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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-
/
"i
SECURITIES
COMMISSION, Plaintiff,
3
AND EXCHANGE
v. AVELLINO 6~ BIENES, FRANK J.
92 Civ.~8314
(JES)
7
8
AVELLINO and MICHAEL S. BIENES,
Defendants.
10
New
York,
N.
Y.
January
11
19,
1993
12 Before:
C
13
HON.
14
JOHN
E.
SPRIZZO, District Judge
15
16
17
APPEARANCES
18
KATHRYN
ASHBAUGH,
19 20
21
22
Attorney
for
plaintiff
SQUADRON,EUENOFF, PLESENT 8 LEHRER Attorneys for defendants
BY: IRA
DORI
LEE
SORKIW
HANSWIRTH
23
RICHARDS SPEARSKIBBE b ORBE Attorneys for the Trustee
24
25
BY:
LEE S. RICHARDS, III,
LINDA IMES
Trustee
SOUTHERNDISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03370
F
WC
1
THE CLERK: SEC versus
Avellino.
2 11
3
MR. RICHARDS: Good afternoon,
MR. SORKIN: Good afternoon,
your Honor.
your Honor.
4
5
6
THE COURT: What is the purpose of the
conference?
MR. RICHARDS:
Your Honor,
we requested
it.
7
There are a couple of items open.
The first
is the time in
8
9
which Price Waterhouse will have to complete the audit,
which is required by the order of the Court.
to
11 that.
THE COURT: I thought we had a stipulation
on
12 13
14
MIZ.RICHARDS: That is correct. until today.
It was extended they
I am advised by Price Waterhouse that
require about a month to do an audit,
Court and the parties also require put us to in --
if that is what the
do.
15 16
We have
17
18
19
THE COURT: Why should I treat
differently from the other case? Your Honor, not
this
case
MR. RICHARDS:
being
a part
of
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21
the other
case,
I am really
not able to address
that.
I can
tell
audit,
you that all we know is we have been asked to do an
Price Waterhouse tells me it takes more time than
22
23
they have been given to do the audit, particularly
absence of records in this case.
with the
24
25
THEC~URT: Then they have to say that they can't
SOUTHERN DISTRICTREPORTERS 212-791-1020
MADOFF EXHIBITS-03371
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1 I(give an opinion. In the other case they put a deadline of
2
January 31.
I see no reason why we shouldn't
here.
3
Do you want to be heard, Mr· Sorkin?
4
5
MR. SORKIN:I do, your Honor. One thing I think
should be brought to the Court's attention immediately: As
6
your Honor was present, your Honor knows that a week ago this past Thursday Price Waterhouse, and with Mr. David
Levine, the trustee in the Telfran case, made a rather
7
8
9
impassioned plea on the telephone that they needed until the
end of February,
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11
THE COURT: I know that.
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13
MR. SORKIN:The·fact remains, Judge, that this
past Friday Price Waterhouse handed the keys over to
Telfran principals and said, "The audit is over.
the
14
15
You can
have your office
back."
This is after
a week before they
So that was
16
17
said they needed until
the end of February.
completed.
In this particular
case, your Honor, ~hey
18
began-- and I amtalking aboutPrice Waterhouse on or I-about November 18· Through December 31 they have incurred
in the approximate amount of fees and disbursements
19
20
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$270,000.
For the first
two weeks of January, they have run
22
up another $60,000 in fees. Yet to this day, to paraphrase
the head of the New York office of the SEC, all themoney
23
24
was there.
There has not been one scintilla
of evidence
25
that the $330,000 has shown, or the time put in by the
SOUTHERN DISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03372
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legions of Price Waterhousepeople has indicated,
one,
that
2
any noteholder did not receive all the interest and all the principal that they were entitled to; andnumber two,
any other noteholder as yet u"discovered, exists. Price Waterhouse, your Honor, is here for really two reasons:
time, which
that
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4
5
6
I guess the first reason is the extension of
we vehemently oppose.
7
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THE COURT: understand that, but I have given I
them until
it in this
January 31 in the other case; why shouldn't
one?
I do
10
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12
MR.SORKIN:For the simple reason, your Honor,
they began earlier than the other case.
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THECOURT: Howmuch earlier?
14
15 Honor.
MR.SORKIN:I believe it is about a week, your
16
17 Il to
THE COURT: should give them until January 24, I
be consistent.
18
19 won't argue
MR.SORKIN: that is your Honor's decision, I If
with that.
20
21
The second point, your Honor, is that through
that entire period, my clients, Frank Avellino and Michael Bienes -- Mr· Avellino is in court today -- have had all of
their assets frozen.
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THE COURT: knowthat. I willing to extend it.
That is whyI was not
MY knowledge auditing procedures of
SOUTHERNDISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03373
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and accounting a test basis;
procedures they don't
is that test
accountants
do an audit
on
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5
every transaction.
If they do they to
not think they are in a position will not give one.
find out whether
to give an opinion,
I am not going to give them forever
can give an opinion.
they
6 7
MR. SORKIN: The point to note on the record is that
also,
your Honor, I wish that 77
it is myunderstanding back approximately
8 )) with the Telfran
9
case they received
percent confirmations;
from what I have been
in this case it is over 90 percent,
told.
10
l1
THE COURT: If that
is the case,
they should be want to
12 11 in a position
f 13 give one, they
to give an opinion.
don't have to.
If they don't
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15
MI~. SORKIN: The last
point,
your Honor, is that
they have made their application today, as has Mr. Richards, a fee application request, to set aside over and above the quarter of a million dollars that has been put aside to pay
the trustee
papers late
16
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18
and the accounts.
Friday night.
We were served with these
19
20 21 22
23
THE COURT: I got those papers "Return to sender," conference before because my practice you file a motion,
and I said, requires a
and I do not allow my
conference procedure to be circumvented by people sending me
letters which are de facto motions. else to MR. SORKIN: Your Honor', I have nothing
SOUTHERN DISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03374
24
25
1
say.
2
3 sender
THE COURT:
without my even
So they
reading
have
them.
been
returned
to the
4
5 the application
MR. SORKIN: Then I will
on behalf of --
not address
the
issue
of
6 7 8 conference,
~HE COURT: I could treat but I don't appreciate
this lawyers
as a pre-motion sending evading me what what is
amounts to a motion
in the form of a letter,
9
10 11
12 13
clearly
indicated
in my rules,
a pre-motion
of any motions.
conference
being
a prerequisite
to the filing
MR. SORKIN: Your Honor,
to treat this as a pre-motion
if your Honor does wish
with respect to
conference
fees,
I will
reserve
whatever
time I may have with Tapplication to I
14 15 16 extend
THE COURT: For the moment the to the end of February their or for
one month is denied. At that
will.extend
time to January
24 at 6 o'clock.
17 11 point
18 won't.
Price Waterhouse will
either
give an opinion
or they
19 20
21 22
23
MR. SORKIN: I would respectfully your Honor, on the opening
THE COURT: commenced
request,
then,
of business
on January
that
25 -they
On the is
Yes.
representation that true?
one week earlier,
MR. RICHARDS:
24
MR. SORKIN:
They began
on January
18.
25
MR. RICHARDS: I think
SOUTHERN DISTRICT
that.is
accurate,
212-791-1020
MADOFF
your
REPORTERS
EXHIBITS-03375
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'k,
1
Honor.
2
3 deal with
THECOURT: I dealt with the first
the second.
issue.
Let's
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5
MR.SORKIN:The second issue, your Honor, is
that on the opening of business on January 25, as is the case with Telfran,
they have access
6
that my clients'
to them.
assets be unfrozen and
7
8
9 case, have
THECOURT:I haven't unfrozen them in the other
I?
to
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MR.SORKIN: YourHonordid.
that the audit ends an January 31. time it THE COURT: As of that
Your Honorsaid
is unfrozen.
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MR.SORKIN: of that time. So, if this audit As
is to go to the 24th, on the 25th.
Lastly,
your Honor, if your Honor wishes to treat
16
this as a fee application on behalf of Price Waterhouse.
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18
THE COURT: they want to makean application If
for fees they can, but what I am saying is that I am not
19
goingto freeze your assets or escrow your assets pendinga
fee.
20
I am not going to make them a secured creditor
am saying.
is what
21
I
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23
MR.SORXIN: only point I wish to makeis The
that if they wish to address that motion today in a
24
pre-motion context, I will reserve sometime to address
that.
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SOUTHERNDISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03376
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THE COURT: They can address
it
now.
2 11
3 address that.
MR. SORKIN: I would like the opportunity
to
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5 wants.
THE COURT: He can file
whatever
motions
he
6
MR. RICHARDS: It was not our efforts
to
7
circumvent
the rules that
of the Court and I apologize. your Honor have the information
It seems -a of
to us important
9 10
11 12
TKE COURT: Pick up the phone and arrange conference.
what amounts
Don't
to
send me a long letter
application. The reason to
in the nature
a motion
MR. RICHARDS:
put
those
papers
i
13
14
before
the
Court was so that
about the extension.
you would have complete
information
15
16 confined to
THE COURT: Then your letter
that. You were going to
should
be here
have been
for a
17
18
conference
all.
anyway on that
issue,
so why send me a letter
.at
19
MR. RICHARDS: Well,
because
it
seemed to us you
20
21
ought to have the documentation
because Mr. Sorkin is --
with respect
to the fees
22
THE COURT:
Why?
23
MR. RICHARDS: Because he is objecting
to the
24 25
fees,
and the fees are obviously
important. at the
THE COURT: I will deal with the objection
SOUTHERN DISTRICT REPORTERS 212-791-1020
MADOFF
EXHIBITS-03377
WC
1
appropriate time.
That doesn't justify writing me a letter
a pre-motion conference.
2
3
4
which amounts to a motion without
My rules are very clear on that.
They are,
MR. RICHARDS:
for that.
your
Honor.
I apologize
5
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8
THE COURT: Your apology is accepted. MR. RICHARDS: But I did think that the fee
question was relevant
to the extension.
If it was, you could
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10
THE COURT: No, it wasn't.
have brbught it up in connection with the conference which
we were having anyway. letter which is designed There was no need to send me a long for whatever purpose it was serve any purpose because I
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designed for,
but it didn't
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didn't
read it.
of that
If I read lawyers' letters
sort, then that
when they send
me letters
would give them an
advantage, wouldn't it?
lawyers are trial ability
I operate upon the assumption that
the
17
lawyers presumably because they have
18
to speak on their feet in open court and therefore when they are fully capable of
19
don't have to send me letters telling
tell me.
20
me on the record in open court what they want to
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22 1)
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MR.RICHARDS: But, yourHonor, we thought it
only fair,~if not to the Court, at least to Mr. Sorkin for
him to have the documentation with respect to our fees
24
25
because, rightly or wrongly, we thdught that the question of
SOUTHERN DISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03378
10
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fees was relevant to the question of the extension. THECOURT:Obviously it is relevant to the fees
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3
extent that he thinks that you people are proliferating and that is why he opposes your extension,
to have the documentation
4
but I don't need
5
as to the fees for that purpose.
6
All I need is for Mr. Sorkin to tell fees are too high, that is all. be an Assistant
feet, presumably.
me that he thinks your He used to
7
He is a lawyer.
8
v.S· Attorney, too.
He can speak on his
g
lo
11
MR.RICHARDS: any event, your Honor, we would In
request permission to file a motion for the THECOURT: You can file like,
fees.
12
13
whatever motions you without a
but you donlt do it in the form of a letter
conference.
14
pre-motion
15
MR. RICHARDS:We ask for that permission-
16
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18
THE COURT: don't need mypermission to file You
a motion but you just
What is the
have to have a conference.
basis for the motion?
19
20
MR.RICHARDS: That fees have been incurred by
both institutions,
order that
and it was our understanding
under the
21
they would be covered.
22 \(
23 filing
THE COURT: right. All
of the motion?
Youdon't object to the
24
25
MR.SORKIN: YourHonor, I can't object to the
filing of any motioneither. Theycan file whatevermotion
SOUTHERNDISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03379
we
11
1
2 3 4
5
they want and we will
respond
in due course.
to file it? to file that it were by in
THE COURT: When do you want MR. RICHARDS: the
the
We will respect
be prepared to the matters
end of the
letter on
week with
Friday.
6
THE COURT:
All
right.
File
your
papers.
7 8 9 10
11 January 22.
How much time MR. SORKIN: in Florida -I will
do you need Your Honor ten days, Friday --
to
respond
to
it? resides
Mr. Avellino Honor, if
need
your
I may. be
THE COURT:
Fine.
of this
week would
12
( 13
14
MR. SORKIN:
Court's indulgence.
(Pause)
Your Honor,
one second,
with
the
15 16 17
18
MR. SORKIN: THE COURT: matter
not in
May we have Fine.
two weeks, of fees last
your is
Honor? not a was
The matter the
of urgency.
the process
Price
of going
Waterhouse,
bankrupt.
I heard,
19
20 might.
MR. SORKLN: Without
this
case,
your
Honor,
they
21
THE COURT:
I don't
know.
22
23 incurred
MR. SORKIN:
on this one.
With the
Thank you,
fees
your
that
they
have
Honor.
24
MR. RTCHILRDS: Your Honor,
one point
of
25
clarification.
I don't
SOUTHERN
think
it
is accurate,
as I indicated
DISTRICT
REPORTERS
212-791-1020 MADOFF EXHIBITS-03380
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t·
12
we
1
earlier,
to say that we began our audit on November 18.
who could be verified so we could --
2
Whatwe.beganon November was an effort to verify the 18
noteholders THECOURT: I assume you apply ordinary auditing
3
4
5
procedures do that. Noauditor I know to requires 100
6
percenttesting to giveanopinion- If youdo, that is news
to me.
7
8
9
MR. RICHARDS: your Honor,what wedo But,
require is records, and there aren't the records
necessary --
10
11
THE COURT: That may be, but you don't
test
all
12
the transactions·
YoU "eed records for 2 sufficient number
13
of transactions upOnwhich, in accordance with ordinary auditing practice, you can render an opinion. If they have
tested 70 percent or 60 percent, I cannot believe they are
not in a position to give an opinion now.
14
15
16
17
MR. RICHARDS:I think there are basic records we
18
need in order to give any opinion at all, and we try to set
those out in the letter.
19
20
21
22
THE COURT: don't give an opinion. It Then
doesn't make any difference to me.
MR.RICHARDS: will probably be the position That
we will be in.
23
24 \(
25
THE COURT: Price Waterhouse If doesn't wantto
give an opinion, they don't have
to. No one can force them
SOUTHERN DISTRICTREPORTERS 212-791-1020
MADOFF EXHIBITS-03381
R
'h
13
we
1
2
to give an opinion. But myjob is to see that assets do not stay frozen unnecessarily over time. The reason that this
is happening in the first place is that they agreed to the freeze order on the assumptionthat these matters would be
If the
3
4
5 Il'resolved'with~n a`rilatively.brief i~eriddof time.
6
understanding or the assumption upon which the agreement was
7
based has been met, I am not going to keep their freeze order in existence, since it was by consent. Their consent is the basis of the freeze order, so I am not going to extend their consent beyond the parameters of what they have
8
9
10
11
agreed to· To the extent they opposean extension to the
24th, I have overruled their objection. I amwilling to
stretch it that much further, but not to the end of
12
13
14
February, not until March, not until June, not until
whatever period of time Price Waterhouse thinks is
most
15
16
comfortable for them. That is not what they agreed to· MR.RICHARDS: think the point here, your I Honor, is that without the books and records that are
17
18
19
missing, Price Waterhousecannot render an opinion,
the parties can't,
position-
and
if
20
and the Court are content
for
it
that
to
say
is
it
our
21
then it is not for us to argue, and
22
23
THECOURT: If they say that they can't
give an
do
24
opinion,they can't give an opinion. What I goingto am
about that?
25
SOUTHERN DISTRICT REPORTERS212-791-1020
MADOFF EXHIBITS-03382
14 we
1
yo, don't care whether they do or whether they
don't, 1 take it·
2
MR.SORXIN: Honor,I don't care what they Your
say. Theycan say whatever they want. I just don't want 5 ~(\. implicationleft wit~i the. t'his eourt·that,.based upon'the
4 6
affidavits whichthe Court has nowrejected but whichwe
7
8 9
expectto see again, myclients havewithheldany records
whatsoever. Every sheet of paper has been turned over to
10
Price Waterhouse-Price Waterhouse wants records that don't exist. It is to that extent that Price Waterhouse continues
to say we don't have the records, and it can
infinitum. To that extent -go on ad
11
12
13
THECOURT: If YOU wa"t to sue Price Waterhouse
14
15 16
on the theory that their decisionnot to;issue an opinionis
in some respects a violation of the law, you can
do that.
MR.SORKIN:Your Honor, these two fine people
17
from the SECare the ones whowant Price Waterhouse's
18
opinion. I don't care whatPrice Waterhouse to say. has
THECOURT:All right. Then we agree. You want
That is
19
20
two weeks to respond to the application for fees?
fair enough.
21
22
MR.SORKIN: Yes, your Honor, thank you.
23
24
MS~ ASHBAUGH: KathyAshbaugh the I am of
Securities and Exchange Commission. As a preliminary matter, I am not a member this Court; I do have a of
SOUTHERN DISTRICT REPORTERS 212-791-1020
MADOFF EXHIBITS-03383
25
.__
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1
certificate
outstanding from the State of Massachusetts.
THE COURT: Does somebody want to move your
2
3 admission?
4 5. 11
6 11 for
MR.RICHARDS: will make that motion. I THECOURT: don't think Leu:need it if ~70u ·I work
a government agency.
7
MS. ASHBAUGH: I am not sure.
8
9
Your Honor, this is some background so that we
understand why we are having this audit in the first
Our allegation in the SEC's complaint is that
place.
10
11
A&Bwas an
unregistered investment companyfor eight years.
been registered
Had they
been
12
with the Commission they would have
/...
13 \(required
14
to have an audit completed each year.
So
the
completion of this audit is nothing more than what they
should have done in the first place on a yearly basis.
15
16
17 with
THECOURT:So what? What has that got to do
anything?
Is
19
MS.ASHBAUGH: as a matter of background, so Just
we understand how we -got here today.
20 ~
21
22
THE COURT: Don't give me irrelevant backgroundMS. ASHBAUGH: way to distinguish between One
this case and the Telfran case which you heard last week is
23
simplythat this case involves $450million, and the Telfran
case involved approximately --
24
25
THECOURT: In that case they were asking until
SOUTHERN DISTRICT REPORTERS212-791-1020
MADOFF EXHIBITS-03384
we
16
1
the
end
of
February.
2 11
3 February.
MS. ASHBAUGH: They were asking
until
the end of
4
5 week.
THE COURT: And now he says they came in this
6
MS. ASHBAUGH: Apparently
they
have.
7 ))
8 made to do.
THE COURT: So maybe people
can do what they
are
9
MS. ASHBAUGH: In that
case
there
is only $90
10
11 12
13
million,
in this
case there
is $450 million,
the auditors'
and it is our
that -too
understanding
from reading
papers give
THE COURT: Then they won't
bad.
an opinion;
14
MS. ASHBAUGH: It
is dur understanding
that
part
15
of the reason that they haven't
or complete their audit,
been able to perform their
which they expected to
16 1) audit
17 18 19
20
complete within two weeks, was that Avellino and Mr. Bienes, had prepared
records.
they expected public
that
Mr.
who are certified financial
accountants,
books and
statements
and had kept
21
22 23
24
THE COURT: Then you bear your burden under the
law of obtaining entitled whatever relief that you think consent. you are What I am
to by me and not with their
saying is, tb the extent that they have consented on a
certain basis, I am not going to enlarge the parameters of
25
SOUTHERN DISTRICT
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1
what they agreed to.
If you think you have some other basis
2
to get the relief you request, make the appropriate showing
and I will let them oppose it.
3
4
MS. ASHBAUGH: I think
my point
here
is simply
5
that they should not be' allowed to circumvent the completion
of the audit simply by refusing to --
6
7
THE COURT: What they did is consent
to it.
If
8
you have an argument that they were unreasonably interfering
with that,
made.
9
10
that
is fine.
I don't
hear that
argument being
11
12 their report
MS. ASHBAUGH: believe I
have made some argument
that
that
the auditors
--
in
13
14
THE COURT: If you make that Will schedule it for a hearing
argument -- and I be prepared
of
-- you had better
15
to prove that,
because if you can't prove it,
the cost
16
the hearing will be imposed upon you personally.
waste their money with your frivolous to show that applications.
We don't
If you
17
18
have evidence
they have willfully
obstructed
19
Price Waterhouse's audit,
for an extension
I will reconsider
an appropriate
your application
hearing, but
20
of time after
21
if that hearing proves to be a waste of my time and their
22
money, your bank account will shrink accordingly.
clear?
Is that
23
24
25
MS. ASHBAUGH: Yes,
your
Honor.
THE COURT: Now, with that
SOUTHERN DISTRICT
'in mind,
do you want a
REPORTERS 212-791-1020
MADOFF EXHIBITS-03386
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we
1
hearing?
2 1)
3 hearing.
MS. ASHBAUGH: this At
time we won't request
a
4
5
THE COURT: I suggest you think
about it before
you do. 'Anything elE;e you want~to say that is relevantj
MS. ASHBAUGH: Nor your Honor.
6
7
8
THE COURT: Sit down.
When do you want me to
hear your application
that?
for fees?
Do you want a hearing on
9
10
MR. RICHARDS: I think
Mr. Sorkin
may.
Wedon't
11 12
need to have a hearing,
but we will get our papers
in by the
end of the week and then if the Court needs to hear it we
will be available for the Court's hearing.
C
13
14
THE COURT: Do you want an oral
argument
or a
15 16
17
hearing?
Do you want testimony
on this
issue?
MR. RICHARDS: Normally I would not expect
testimony.
Is
19
THECOURT: Do you want discovery on this
MR. RICHARDS:
Mr. Sorkin.
issue?
is up to
We don't,
your
Honor.
It
20
21
THE COURT:
They
may.
22
23
MR. SORKIN: Your Honor, I would like
to see
their papers before I make the decision,
but I think,
your
24
Honor, if ~the issues as we read them in these papers that we were served with are continued to be raised,
SOUTHERN DISTRICT
25
live testimony
REPORTERS 212-791-1020
MADOFF EXHIBITS-03387
wc
·
19
1
2
3
may be relevant.
notice
the
We have
now,
items
found,
and I will
with
in the
put
themon
to some of
right
material
inconsistencies
represented
respect
papers.
4 5 () 'give you
THE COURT: two~weeks to
When you respond to
get
their If
papers, pursuant
I will to that
them.
6
7 8
9
response
make that
you think
request to schedule
MR.
a hearing
in your oral
and/or
and
discovery
then
is
required,
decide
papers argument
Thank you,
I will a hearing.
Honor.
whether
and/or
your
SORKIN:
10 11 ask for
THE COURT: a hearing unless
But it
on is
the
same
ground based.
rules. I don't
Don't let
colorably
12
/ 13
~11 people
else?
waste
my time
and
their
opponent's
money.
Anything
14 15
16 conference
MR.
SORKIN:
Nothing When is
from your
me. next regularly scheduled
THE COURT:
in this case?
17 18
19 about March
MR.
SORKIN:
I
don't I
think should
we have schedule
one. one. How
THE COURT:
5?
Maybe
20
MR.
SORKIN:
Fine,
your
Honor.
21
THE COURT:
March
5 at
1 o'clock.
This
case
22
23
always
seems
to take
more time
than
most.
24
25
SOUTHERN
DISTRICT
REPORTERS
212-791-1020
MADOFF
EXHIBITS-03388