Legal victories by owners of the New York Mets and JPMorgan Chase & Co. may slash the $100 billion Irving Picard is seeking on behalf of Bernard Madoff's clients, undercutting bets traders have made on victims' claims.
Picard, liquidator of Madoff's firm, has filed 1,000 suits on behalf of Madoff investors. He sued JPMorgan Chase for $19 billion, equal to all the money lost by all investors in Madoff’s Ponzi scheme. He sued HSBC Holdings Plc and a dozen feeder funds for $9 billion, and seeks as much as $59 billion -- including trebled racketeering charges -- from Bank Medici AG, its founder, Sonja Kohn, and UniCredit SpA. The Mets owners, Fred Wilpon and Saul Katz, face a $1 billion suit.
The banks say that Picard is straining the limits of the law as he tries to grab back money for victims of Madoff’s fraud. They won initial victories by persuading a judge to remove their dispute with Picard from bankruptcy court to higher district courts, which will decide whether Picard exceeded his powers.
If the suits are scaled back by this tactic, Madoff clients will have a smaller pot of damages from which to recover losses, and investors who bought some of their claims at discount may lose the bets they made. Madoff claims are now trading at about 70 cents on the dollar.
“The general view is, Picard will have enough success with his lawsuits to provide substantial recovery over and above what has settled,” said Andrew Gottesman, who heads bankruptcy claims trading at SecondMarket in Manhattan. “That’s what’s driving pricing. If the trustee loses those lawsuits against the banks, traders’ sense of the risk involved would change.”
Signs of Fraud
Many of Picard’s suits are based on the theory that banks and investors had a duty to investigate what Madoff was doing. Instead, he says they ignored signs of possible fraud such as the con man’s low-grade accountants and unusually steady results.
JPMorgan, Madoff’s primary banker, could have stopped the fraud if it had passed on its suspicions to regulators, Picard said in his suit, revised on June 24 to triple his demands from an earlier complaint. New York-based JPMorgan, the second-biggest U.S. bank, “knew” that billions of dollars flowing through the Madoff account “could not have been linked to a legitimate business purpose,” he wrote.
Banks, though, don’t have a duty to investigate customers, JPMorgan says. Picard’s interpretation of banking law “would impose broad investigative duties on banks that do not exist,” it said in February as it asked a district judge to take the case out of bankruptcy court where Picard filed it.
In the U.S. justice system, bankruptcy judges rank below district court judges and they’re not supposed to interpret undecided issues of non-bankruptcy law. That’s what the banks say Picard’s suits require U.S. Bankruptcy Judge Burton Lifland, who is handling the Madoff case, to do. So Picard has to persuade a higher court that he has the authority to sue the banks for damages before he can try to get any money from them.
U.S. District Judge Jed Rakoff said on June 6 that he will decide if Picard can use U.S. racketeering law to sue Milan-based UniCredit and other foreign banks, in the biggest challenge so far to the liquidator. Picard’s bankruptcy court suit against these banks represents about 60 percent of the money he is seeking for investors in the Ponzi scheme.
An adverse ruling from Rakoff could send Picard back to the drawing board to see how much he can demand. He sued UniCredit with Bank Medici and other parties for $19.6 billion in New York in December, using the Racketeer Influenced and Corrupt Organizations Act to treble the amount.
Duty to Investigate
At a July 1 court hearing, Rakoff said the Mets owners may not have had a legal duty to investigate whether Madoff was running a fraud. If he rules that they didn’t, he would undermine Picard’s argument for taking back $700 million in principal they invested with the con man.
“If Picard loses in district court, the risk he has is that he might get some money back from JPMorgan and lose the $19 billion,” said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky. “With the Mets owners, there if he loses, he stands at best to get the fictitious profits and not the $700 million in principal.”
Picard said in April he had recovered $7.6 billion to pay $17 billion in claims, although most of the money isn’t available for distribution. He and his law firm, Baker & Hostetler LLP, have charged more than $175 million for their work since the Ponzi scheme collapsed in 2008, according to court filings.
“I just keep reading in the papers how much is being paid to Picard,” Rakoff told the trustee’s lawyers at a May hearing.
The Manhattan judge, who in past rulings has struck down some charges leveled against banks, also will decide if Picard can bring common-law claims such as unjust enrichment against HSBC and can sue on behalf of customers, since his job is to liquidate the Madoff firm, Bernard L. Madoff Investment Securities LLC.
Liquidators aren’t allowed by law to bring class actions on behalf of investors, HSBC says. Asking Rakoff on May 3 to dismiss Picard’s suit, Europe’s biggest bank said Picard was “attempting to steal” money from Madoff investors who sued HSBC in class actions. He planned to hand their money to other parties on the principle of “robbing Peter to pay Paul,” it said.
Picard’s bank suits are “very aggressive,” according to bankruptcy lawyer Harvey Miller.
“The question is whether Picard is suing for damages caused to the estate, or pursuing rights that are personal to the individual customers of the firm,” said Miller, a partner at Weil Gotshal & Manges LLP who’s the lead bankruptcy lawyer for Lehman Brothers Holdings Inc. “The Supreme Court long ago decided that a bankruptcy trustee could not sue based upon personal claims of investors.”
Picard has estimated that his 1,000 suits if successful would bring in about $100 billion. His spokeswoman, Amanda Remus, said he wouldn’t comment beyond what he’s filed in court.
HSBC, which acted as custodian for so-called feeder funds that had money with Madoff, has denied that it ignored signs of fraud at the Madoff firm. The bank lost almost $1 billion of its own money investing in feeder funds, “a fact that clearly undermines the trustee’s claim that HSBC was on notice of Madoff’s fraud,” it said in a filing.
Rakoff, who rejected securities regulators’ $33 million settlement with Bank of America Corp. over undisclosed Merrill Lynch bonuses in 2009, also has dismissed or reduced lawsuits against banks. In 2004, he refused group status to a case against Lehman over biased research.
Defending his suit against HSBC, Picard said in a filing he is suing on behalf of a fund for customers, not on behalf of customers themselves. He similarly defended his suit against JPMorgan, saying it wasn’t a class action either. JPMorgan accused Picard of fighting a “back door” class action suit on behalf of Madoff customers.
U.S. District Judge Colleen McMahon in New York will decide if Picard is entitled to bring such a suit against JPMorgan.
The Mets owners have also challenged the trustee’s right to sue them. Brokerage customers don’t have a duty to investigate their money manager, according to Katz and Wilpon. Rakoff said that may be true, and that he will review Picard’s $1 billion suit against them and other Sterling Equities Inc. partners.
Madoff claims have shot up to around 70 cents on the dollar, from about 30 cents in early December, according to Gottesman, the Manhattan claims trader. That was before Picard began filing his suits against the banks, and before the estate of Madoff investor Jeffry Picower agreed to pay him $7.2 billion.
“I wouldn’t recommend paying 70 cents for Madoff claims,” said Bowles. “Trying to bet on litigation is a real scary game.”
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).