HSBC Holdings Plc, UniCredit SpA, Merrill Lynch and hundreds of other defendants in lawsuits filed by the liquidator of Bernard Madoff’s defunct firm are finding that their best ally may be U.S. District Judge Jed S. Rakoff.
Rakoff, who along with another federal judge has already dismissed about $90 billion of the $100 billion in claims made by the liquidator, Irving Picard, has invited Picard’s targets to ask that their cases be moved from bankruptcy court to his district court. Rakoff said district courts are the proper venue for some of Picard’s claims because they involve issues outside of bankruptcy law. Picard has said that defendants who want to switch are engaging in “forum shopping.”
Last week, Picard made his own bid for a more congenial venue, asking to remove some of his cases from Rakoff’s court to that of another U.S. District Judge, Loretta Preska. Unfortunately for Picard, the judge in charge of making the decision was Rakoff, who turned him down, according to a person familiar with the situation and an e-mail obtained by Bloomberg.
“Picard faces an uphill battle with Rakoff,” said Michael Clark, a former federal prosecutor with Duane Morris LLP in Houston who specializes in financial fraud. Rakoff’s court seems to have been a “graveyard” for Picard’s claims, he said.
Amanda Remus, a Picard spokeswoman, didn’t immediately respond to an e-mail seeking comment on the trustee’s move to transfer cases to Preska, or the group message sent by his firm, Baker & Hostetler LLP.
Bankruptcy Judge Power
The transfer of cases may undercut U.S. Bankruptcy Judge Burton Lifland’s power to recover some of the money that Madoff generated through his fraud and limit Picard’s ability to collect money to pay victims of Madoff’s $52 billion Ponzi scheme, the largest in U.S. history. For example, Rakoff cut Picard’s $1 billion demand from the owners of the New York Mets baseball team by almost two-thirds by making it harder for him to take back principal and limiting his ability to recover profit.
In the end, the Mets owners settled Picard’s claims by agreeing to pay $162 million in fictitious profits, a sum they won’t be required to pay for at least four years, if at all, depending on what happens to the owners’ own claims of $178 million in losses in the Madoff fraud.
This month, Rakoff took more than 300 of Picard’s lawsuits in which defendants adopted the common theme of a Supreme Court decision in June that described limits to bankruptcy judges’ power, according to his April 13 order filed in Manhattan federal court.
Playboy Model Suit
The Supreme Court decision stopped former Playboy model Anna Nicole Smith’s heirs from collecting millions from Texas billionaire J. Howard Marshall’s estate and put district judges in control of more bankruptcy issues.
Clients of lawyers who received Picard’s e-mail saying he intended to transfer their cases from Rakoff to Preska, include Merrill Lynch, represented by Arnold & Porter, and a fund client of Cleary Gottlieb Steen & Hamilton LLP.
Cleary lawyer Tom Moloney, who represents HSBC as well as the fund on the trustee’s list, declined to comment on his clients’ Madoff cases.
The trustee’s group message went to lawyers who represent investors sued by Picard for return of money allegedly received from a feeder fund to the Madoff Ponzi scheme, Fairfield Sentry Ltd., wrote lawyer Nicholas Cremona, a member of Picard’s Madoff team at Baker & Hostetler, in the e-mail. Preska has handled similar suits in the past, he said, asking them to withdraw their cases from a plan being devised by Rakoff “to the extent that you have signed on.”
Justice and Efficiency
The law “provides that cases will be transferred for consolidation when the interests of justice and efficiency will be served,” Cremona wrote. “As a result, we intend to write to Judge Preska and Judge Rakoff to request that the motions be heard before Judge Preska.”
Explaining why he would take all the cases instead, Rakoff said on the conference call that Preska currently isn’t handling any Madoff cases, so the suits on the trustee’s list can’t be directed to her, said the person who was on the call.
Defendants in Picard’s suits may be disappointed if they’re hoping their whole cases will be handled by Rakoff, said Kent Yalowitz, a lawyer representing Merrill Lynch and other defendants. Rakoff could send the cases back to Lifland to handle and issue recommendations to Rakoff on how to rule, he said.
“Judge Rakoff is looking very carefully at how to manage this very large group of cases, and he could end up sharing that task with Judge Lifland,” he said.
In their requests to Rakoff to take their cases, more than 300 Picard targets cited the Smith ruling; many also cited the Mets case. In his order, Rakoff told them to choose one lawyer to file arguments on whether the Smith ruling barred bankruptcy judges from making final decisions on fraudulent transfers -- and if so, whether the lower court judges could file recommendations on the cases to a district judge. He’ll decide in June how to handle the suits, he said.
Rakoff set his deadline for new applications in March. At the time, more than 400 defendants had tried to move their cases from bankruptcy court, mostly to Rakoff, according to a March 5 bankruptcy court order. From March 27 to April 2, more than 400 new requests came in to Rakoff, including second pleas by banks such as HSBC that had benefited from his earlier decisions. Koch Industries Inc., the company run by billionaire brothers Charles and David Koch, and Mark Madoff’s widow, Stephanie, wanted Rakoff, too.
Picard has said people and companies he sued are “eviscerating” the bankruptcy court and “perverting” the law by rushing to find new judges for their cases. They seek an “escape hatch” from bankruptcy court, which Congress intended to handle cases involving clawbacks of money withdrawn from a Ponzi scheme, the trustee said in an October filing in U.S. Bankruptcy Court in Manhattan.
“With the floodgates fully flung open, more and more parties are blatantly engaging in forum shopping,” Picard said.
Picard filed more than 1,050 lawsuits to recoup $100 billion he alleges was stolen from the confidence man’s other customers. Picard estimates that the fictitious account statements of Madoff customers totaled $52 billion.
He often accused parties of ignoring “red flags” warning of fraud. Rakoff told him that wasn’t enough to recoup money they invested -- there must be proof of bad faith.
Picard, who has charged $273 million for his firm’s Madoff work, is appealing district court decisions that knocked out $30 billion of his claims against banks. Madoff is in jail, serving a 150-year sentence for fraud.
The Mets case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).