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Report of Irving Picard, the court-appointed trustee for overseeing Madoff bankruptcy claims.

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  • 1.Baker & Hostetler LLP 45 Rockefeller Plaza New York, NY 10111 Telephone: (212) 589-4200 Facsimile: (212) 589-4201 Irving H. Picard Email: ipicard@bakerlaw.com David J. Sheehan Email: dsheehan@bakerlaw.comAttorneys for Irving H. Picard, Esq. Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC And Bernard L. Madoff UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORKSECURITIES INVESTOR PROTECTIONAdv. Pro. No. 08-1789 (BRL)CORPORATION, Plaintiff-Applicant,SIPA Liquidation v.(Substantively Consolidated)BERNARD L. MADOFF INVESTMENTSECURITIES LLC, Defendant. In re: BERNARD L. MADOFF, Debtor. TRUSTEES FIRST INTERIM REPORT FOR THE PERIOD DECEMBER 11, 2008 THROUGH JUNE 30, 2009 300016705

2. TABLE OF CONTENTSI.INTRODUCTION ...............................................................................................1II. BACKGROUND .................................................................................................2III.PROCEDURAL HISTORY .................................................................................5IV. LIQUIDATION PROCEEDING..........................................................................5V.ADMINISTRATION OF THE ESTATE..............................................................7 A. RETENTION OF PROFESSIONALS ............................................................7 B. MARSHALLING AND LIQUIDATION OF ESTATE ASSETS ...................8 C. WIND-DOWN OF ESTATE OPERATIONS ...............................................15 VI. FINANCIAL CONDITION OF ESTATE ..........................................................17VII.CLAIMS ADMINISTRATION..........................................................................18 A. CUSTOMER CLAIMS ................................................................................18 B. CLAIMS OF GENERAL CREDITORS .......................................................26 VIII. TRUSTEE INVESTIGATION...........................................................................26 A. INTERNATIONAL PROCEEDINGS ..........................................................27 B. FEEDER FUNDS.........................................................................................30 C. OTHER CORPORATE ASSETS .................................................................30 D. EVIDENCE GATHERING ..........................................................................31 IX. BANKRUPTCY COURT PROCEEDINGS .......................................................32 A. THIRD-PARTY ACTIONS AGAINST THE TRUSTEE .............................32 B. THIRD PARTY ACTIONS BY THE TRUSTEE .........................................34 C. SUBSTANTIVE CONSOLIDATION ..........................................................41 D. OBJECTIONS TO CLAIMS DETERMINATIONS .....................................42 E. JOINT PROVISIONAL LIQUIDATORS.....................................................43 F. MOTIONS TO INTERVENE.......................................................................43 X.CONCLUSION..................................................................................................44 300016705 3. TO THE HONORABLE BURTON R. LIFLAND, UNITED STATES BANKRUPTCY JUDGE: Irving H. Picard, Esq. (the Trustee), as trustee for the substantively consolidatedliquidation proceeding of Bernard L. Madoff Investment Securities LLC (BLMIS) and BernardL. Madoff (Madoff and together with BLMIS, each a Debtor and collectively, theDebtors), respectfully submits his First Interim Report (this Report) pursuant to section78fff-1(c) of the Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa et seq. (SIPA),1and in accordance with the terms of the Order on Application for an Entry of an OrderApproving Form and Manner of Publication and Mailing of Notices, Specifying Procedures ForFiling, Determination, and Adjudication of Claims; and Providing Other Relief entered onDecember 23, 2008 (the Housekeeping Order or Claims Procedures Order) (Docket No. 12).Pursuant to the Housekeeping Order, the Trustee shall file additional interim reports at leastevery six (6) months hereafter. This Report covers the period from December 15, 2008 throughJune 30, 2009 (the Report Period).I. INTRODUCTION 1.Almost seven months have passed since the Trustee was appointed to liquidate theestate of the largest Ponzi scheme ever conducted. During this initial Report Period, the Trusteeand his professionals have made significant headway into the investigation of Madoffs fraud.As of June 30, because of efforts made by Trustee and his professionals, over $1,088,507,818has been recovered for the estate. In addition, the Trustee has filed eight (8) avoidance actionsseeking to recover over $13.7 billion in funds from various feeders funds and related parties. 2.During the Report Period, the Trustee initiated a claims process for all customersand creditors of BLMIS. As described in further detail below, within the Report Period the 1 For convenience, subsequent references to SIPA will omit 15 U.S.C. ____. 300016705 4. Trustee received over 13,705 claims from potential customers and 212 claims from othercreditors of the estate.2 3. Given the task of liquidating BLMIS and coordinating efforts with federal andstate authorities investigating the criminal matter, the Trustee has also dealt with issues spanninga broad spectrum of legal and administrative specialties and disciplines. The Trustees ability tocall on the resources of his counsel in such areas as corporate, real estate, bankruptcy,employment, tax, banking, litigation (and others) has been of material assistance in achievingresults, establishing protocols, and directing the efforts of the Trustees financial professionals.Beyond issues that may be handled pursuant to work plans or protocols, many issues that couldnot have been anticipated were especially challenging during the initial investigative phase ofthis proceeding. 4. This Report is meant to provide an overview of all the efforts engaged in by theTrustee and his team of professionals and to summarize all of the results achieved, as well aschallenges faced by the Trustee during the Report Period. II.BACKGROUND 5. BLMIS was founded by Madoff in 1960 and engaged in three primary types ofbusiness: market making, proprietary trading and investment advisory services. BLMIS wasregistered with the SEC as a broker-dealer and beginning in 2006 as an investment advisor.Pursuant to such registration as a broker-dealer, BLMIS was a member of the Securities InvestorProtection Corporation (SIPC).BLMIS was also a member of the Financial IndustryRegulatory Authority (FINRA), formerly known as the National Association of SecuritiesDealers, Inc. (NASD). 2 As of the date of the filing of this Report, the Trustee has received over 15,400 customer claims and over 400 claims from other creditors. 300016705 2 5. 6. On December 11, 2008, Madoff was arrested by the FBI in his Manhattan homeand was criminally charged with a multi-billion dollar securities fraud scheme in violation of 15U.S.C. 78j(b), 78ff, and 17 C.F.R. 240.10b-5 in the United States District Court for theSouthern District of New York (District Court), captioned United States v. Madoff (No. 08 CV2735) (the Criminal Case).7. Also on December 11, 2008 (the Filing Date)3, the Securities and ExchangeCommission (SEC) filed a complaint in the District Court against defendants Madoff andBLMIS (No. 08 CV 10791) (the Civil Case). The complaint alleged that the defendantsengaged in fraud through investment advisor activities of BLMIS.8. Based on allegations brought by the SEC against Madoff and BLMIS in the CivilCase, on December 12, 2008, the Honorable Louis L. Stanton of the District Court entered anorder which appointed Lee S. Richards, Esq. as receiver for BLMIS (the Receiver).9. On December 18, 2008, the District Court entered the Order on Consent ImposingPreliminary Injunction, Freezing Assets and Granting Other Relief Against Defendants (thePreliminary Injunction Order). Among other things, the Preliminary Injunction Order clarifiedthat the Receivers authority was limited to assets of the London entity, Madoff SecuritiesInternational Ltd.10.On February 26, 2009, the Receiver submitted a report and application toTerminate the Receivership to the District Court. After receipt of submissions by the Trustee, 3 [1] Section 78lll(7)(B) of SIPA states that the filing date is the date on which an application for a protective decree is filed under 78eee(a)(3), except where the debtor is the subject of a proceeding pending before a United States court in which a receiver, trustee, or liquidator for such debtor has been appointed and such proceeding was commenced before the date on which such application was filed, the term filing date means the date on which such proceeding was commenced. Section 78lll(7)(B). Thus, even though the Application for a protective decree was filed on December 15, 2008, the Filing Date in this action is on December 11, 2008. 3000167053 6. the SEC, and the Department of Justice, and after a hearing on March 23, 2009, the DistrictCourt issued an order discharging the Receiver and terminating the receivership.11.At a plea hearing (the Plea Hearing) on March 12, 2009 in the Criminal Action,Madoff pled guilty to an 11-count criminal information, which counts included securities fraud,money laundering and theft and embezzlement, filed against him by the United States AttorneysOffice for the Southern District of New York. At the Plea Hearing, Madoff admitted that heoperated a Ponzi scheme through the investment advisory side of [BLMIS]. (Plea Hrg Tr. at23:14-17.) Additionally, Madoff asserted [a]s I engaged in my fraud, I knew what I was doing[was] wrong, indeed criminal. (Id. at 23:20-21.) Madoff filed a plea allocution describingsome of the details of his fraud (the Allocution), No. 09-213 [Dkt. No. 50].12.Madoff represented to clients and prospective clients that he would