Has the Madoff Trustee Gone Too Far?

Picard’s targets contend he oversteps his authority with charges of fraud and racketeering

Irving Picard has collected $7.6 billion for victims of Bernard Madoff’s Ponzi scheme, and he’s aiming much higher. As the trustee liquidating Madoff’s firm, Picard has filed more than 1,000 lawsuits that he calculates would bring in $100 billion—far more than the $19 billion that he estimates disappeared. Yet some of his claims rest on charges of fraud and racketeering that banks and investors say are beyond the scope of typical bankruptcy cases, and they want judges to bar Picard from pursuing them. Now there are signs judges may agree. Picard’s bank suits are “very aggressive,” says bankruptcy lawyer Harvey Miller, who is not involved in any Madoff case. His claims “are in a gray area of the law.”

Many of the suits are based on the theory that banks and investors had a duty to investigate what Madoff was doing. Instead, Picard says, they ignored signs of possible fraud such as the con man’s “three-person accounting firm” in a “strip mall” and unusually steady results. While Picard’s strategy could lead to big payouts, the danger is that if judges reject his approach, he will get less from banks and investors in court and may be left with less leverage in any future negotiations.

JPMorgan Chase, HSBC, UniCredit, and the owners of the New York Mets have won initial victories by persuading judges to remove their disputes with Picard from bankruptcy court to higher district courts, which will decide whether Picard exceeded his powers. If the district court rulings go against Picard, Madoff’s victims may end up with a smaller pool of money from which to recover their losses. Picard’s spokeswoman, Amanda Remus, says Picard won’t comment beyond what he has filed in court.

JPMorgan, Madoff’s primary banker, could have stopped the fraud if it had passed on its suspicions to regulators, Picard said in his suit against the bank. On June 24 he revised the suit to triple his damage demands to $19 billion, an amount equal to all of the money investors lost in the Madoff fraud. JPMorgan should be responsible for the total because it “knew” that billions of dollars flowing through the Madoff account “could not have been linked to a legitimate business purpose,” Picard wrote.

Banks have no duty to investigate customers, JPMorgan says. Picard’s interpretation of bank law “would impose broad investigative duties on banks that do not exist,” it said in February, when it asked a district judge to pull the case out of bankruptcy court, where Picard filed it. The judge granted the request.

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. The banks say that’s just what Picard’s suits require Burton Lifland, the bankruptcy judge handling the Madoff case, to do. So now 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 Colleen McMahon in New York will decide if Picard is entitled to bring such a suit against JPMorgan.

Among Picard’s biggest targets are foreign banks. In December he sued UniCredit of Italy and dozens of other parties for $19.6 billion in New York, invoking the Racketeer Influenced and Corrupt Organizations Act to ask for triple that amount in damages. UniCredit says in court filings that Picard’s use of U.S. RICO law for foreign entities is “unprecedented” and that his claims are “exorbitant.” On June 6, U.S. District Judge Jed Rakoff said he would decide whether the U.S. RICO law can be used to extract damages from foreign companies. If he says no, Picard will have to claim much smaller amounts from banks and investors, saying they shouldn’t have taken profits from the Ponzi scheme.

New York Mets owners Fred Wilpon and Saul Katz have also challenged Picard’s right to sue them. Brokerage customers don’t have a duty to investigate their money manager, they say. At a July 1 hearing, Rakoff said their contention may be true and that he will review Picard’s $1 billion suit against them and other partners in their group, Sterling Equities. If he rules in favor of the Mets owners, he would undermine Picard’s argument for taking back $700 million in principal they invested with Madoff, according to Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald in Louisville. Bowles, who is not involved in the case, says Picard might still have a basis for collecting the $300 million in fictitious profits Wilpon, Katz, and their partners allegedly withdrew from their accounts with Madoff.

Outside investors speculating in Madoff claims have been optimistic about Picard’s efforts, according to Andrew Gottesman, who heads bankruptcy claims trading at SecondMarket in New York. That would change very quickly if Picard suffers serious setbacks in court. Madoff claims trade at 70¢ on the dollar, up from 30¢ in early December. “The general view is, Picard will have enough success with his lawsuits to provide substantial recovery over and above what has settled,” says Gottesman. “That’s what’s driving pricing. If the trustee loses those lawsuits against the banks, traders’ sense of the risk involved would change.”


    The bottom line: Picard’s attempts to collect $100 billion for victims of Madoff’s Ponzi scheme may face setbacks from district court judges.

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