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August 15‚ 2011
Madoff Trustee Cannot Sue Firms That Ignored
Evidence of Fraud
By Kevin J. Walsh
and Ella Shenhav
In the aftermath of the largest Ponzi scheme ever to hit
investors, Bernie Madoff’s victims are still reeling from the tremendous
losses they have suffered, and are looking for any possible avenue to
recover even a fraction of their investments. One potential avenue of such
recovery, “feeder funds”—firms that sent investors’ funds to Madoff
Securities and that failed to detect the fraud—may have been closed off
recently when the US District Court for the Southern District of New York
held that the Madoff trustee, Irving H. Picard, has no standing to pursue
certain common law claims against the funds. Picard v. HSBC Bank PLC,
2011 WL 3200298 (S.D.N.Y., July 28, 2011). Not only did this decision halt
the pursuit of approximately $8.5 billion of claims against the funds, it
may also foreclose Picard from pursuing lawsuits based on similar claims
seeking $19 billion from JPMorgan Chase and nearly $60 billion from Bank
Medici and other defendants.
Picard, who was appointed trustee pursuant to the Securities
Investor Protection Act (SIPA) shortly after the Ponzi scheme was
discovered in December 2008, has attempted to maximize the recovery to
Madoff’s injured parties by bringing suits against alleged wrongdoers. In
this recent proceeding, the trustee brought suits totaling more than $8.5
billion against HSBC Holdings and several other defendants that allegedly
helped funnel money from foreign investors into Madoff’s fraudulent
business. These feeder funds, argued Picard, violated a duty to Madoff’s
investors by failing to investigate and detect the fraud, despite being
confronted with “myriad red flags and indicia of fraud.” Picard sought
recovery against these defendants on several common law theories, including
unjust enrichment, aiding and abetting fraud, and aiding and abetting
breach of fiduciary duty.
Refusing to address the issue of liability on the merits,
Judge Rakoff, in an explicit and unequivocal decision, struck down each of
Picard’s many arguments in support of his standing to bring such claims.
The court determined that Picard did not have standing to bring the common
law claims because such claims belonged to third parties—the defrauded
investors—not to the trustee, who is standing in the shoes of Madoff
Securities but not in the shoes of the investors. Under prudential
limitations to the issue of standing, “a party must assert his own legal
rights and interests, and cannot rest his claim to relief on the legal
rights or interests of third parties.” Id. at *2 (internal citations
omitted). The court also held that neither the Bankruptcy Code nor SIPA
authorized standing to bring the common law claims.
Moving beyond the issue of standing, and perhaps sounding the
death knell for many similar claims Picard has pending against other
defendants, the court “amplified” its reasoning why Picard could not bring
the common law claims on behalf of the estate. The court cited the common
law doctrine of in pari delicto (“in equal fault”) and held that
Picard cannot assert the common law claims because a wrongdoer like Madoff
Securities may not recover from another wrongdoer; therefore, by extension,
the trustee for Madoff Securities, stepping into the shoes of that
wrongdoer, is barred by the same limitation from pursuing these claims.
Now, even if the trustee has standing to pursue certain claims against
other defendants, the court has validated the in pari delicto
defense against any of Picard’s claims that he would bring on behalf of the
estate.
HSBC Bank could well be Picard’s Catch 22 in that many
of the claims Picard would bring on behalf of injured investors would
likely be barred by the standing doctrine, and any claims that Picard would
bring on behalf of the estate, while standing would not be an issue, would
likely be barred by the doctrine of in pari delicto.
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