Madoff Trustee Tries Comeback as JPMorgan Opposes Appeal

Updated on

As the liquidator of Bernard Madoff’s firm tries to come back from defeats in U.S. district court, JPMorgan Chase & Co. opposed his appeal of a judge’s ruling that threw out $19 billion of his claims for damages.

“The district court correctly held that the trustee has no authority to bring common law damages claims against JPMorgan,” the bank said in a filing today in federal appeals court in New York. UBS AG and HSBC Holdings Plc separately opposed the trustee’s appeal.

Madoff trustee Irving Picard appealed rulings in four cases against banks that barred him from demanding a total of about $30 billion on behalf of the con man’s investors. UniCredit SpA also filed arguments today on why the appeal should be rejected.

U.S. District Judge Jed Rakoff in July dismissed almost $9 billion in damages that Picard sought from HSBC and feeder funds, saying the trustee exceeded his powers. Picard sued for $19 billion from the con man’s banker, JPMorgan, which U.S. District Judge Colleen McMahon dismissed, agreeing with Rakoff.

Picard alleged in his lawsuits that the banks ignored “red flags” warning of Madoff’s fraud, hurting Madoff’s customers. Rakoff said Picard’s powers as a bankruptcy trustee are limited. While he can try to recover some money for the Ponzi scheme operator’s estate, he can’t sue banks on behalf of Madoff customers, and he can’t accuse them of fraud because he is trustee for a fraudulent enterprise.

‘Too Activist’

“How far will the courts allow someone to be aggressive in their use of the law?” said Michael Clark, a former federal prosecutor with Duane Morris LLP in Houston who specializes in financial fraud and has handled appeals. “When lower court judges and trustees are too activist, there’s a tendency for higher courts to look and say, ‘You have spread your wings too far.’”

Picard, a New York bankruptcy lawyer, filed multibillion-dollar lawsuits against the biggest banks, charging $273 million for his firm’s work since Madoff’s 2008 arrest. Now, he’s having to defend his aggressive approach.

Picard’s lawsuit against JPMorgan, the biggest U.S. bank, “is a massive overreach on the part of a trustee who, in a search for deep pockets, has recklessly accused people at JPMorgan of participating in Madoff’s crimes without factual support and without regard for the consequences of his public accusations,” the bank said in today’s filing. “And his basic thesis -- namely that JPMorgan employees deliberately joined in a doomed-to-fail Ponzi scheme simply to preserve routine banking income -- is preposterous.”

JPMorgan Fees

JPMorgan earned $590,000 in fees from Madoff’s brokerage for banking services from 2002 to 2008, and $3.5 million in interest, the bank said. JPMorgan’s revenue in 2008 was about $67 billion, according to data compiled by Bloomberg.

Suing banks, “the trustee purported to bring tort claims against deep-pocket third parties on behalf of BLMIS customers based on a variety of inconsistent and often-changing theories,” UBS, Switzerland’s largest bank, said in its filing. “The court rightly rejected the trustee’s effort to assert such overreaching claims.”

McMahon handled Zurich-based UBS’s case as well.

Picard’s legal strategy is “contrary to well-established precedent,” London-based HSBC said in today’s filing, referring to a trustee’s powers in other frauds. HSBC, Europe’s largest bank, has faulted Picard for insisting it had obligations to all Madoff investors and should have probed the fraud.

‘Enormous Claims’

HSBC, which provided custodial services to feeder funds that invested with Madoff, said Picard is “asserting enormous claims against parties who provided no services and owed no duty to BLMIS or to the creditors or customers the trustee seeks to benefit.” Picard “seems determined to make this the largest and most expensive” brokerage liquidation in history, HSBC said.

The HSBC and JPMorgan rulings came after the Anna Nicole Smith case, when the U.S. Supreme Court in June limited bankruptcy judges’ ability to rule on common-law claims. That stopped the former Playboy model’s heirs from collecting millions of dollars from Texas billionaire J. Howard Marshall’s estate, and put district judges in control of more bankruptcy issues.

The Madoff trustee’s appeals may not bring a reversal, said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University in Detroit.

‘Solid Ground’

“Rakoff and McMahon were on fairly solid legal ground, so the appeals judges are less likely to reverse them,” he said.

Separately, Picard on March 21 filed a notice of appeal in his biggest case, a $59 billion racketeering suit against UniCredit, Sonja Kohn and other parties, bringing the total amount he is fighting for to $90 billion. The current appeal involves a smaller amount sought from Italy’s UniCredit in the HSBC case.

If he loses the appeals, Madoff clients will have a smaller pot from which to recover losses, and investors who bought discounted claims on the con man’s estate may lose the bets they made. The trustee’s more than 1,000 suits demanded about $100 billion initially.

Amanda Remus, a Picard spokeswoman, has previously said Picard remains confident of his right to make the claims against the banks. She didn’t respond to an e-mail seeking comment on today’s filings.

Lost Principal

Picard’s demands for money from JPMorgan equaled his estimate of principal lost by all Madoff investors by the time the Ponzi scheme collapsed, according to his lawsuit. The bank could have stopped the fraud by passing on its suspicions to regulators, he alleged.

JPMorgan, based in New York, said it didn’t know about the fraud or participate in it, and can’t be blamed for a scheme orchestrated by Madoff alone.

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).

The district court cases are Picard v. JPMorgan, 11-5044, Picard v. UBS, 11-5051, Picard v. UniCredit, 11-5175, Picard v. HSBC, 11-5207, all in the U.S. Court of Appeals, Second Circuit (Manhattan).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE