Madoff Trustee Tries to Recoup $30 Billion After Defeats

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The Bernard Madoff firm’s liquidator will try to recoup $30 billion for the con man’s customers in court by reviving damage claims against banks including JPMorgan Chase & Co. and HSBC Holdings Plc.

Madoff trustee Irving Picard appealed rulings barring him from demanding damages from banks that allegedly ignored Madoff’s fraud for the sake of fees. Federal district judges Colleen McMahon and Jed Rakoff, both in Manhattan, said Picard can’t accuse the banks of fraud because he’s the trustee for a fraudulent enterprise. A panel of the U.S. Court of Appeals in New York is hearing arguments today on what Picard’s powers are as a bankrupt firm’s trustee.

If he loses the appeals, Ponzi customers will have a smaller pot from which to recover their remaining losses, and some investors who bought discounted claims on the con man’s estate may lose the bets they made. Picard so far has distributed $2.9 billion out of $9.2 billion he has raised to plug estimated customer losses of about $17.5 billion.

Picard “is challenging a well-established doctrine that has been applied in a number of cases,” said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University in Detroit.

Tough Time

“Courts have been consistent in using the in pari delicto principle to prevent lawsuits between wrongdoers, even when there is a trustee who had nothing to do with the fraud,” Henning wrote in an e-mail. “The decisions by Judges McMahon and Rakoff were fairly typical applications of the doctrine, so I expect Mr. Picard will have a tough time asking for an exception to it, despite the huge losses suffered by investors.”

The banks fighting the appeal include Switzerland’s UBS AG and Italy’s UniCredit SpA. The biggest U.S. bank, JPMorgan, was hit with the largest demand from Picard, for $19 billion. It has said in court filings that it was “preposterous” to accuse an institution of propping up a doomed Ponzi scheme, and the fees were small.

In court today, a lawyer for Picard told Chief Judge Dennis Jacobs that, contrary to the district judges’ rulings, the right of a bankrupt brokerage’s trustee to sue to recover money for customers is recognized in investor protection law and court decisions.

“For 30 years, a trustee could bring these claims,” said Oren Warshavsky of Baker & Hostetler. “These laws were enacted for the sole purpose of protecting customers.”

Unbroken Line

A lawyer for JPMorgan, John Savarese of Wachtell Lipton Rosen & Katz, told Jacobs that the district judges’ rulings must be upheld as part of a “long and unbroken line of decisions” limiting a trustee’s power.

The appeals court in New York had ruled over two decades that “a bankruptcy trustee has no standing to sue third parties on behalf of customers,” Savarese said. “Every single time these claims come up, this court has rejected the argument.”

Most of the money Picard has raised since Madoff’s 2008 arrest came from settling lawsuits against former Madoff customers out of court. He took in $5 billion from Jeffry Picower’s estate, and might get something from the New York Mets owners. The trustee’s more than 1,000 suits demanded about $100 billion initially.

Rakoff last year dismissed almost $9 billion in damages that Picard sought from HSBC and feeder funds, saying the trustee exceeded his powers. While Picard can try to recover some money for victims, he can’t sue banks for damages on behalf of customers, he said. Agreeing with Rakoff, McMahon dismissed Picard’s suit against the con man’s banker, JPMorgan.

Liquidation Cost

The cost of liquidating the Madoff brokerage climbed to almost $682 million by Sept. 30, the trustee said in a federal court filing in Manhattan. He and his firm, Baker & Hostetler LLP, have made around $330 million, according to their last bills filed in court.

The HSBC and JPMorgan rulings came after the Anna Nicole Smith case, when the U.S. Supreme Court last year 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.

Picard remains confident of his right to make the claims against the banks, spokeswoman Amanda Remus has said. Madoff, 74, 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 appeal is In re: Bernard L. Madoff, 11-05175, U.S. Court of Appeals, Second Circuit (Manhattan).

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