Bloomberg News

Big Banks Don’t Owe Madoff Estate $30 Billion, Court Rules (3)

June 20, 2013

Banks including JPMorgan Chase & (JPM:US) Co. and HSBC Holdings Plc (HSBA) can’t be sued by the Bernard Madoff firm’s liquidator for $30 billion because he is tainted by the con man’s fraud, an appeals court ruled.

Madoff trustee Irving Picard appealed rulings barring him from demanding damages from banks that allegedly ignored Madoff’s fraud for the sake of fees. Federal district judges Colleen McMahon and Jed Rakoff, both in Manhattan, had said Picard can’t accuse the banks of fraud because he’s the trustee for a fraudulent enterprise, citing a legal principal called in pari delicto.

The U.S. Court of Appeals in New York agreed today, saying Picard’s “scattershot responses” had “missed the mark.”

“Picard stands in the shoes of BLMIS and may not assert claims against third parties for participating in a fraud that BLMIS orchestrated,” according to the ruling by three judges including Chief Judge Dennis Jacobs.

BLMIS is the former securities firm of Madoff, who orchestrated the biggest Ponzi scheme in U.S. history, reporting a mostly fictitious $65 billion in assets. His fraud cost customers an estimated $17 billion in principal.

Picard’s defeat today means that Ponzi customers will have a smaller pot from which to recover their remaining losses, and some investors who bought discounted claims on the con man’s estate may lose the bets they made.

‘Not Positive’

“It’s certainly not a positive that the trustee lost against the big banks,” said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt. For Madoff’s customers to get all their money back, Sarachek estimates, Picard must collect billions of dollars, “and who but the big banks have that?”

The judges’ ruling was “well reasoned,” said JPMorgan and UniCredit SpA (UCG), also sued by Picard. The decision “affirms our view that the trustee’s common-law claims lacked merit,” Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, said in an e-mail. HSBC declined to comment.

Picard is reviewing the decision, spokeswoman Amanda Remus said in an e-mail. He has about $4 billion of other claims against the banks that he is “vigorously” pursuing, she said.

Picard could ask for a second hearing by more appeals court judges, or take his case to the U.S. Supreme Court, though his odds of winning are low, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.

‘Low Chance’

“For this much money, I think he will try,” Bowles said. Both avenues of appeal have “a very low chance of success,” he said.

Two other appeals courts have ruled that a trustee liquidating a fraudulent business can’t accuse other parties of fraud. A court in Richmond, Virginia, in May said a bank allegedly holding Ponzi customers’ money couldn’t be sued, and a Chicago court in April 2012 said a trustee couldn’t sue accountants for not detecting a Ponzi scheme.

The New York appeal judges said at the end of their ruling that they would leave it to Congress to change the law if legislators wanted to empower trustees to bring such lawsuits.

Picard has so far paid investors almost $4.8 billion from the Madoff estate’s customer fund, out of about $17 billion of estimated lost principal, according to his website.

Legal Settlements

Mostly by settling earlier lawsuits against individuals who allegedly knew of the fraud, he gathered a total of about $9.3 billion to compensate approved customers of the jailed con man. The Securities Investor Protection Corp. has paid customers about $705 million.

Some bankruptcy experts faulted the legal principle that knocked Picard out of court, barring him from alleging that banks defrauded what was a fraudulent enterprise.

“It does seem to ignore the extent to which a trustee is not just a representative of the old enterprise, but also a representative of all the creditors,” said Stephen Lubben, a bankruptcy law professor at Seton Hall University School of Law in Newark, New Jersey.

Madoff, 75, is serving a 150-year sentence in a federal prison in North Carolina. His scheme collapsed in 2008 when he could no longer lure new money to fund withdrawals.

The bankruptcy 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).

The appeal is In re Bernard L. Madoff, 11-05175, U.S. Court of Appeals for the Second Circuit (Manhattan).

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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