. (Id.) Although
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`BLMIS purportedly employed a long-term, buy and hold strategy for Stanley’s accounts,
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`Bongiorno did not sell a long-held position in order to generate a specific gain or loss, and
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`instead, backdated stock sales that were turned around quickly rather than as part of a long-term
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`strategy. (¶ 66.)
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`For example, in a November 10, 2000 note from Stanley to Bongiorno, Stanley requested
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`a “loss of about $50,000” in the S&R Account 1SH014 by selling stock in Abercrombie & Fitch
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`Co. (¶ 67.) Instead, BLMIS generated the requested “loss” by reporting on the November 2000
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`statement for Account 1SH014 that it had purchased a block of Oracle Corp. stock (5,000 shares
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`at $34.50 per share) on October 27, 2000 (which settled on November 1, 2000) and then sold the
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`block at a much lower price ($25.00 per share) just two weeks later for an apparent $47,500 loss.
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`(Id.)
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`In the same November 10 note, Stanley wrote that he needed a “loss of about
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`$100,000/110,000” in Account 1SH030 held by the Leslie Trust and a “loss of about $60,000” in
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`Account 1SH028 held by the David Trust, and suggested that BLMIS sell Proctor & Gamble
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`stock reportedly held in each account. (¶ 68.) In the November 2000 statement for Account
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`1SH030, BLMIS instead reported an intra-month buy and sell of a block of Oracle stock (5,000
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`shares at prices of $34.50 and $25.00) for a $47,000 loss, the same as it had done for S&R
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`Account 1SH014. (Id.) In addition, BLMIS reported for the same account that it had also
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`purchased and sold a block of Gateway, Inc. stock (4,000 shares) at prices ($52.75 and $37.25)
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`within the span of three weeks for an additional $62,000 in losses. (Id.) These transactions
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`reportedly yielded an aggregate loss of $109,000, almost matching the “100,000/110,000” loss
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`Stanley had requested. (Id.) For the David Trust Account 1SH028, BLMIS reported that it had
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`bought and sold a slightly larger block of Oracle stock (6,000 shares) at the same prices as
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`reported in the other Core Accounts ($34.50 and $25.00) resulting in a loss of $57,000, just
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`“about” the $60,000 loss that Stanley had requested. (Id.)
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`A year later, Stanley told Bongiorno in a November 1, 2001 note that he needed a
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`$360,000 gain in S&R Account 1SH014. (¶ 70.) In response, BLMIS reported a purchase of
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`Sabre Holdings stock on October 31 that it sold three weeks later for a $360,770 gain. (Id.)
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`Stanley contacted Bongiorno again on December 12, 2001 to say he needed a $125,000 loss in
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`the same S&R account. (¶ 71.) BLMIS reported a November 30 purchase of Too Inc. that it
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`sold two weeks later for a $124,380 loss. (Id.) BLMIS reported that the transactions had
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`occurred on dates that preceded Shapiro’s request. (Id.)
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`D. During 2002 and 2003, Stanley Caused BLMIS to Fabricate Large Groups of
`Backdated Trades in the Core Accounts
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`i. At Stanley’s Request, BLMIS Fabricated Revised 2002 Monthly
`Statements for the Core Accounts to Reverse Millions in Previously
`Reported Paper Losses
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`During the stock market downturn in 2002, BLMIS’s statements sent to Stanley and
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`Konigsberg reflected minimal trading activity and a decline in value. (¶ 74.) The BLMIS
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`monthly statements indicated that the total value of the Core Accounts dropped by more than $50
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`million through September of 2002. S&R Account 1SH014 alone dropped from approximately
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`$71 million at the start of 2002 to $40 million at the end of September 2002. (¶ 75.) At the same
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`time, the margin balance in S&R Account 1SH014 stood at more than $46 million. (¶¶ 75-76.)
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`Because BLMIS “purchased” securities in the Core Accounts on margin, (¶ 58), the net values of
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`the Core Accounts including the David and Leslie Trust accounts were below zero. (¶ 76.)
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`In late 2002, Stanley met with Madoff. Madoff told Stanley that he would fix the
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`problem and advised Stanley to see Bongiorno. Stanley and Konigsberg subsequently met with
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`Bongiorno on BLMIS’s 17th Floor. (¶ 77.) After the meeting, Bongiorno used a program called
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`STMTPro to generate multiple revised account statements for Stanley after fabricating back-
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`dated short-against-the-box sales4 to eliminate the losses in the 2002 crash. (¶ 78.) For example,
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`S&R Account 1SH014 had reportedly held 345,000 shares of Siebel Systems, Inc. stock which
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`had reportedly lost $11 million between January and October 2002. (¶ 79.) A new January 2002
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`statement reflected a short sale of all the shares (at its $37 peak) which improved the value of the
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`account as of September 2002 by $11 million, wiping out the paper loss. (Id.) BLMIS
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`backdated 25 more trades in this fashion for the 1SH014 account. (Id.)
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`BLMIS also prepared STMTPro statements for 1SH030 and 1SH028, the Core Accounts
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`held, respectively, by the Leslie Trust and the David Trust. The original statements reported that
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`the collective value of the holdings of Broadcom and Intel securities in these accounts had fallen
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`by $5 million between January and September 2002 resulting in unrealized losses totaling $1
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`million. (¶ 80.) BLMIS sent revised statements with newly-fabricated, backdated short sales of
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`Broadcom and Intel that entirely eliminated the $5 million decline in value and turned the unrealized
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`$1 million loss into a nearly $4 million unrealized gain. (Id.) The new STMTPro statements for
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`these three accounts (1SH014 (S&R), 1SH028 (David Trust) and 1SH030 (Leslie Trust)) show
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`multiple fabricated short sales that increased the value in S&R Account 1SH014 by more than
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`$40 million and the David and Leslie Trust Accounts by $12 million in each. (¶ 81 & fig.2.)
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`Stanley and Konigsberg still had the original monthly statements. Before issuing the
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`STMTPro statements to Stanley and Konigsberg, BLMIS asked them to return their original
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`statements. They complied and returned all of their original Core Account monthly statements, (¶
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`82), and BLMIS sent the revised statements. (¶ 78.)
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`A short-against-the-box sale is a short sale of stock one already owns. (¶ 78.)
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`ii. At Stanley’s Request, BLMIS Fabricated Numerous Groups of Trades in
`the Core Accounts in 2003 to Generate Millions in Reported Losses to
`Eliminate an Apparently Huge Tax Liability
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`As a result of the backdated trades, the accounts incurred millions of dollars in tax
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`liability for 2002 and 2003. (¶¶ 84-85.) For example, the Shapiros reportedly realized short-
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`term capital gains of more than $27 million in January of 2003. (¶ 85.) But Stanley did not pay
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`any estimated taxes in the first quarter of 2003, (¶ 86), and wrote to Konigsberg on April 27,
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`2003, “Here is copy of note on details I worked with Annette. Both Bernie + Annette are aware
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`of problems we have. June is target for action [.]” (¶ 86 n.2 (emphasis in original).)
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`Subsequently, Bongiorno and BLMIS began fabricating trades to generate losses to avoid the
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`tax liability. (¶ 87.)
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`a. In the April 2003 statement for the 1SH014 account, BLMIS purportedly bought and sold
`a block of HCA Inc. stock for a $1.5 million loss in two transactions that supposedly
`occurred weeks apart but were nevertheless reported in consecutive transaction numbers.
`(¶ 88.)
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`b. BLMIS reported a short sale of KB Homes stock in May which it covered in June for a
`$3.1 million loss. (Id.)
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`c. In June 2003, BLMIS reported a purchase of National Semiconductor Corp. and a sale in
`July for a $1.5 million loss. (Id.)
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`d. BLMIS reported purchases and sales of Apple Computers Inc., Delta Airlines, Inc. and
`Priceline.com Inc. for a total $2.5 million loss in November 2003. (Id.)
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`e. BLMIS created a subaccount to the 1SH079 Account in late 2003, and reported that the
`subaccount had previously sold Sears Roebuck stock short in March 2003 that it
`supposedly covered in November 2003, generating a loss of $12 million. (¶ 89.)
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`f. BLMIS reported realized gains totaling more than $27 million in January 2003 and $20
`million in losses from March through December 2003, (id., fig. 5), and sent Shapiro
`revised account statements. (¶ 90.) The fabricated losses substantially resolved the
`Shapiros’ tax problems and, instead of owing taxes for 2003, the Shapiros received a
`$629 federal refund. (¶ Id.)
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`The David Trust and Leslie Trust also faced taxable gains in 2003 that were offset by
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`fabricated and backdated short sales. BLMIS reported numerous transactions resulting in losses:
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`one short sale of Amazon stock created a $3 million loss; another of Sony Corp. produced a
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`$635,000 loss. (¶ 91.)
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`The fabricated losses negatively impacted the reported value in the Core Accounts, so
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`Bongiorno boosted the value of the Core Accounts with backdated trades. (¶ 92.) Using the
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`1SH079 account, for instance, Bongiorno issued a STMTPro statement in late 2003 indicating a
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`March 2003 purchase of Genentech, Inc. stock which tripled in value by December. (Id.) This
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`backdated transaction increased the value of the 1SH079 account by $13 million. (Id.) The
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`Konigsberg schedules for the first two quarters of 2003 did not list any Genentech position
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`because Bongiorno used STMTPro to backdate the March trade. (Id.)
`
`E.
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`Customer Claims
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`The Initial Transferees filed a total of seven claims relating to their respective accounts.
`
`(¶ 98; SAC, Ex. A.) The Trustee issued claims determinations denying the claims, (¶ 99), and
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`only Kenneth filed an objection contesting the determination to disallow Claim # 013658 relating
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`to Citron Account 1C1251. (¶ 100.) That objection remains pending. (Id.)
`
`The Children’s Trusts, which held Accounts 1S0540 and 1C1345, respectively, also filed
`
`several claims designated as Customer Claims # 005116 and # 005656, respectively. (¶ 102; SAC,
`
`Ex. A.) These claims also remain unresolved. (¶¶ 103-04.)
`
`F.
`
`The Subsequent Transfers
`
`The Initial Transferees and Other Initial Transferees transferred $53,778,486 of the
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`BLMIS transfers to Stanley, Renee, the LAD Trust, David, the David Trust, the Leslie Trust,
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`Rachel, the Citrons and the Children’s Trusts (collectively, the “Subsequent Transferees”). (¶
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`110.)
`
`VI.
`
`This Adversary Proceeding
`
`
`
`The Trustee commenced this adversary proceeding on December 9, 2010 and filed the
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`SAC on July 8, 2014. The SAC asserts eleven claims for relief summarized in the following
`
`table:
`
`Count
`
`¶¶
`
`Defendant(s)
`
`Description of Claim(s)
`
`1
`
`2
`
`3
`
`4
`
`5
`
`114-19
`
`120-28
`
`129-34
`
`135-40
`
`Initial Transferees Avoid and recover the actual two-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`548(a)(1)(A), 550(a), 551, and 15 U.S.C § 78fff-2(c)(3).
`
`Initial Transferees Avoid and recover the constructive two-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`548(a)(1)(B), 550(a), 551, and 15 U.S.C § 78fff-2(c)(3).
`
`Initial Transferees Avoid and recover the actual six-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`544(b), 550(a), 551, 15 U.S.C § 78fff-2(c)(3), N.Y.
`Debtor and Creditor Law §§ 276, 276-a, 278, 279.
`
`Initial Transferees Avoid and recover the constructive six-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`544(b), 550(a), 551, 15 U.S.C § 78fff-2(c)(3), N.Y.
`Debtor and Creditor Law §§ 273, 278, 279.
`
`141-46
`
`Initial Transferees Avoid and recover the constructive six-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`
`
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`544(b), 550(a), 551, 15 U.S.C § 78fff-2(c)(3), N.Y.
`Debtor and Creditor Law §§ 274, 278, 279.
`
`147-52
`
`Initial Transferees Avoid and recover the constructive six-year fraudulent
`transfers, and disallow Customer Claim # 013658 and
`Related Account Customer Claims # 005116 and #
`005656 (until repaid), under 11 U.S.C. §§ 502(d)
`544(b), 550(a), 551, 15 U.S.C § 78fff-2(c)(3), N.Y.
`Debtor and Creditor Law §§ 275, 278, 279.
`
`153-59
`
`Initial Transferees
`and Other Initial
`Transferees
`
`Avoid and recover the undiscovered fraudulent transfers
`(initial transfers), and disallow Customer Claim #
`013658 and Related Account Customer Claims #
`005116 and # 005656 (until repaid), under 11 U.S.C.
`§§ 502(d) 544(b), 550(a), 551, 15 U.S.C § 78fff-2(c)(3),
`N.Y. Debtor and Creditor Law §§ 276, 276-a, 278, 279,
`N.Y. C.P.L.R. 203(g), 213(8).
`
`160-66 Subsequent
`Transferees
`
`Recover the subsequent transfers pursuant 11 U.S.C.
`§§ 550(a), 551, 15 U.S.C § 78fff-2(c)(3), N.Y. Debtor
`and Creditor Law §§ 276-a, 278.
`
`167-71 Citrons and the
`Children’s Trust
`
`Disallow any and all claims against BLMIS based on
`their knowledge of the fraud, under 11 U.S.C. § 502(a),
`502(b)(1), 15 U.S.C. § 78fff(b), 78fff-1(a).
`
`172-77 Citrons and the
`Children’s Trust
`
`Equitable subordination of any and all claims under 11
`U.S.C. §§ 105(a), 510(c).
`
`178-83 Citrons and the
`Children’s Trust
`
`Equitable disallowance of any and all claims due to
`Defendants’ failure to deal fairly and in good faith.
`
`The Defendants have moved to dismiss the SAC on several grounds. In their
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`
`
`memorandum, (Defendants’ Memorandum of Law In Support of Their Motion to Dismiss the
`
`Trustee’s Second Amended Complaint, dated Aug. 28, 2014 (“Defendants’ Memo”) (ECF Doc #
`
`38)) they primarily argue that the safe harbor, 11 U.S.C. § 546(e), bars all of the avoidance
`
`claims other than the intentional fraudulent transfer claim under 11 U.S.C. § 548(a)(1)(A), and §
`
`548(c) bars all of the avoidance claims, including the claim under 11 U.S.C. § 548(a)(1)(A),
`
`because the Initial Transferees received the initial transfers in good faith and for value. The
`
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`Defendants also argue that Stanley’s knowledge cannot be imputed to the other Defendants, the
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`SAC fails to plead sufficient facts relating to inter-account transfers and subsequent transfers,
`
`and the Court should dismiss the equitable disallowance and equitable subordination claims.
`
`DISCUSSION
`
`A.
`
`Standards Governing the Motion
`
`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
`
`
`
`
`
`accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556
`
`U.S. 662, 678 (2009) (citation omitted); accord Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
`
`(2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the
`
`court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
`
`Iqbal, 556 U.S. at 678; accord Twombly, 550 U.S. at 570. Courts do not decide plausibility in a
`
`vacuum. Determining whether a claim is plausible is “a context-specific task that requires the
`
`reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.
`
`“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a
`
`sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678; Twombly, 550
`
`U.S. at 570. “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s
`
`liability, it ‘stops short of the line between possibility and plausibility of “entitlement to relief.”’”
`
`Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557).
`
`
`
`Iqbal outlined a two-step approach in deciding a motion to dismiss. First, the court
`
`should begin by “identifying pleadings that, because they are no more than [legal] conclusions,
`
`are not entitled to the assumption of truth.” Iqbal, 556 U.S. at 679. “Threadbare recitals of the
`
`elements of a cause of action supported by conclusory statements” are not factual. See id. at 678.
`
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`Second, the court should give all “well-pleaded factual allegations” an assumption of veracity
`
`and determine whether, together, they plausibly give rise to an entitlement of relief. Id. at 679.
`
`
`
`In deciding the motion, “courts must consider the complaint in its entirety, as well as
`
`other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
`
`particular, documents incorporated into the complaint by reference, and matters of which a court
`
`may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
`
`(2007). The court may also consider documents that the plaintiff relied on in bringing suit and
`
`that are either in the plaintiff’s possession or that the plaintiff knew of when bringing suit.
`
`Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); Cortec Indus., Inc. v. Sum
`
`Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992); McKevitt v.
`
`Mueller, 689 F. Supp. 2d 661, 665 (S.D.N.Y. 2010). Where the complaint cites or quotes from
`
`excerpts of a document, the court may consider other parts of the same document submitted by
`
`the parties on a motion to dismiss. 131 Main St. Assocs. v. Manko, 897 F. Supp. 1507, 1532 n.23
`
`(S.D.N.Y. 2010).
`
`B.
`
`Counts I through VII (Avoidance Claims)
`
`
`
`
`
`1.
`
`Introduction
`
`Coun