Bernard L. Madoff orchestrated a massive Ponzi scheme through the investment advisory unit of Bernard L. Madoff Investment Securities LLC ("BLMIS").   After the scheme collapsed, Irving H. Picard (the "Trustee") was appointed trustee for BLMIS pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. ("SIPA"). Under SIPA, a trustee is empowered to "recover" (or claw back) money paid out by the debtor, as long as the money "would have been customer property" had the payment not occurred, and the transfers could be avoided under the Bankruptcy Code.  Id. § 78fff‐2(c)(3).

Section 546(e) of the Bankruptcy Code, in turn, establishes an important exception to a trustee's clawback powers.  See 11 U.S.C. § 546(e). Section 546(e) provides generally that certain securities‐ related payments, such as transfers made by a stockbroker "in connection with a securities contract," or "settlement payment[s]" cannot be avoided in bankruptcy.

Invoking his clawback powers, the Trustee sued hundreds of BLMIS customers who withdrew more from their accounts than they had invested and, as a result, profited (whether knowingly or not) from Madoff's scheme.  The Trustee contends that, if BLMIS had not preferentially paid these customers, the money would have been customer property available to be distributed ratably to all customers, including those who, over time, had withdrawn less than they had invested.

Several defendants moved to dismiss the actions on the ground that the payments received by BLMIS customers were securities‐related payments that cannot be avoided under § 546(e). The dispositive issue presented by this appeal is whether the payments that BLMIS made to its customers are the type of securities‐related payments that are shielded by § 546(e) from clawback.

The United States District Court for the Southern District of New York (Rakoff, J.) concluded that the payments were shielded by § 546(e) and dismissed the relevant claims under Federal Rule of Civil Procedure 12(b)(6).  We agree and therefore we affirm  

Certainly SIPC and the Trustee are correct that these transfers were also made "in connection with" a Ponzi scheme and, as a result, were fraudulent. See id. at 29. Indeed, BLMIS's conduct was in flagrant breach of the agreements it made with its customers.  But the fact that a payment was made in connection with a Ponzi scheme does not mean that is was not at the same time made in connection with a (breached) securities contract.    After all, a transfer can be connected to, and can be made in relation to, multiple documents or purposes simultaneously.

We also conclude that the transfers constituted "settlement payments," which provides another basis to shield the transfers from avoidance under § 546(e).    As described above, § 546(e) provides that a trustee "may not avoid a transfer that is a . . . settlement payment, as defined in . . . this title, made by [a] . . . stockbroker." Section 741(8) defines "settlement payment" as a "preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade."

Finally, we disagree with the Trustee's contention that affirming the district court's decision would be inconsistent with our decision in In re BLMIS, 654 F.3d 229 (2d Cir. 2011).  There, we faced the question of how to calculate each BLMIS customer's "net equity," as that term is defined in SIPA.  Id. at 233. We said that it would be "absurd" to calculate customers' net equity using BLMIS's fictitious account statements, because that would "have the . . . effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations." Id. at 235. According to the Trustee, this case is similar.    The Trustee argues that, to allow customers to retain the fictitious profits Madoff arbitrarily bestowed on them amounts to giving legal effect to his fraud.  Trustee's Br. 51‐55.