Madoff Trustee Case Against Banks Draws Top Court Inquiry

The U.S. Supreme Court signaled interest in an appeal by the liquidator of Bernard Madoff’s firm, asking the Obama administration for advice on suits seeking $8 billion from banks alleged to have helped funnel money into his Ponzi scheme.

The Madoff trustee, Irving Picard, is urging the justices to let him sue HSBC Holdings Plc (HSBA), UniCredit SpA (UCG) and UBS AG (UBSN) to recoup customer losses. A federal appeals court said Picard lacked authority to press those suits, and the justices today requested input from U.S. Solicitor General Donald Verrilli.

Picard argued in his appeal that the banks “are as responsible as Madoff for the enormous magnitude of customer losses.”

A Supreme Court victory would open a new avenue for Picard and victims as they seek to recover losses. Picard so far has recouped about $10 billion for victims of the fraud, which cost investors about $17 billion before Madoff was arrested in December 2008. Madoff is serving a 150-year federal prison sentence in North Carolina.

The appeals court also said Picard couldn’t pursue JPMorgan Chase & Co. (JPM), which last week took itself out of the legal dispute by agreeing to settle Picard’s claims for $543 million. JPMorgan also said it would pay more than $2 billion to resolve government allegations.

In throwing out Picard’s suits against the banks, the New York-based appeals court said he lacked the legal right, or standing, to sue on behalf of defrauded investors. The appeals court pointed to a 1972 Supreme Court decision that said bankruptcy trustees are authorized to collect only money owed to the estate, not sums owed to creditors.

‘Unremarkable Conclusion’

In court papers, HSBC and UniCredit called that an “unremarkable conclusion” that wasn’t worthy of Supreme Court scrutiny.

Picard argues that the appeals court misinterpreted the U.S. Securities Investor Protection Act, a 1970 law that governs the liquidation of failed brokerage firms.

Among other arguments, Picard contends that SIPA, as the law is known, authorizes trustees to sue wrongdoers to recoup money the Securities Investor Protection Corp. gave investors as advances. Picard also says SIPA lets trustees pursue some claims under New York state law.

Picard accuses HSBC, UniCredit and UBS of facilitating the fraud by promoting “feeder funds” that sent new cash to Madoff and kept his Ponzi scheme afloat. The banks deny wrongdoing and say they were victims of the Madoff fraud.

The Supreme Court case is Picard v. JPMorgan Chase, 13-448.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Patrick Oster at poster@bloomberg.net

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