Madoff trustee Irving Picard filed arguments in a federal appeals court in New York on why district judges Jed Rakoff and Colleen McMahon were wrong in barring him from demanding damages from the banks, which include UBS AG (UBSN) and UniCredit SpA. (UCG) He is challenging two similar rulings made on “solid legal ground,” said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University in Detroit.
Rakoff in July threw out almost $9 billion in damages that Picard demanded from HSBC and feeder funds, saying the trustee can’t sue on behalf of customers, using common-law claims against parties who had an alleged duty to detect Madoff’s fraud. Picard demanded $19 billion in damages from the con man’s banker, JPMorgan, which McMahon also dismissed.
“The chances are not good for turning around a ruling on a matter where the court has substantial discretion,” said Michael Clark, a lawyer with Duane Morris LLP in Houston who specializes in financial fraud and has handled appeals. “He has to show the court misapplied the law in a way that’s beyond a discretion call. Rakoff is a very bright judge, and he sets out clearly why he’s ruled.”
Right to Sue
Ruling that Picard has no right to pursue lawsuits on behalf of the con man’s customers, the judges cited the U.S. Constitution, which says only a party injured by the defendant can sue in a federal court, and previous appeals court rulings.
“The district court’s holding is erroneous,” Picard said in his filing in the HSBC case.
As a trustee, he has “exclusive standing to assert claims to redress common injuries suffered by all customers,” Picard said, citing an appeals court ruling.
Other parts of the judges’ rulings he termed “legal error.” The trustee’s allegations against the banks “should have been given the utmost deference,” Picard said. “The trustee is not a wrongdoer, fraudster or criminal.”
Picard, appointed to liquidate the Madoff brokerage by the Securities Investor Protection Corp., said that corporation has advanced about $800 million to satisfy claims by Madoff customers and therefore has right to recover money “from those legally responsible for the damage.”
If Picard loses the appeals, Madoff clients will have a smaller pot from which to recover losses, and investors who bought claims on the con man’s estate at a discount may lose the bets they made. The trustee’s more than 1,000 suits demanded about $100 billion initially.
Amanda Remus, a Picard spokeswoman, didn’t immediately respond to an e-mail seeking comment on the lawyers’ views that overturning the judges’ rulings would be hard. She has previously said Picard remains confident of his right to make the claims against the banks.
Picard, a New York lawyer who has earned more than $200 million in fees for himself and his law firm since Madoff’s 2008 arrest, has permission to file 17,500-word briefs with the appeal judges. A victory would allow him to replenish the jackpot he tried to gather through lawsuits for Madoff’s customers.
“There is a good fairness argument he can make,” Henning said. “He can say, ‘Look, I’m in here trying to protect these people’ -- but unfortunately that doesn’t trump the law.”
One reason why Picard can’t sue the banks, the judges said, was that he represents the Madoff estate, not the con man’s customers, as he had argued. Doing so, he stands in the shoes of a Ponzi scheme operator, and can’t legally accuse others of wrongdoing.
“That’s how the legal doctrine works,” Henning said. “The trustee for a crooked man can’t accuse others of wrongdoing.” The appeals court probably won’t rewrite that law, he said.
Picard’s demands for money from New York-based JPMorgan, Madoff’s primary banker, equaled his estimate of principal lost by all Madoff investors by the time the Ponzi scheme collapsed in December 2008, according to his lawsuit. The bank could have stopped the fraud if it had passed on its suspicions to regulators, he alleged.
JPMorgan said it didn’t know about the fraud, or in any way participate in it, and couldn’t be held responsible for a scheme orchestrated by Madoff alone.
HSBC faulted Picard for his theory that the bank had obligations to all Madoff investors and should have probed the fraud. HSBC wasn’t the “watchman” for all the con man’s investors and didn’t owe them any duty, a lawyer for the London- based bank said at a court hearing before Rakoff last year in Manhattan.
In his biggest case, Picard wants as much as $59 billion -- including triple damages based on racketeering allegations that Rakoff is examining -- from UniCredit and Bank Medici AG and its founder, Sonja Kohn. Tomorrow’s appeals involve a smaller amount sought from Italy’s UniCredit.
Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina.
To contact the reporter on this story: Linda Sandler in New York at firstname.lastname@example.org