Bloomberg News

HSBC’s Victory May Cut $100 Billion Jackpot for Madoff Investors

July 30, 2011

July 30 (Bloomberg) -- A courtroom win by HSBC Holdings Plc may reduce the $100 billion trustee Irving Picard is seeking on behalf of Bernard Madoff’s clients, undercutting bets traders have made on victims’ claims.

U.S. District Judge Jed Rakoff on July 28 threw out almost $9 billion in damages that Picard demanded from HSBC and feeder funds, saying the trustee was free to pursue $2 billion in bankruptcy claims. Picard has no right to sue on behalf of customers or the Madoff estate, using common-law claims against parties “who allegedly violated a duty to Madoff Securities’ customers by failing to detect Madoff’s fraud,” Rakoff ruled.

Much of the $100 billion Picard is seeking from banks such as JPMorgan Chase & Co. involves similar claims to the HSBC case, or other claims being scrutinized by two district judges.

Rakoff’s ruling “is clearly bad news for Picard,” said New York bankruptcy lawyer Harvey Miller. “Picard was pushing the envelope in his zeal to recover against alleged wrongdoers and overlooked existing constraints and precedents as pointed out by Judge Rakoff.”

Picard demanded $19 billion in damages from the con man’s banker, JPMorgan, equal to all the money lost by all investors in Madoff’s Ponzi scheme. He seeks as much as $59 billion -- including trebled racketeering charges that Rakoff is examining -- from Bank Medici AG, its founder, Sonja Kohn, and UniCredit SpA.

If the suits are scaled back as HSBC’s was, Madoff clients will have a smaller pot of damages from which to recover losses, and investors who bought some of their claims at a discount may lose the bets they made. Madoff claims are trading at about 70 cents on the dollar.

Assumption Change

“The HSBC ruling probably changes the assumption you’re making as to how much the trustee can settle for on similar suits where he has the same kind of claims,” said Andrew Gottesman, who heads bankruptcy claims trading at SecondMarket Inc. in Manhattan. “If you were bearish, it edifies your position. If you were bullish, it maybe changes you to neutral.”

Amanda Remus, a Picard spokeswoman, said the trustee is “reviewing the district court decision as well as preparing to move forward in the bankruptcy court on the remaining” claims of more than $2 billion.

UBS AG, sued for $2.6 billion, has said that more than $2 billion of common-law claims were brought by Picard. The Mets owners, Fred Wilpon and Saul Katz, face a $1 billion suit, as Picard bids to recoup $300 million in so-called fictitious profit and $700 million in principal.

Common-Law Claims

There are no common-law claims against the Mets owners, according to Remus. However, Rakoff is scrutinizing Picard’s demands that were based on allegations they suspected the fraud and failed in their duty to investigate it. Wilpon and Katz may not have had a legal duty to investigate whether Madoff was running a fraud, Rakoff said at a court hearing this month.

For investors who settled with Picard before the HSBC ruling, it may be too late to change anything, said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky.

“It would be nearly impossible to undo it if it has been approved by the courts,” he said.

A $220 million settlement between Picard and heirs of Norman F. Levy survived a court challenge in March. Picard’s $5 billion share of a settlement with Jeffry Picower’s estate is still under challenge, after being approved in bankruptcy court.

Picard will almost certainly appeal Rakoff’s ruling, because “so much money is at stake,” said Michael Clark, a lawyer with Duane Morris LLP in Houston who specializes in financial fraud and white-collar law.

‘Better Stead’

“Even if there’s an appeal, JPMorgan and the others are in much better stead” after the Rakoff ruling, he said. “Short term, an appeal is not good for investors who’ve lost money because you’re talking two or three years, if it goes all the way to the Supreme Court.”

If the ruling isn’t reversed on appeal or modified, “it will reduce Picard’s ability to pursue all similar common law claims,” said Miller of Weil Gotshal & Manges LLP.

Picard said July 28 he has recovered about $8.6 billion to pay $17.3 billion in claims filed, including a $1 billion settlement with hedge-fund firm Tremont Group Holdings Inc. that day, and the $5 billion from Picower. He and his law firm, Baker & Hostetler LLP, have charged about $179 million for their work since Madoff’s Ponzi scheme collapsed in 2008, according to court filings.

“There have been considerable recoveries,” Duane Morris’s Clark said. “The question is, is this something that could be done more efficiently.”

Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina.

The main case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-1789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--Editors: John Pickering, Stephen Farr

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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