"No doubt, there are advantages to the course Picard
wants to follow. But equity has its limits."
A federal appeals court dealt
a significant setback to the quest to recover funds for victims of Bernard
Madoff's $65 billion Ponzi scheme, ruling that the court-appointed bankruptcy
trustee could not pursue claims totaling more than $30 billion against
financial institutions accused of aiding the scheme. The U.S. Court of
Appeals for the Second Circuit issued a unanimous order Thursday upholding the
dismissal of claims that JP Morgan, HSBC, Unicredit, and UBS (the
"Financial Institutions") 'aided and abetted' Madoff's fraud by
ignoring numerous red flags that should have alerted them to the fraud.
The three-judge panel agreed that, under the theory of in pari delicto, because
the bankruptcy trustee, Irving Picard, stood in the shoes of Madoff's former
firm, he was precluded from bringing claims against third parties for their
role in a fraud that Madoff's firm masterminded.
Picard filed lawsuits against a multitude of financial
institutions in 2009 and 2010, including the Financial Institutions.
Originally filed in bankruptcy court, the Financial Institutions sought
to have the actions removed to federal district court based on Picard's
standing to assert the claims, as well as whether the claims were precluded by
the Securities Litigation Uniform Standards Act. In late 2011, two
different federal judges in the Southern District of New York granted motions
to dismiss the trustee's common-law claims against the Financial Institutions,
finding that Picard's claims were barred by the doctrine of in pari delicto.
Picard immediately appealed those decisions.
The doctrine of in pari delicto, translating to
'in equal fault,' is a compelling defense in the realm of bankruptcy
jurisprudence, as "a debtor's misconduct is imputed to the
trustee because, innocent as he may be, he acts as the debtor's
representative." The Wagoner rule, drawn from the seminal case
of Shearson Lehman Hutton, Inc. v. Wagoner, bars a trustee
from suing to recover for a wrong that he himself essentially took part
in. 944 F.2d 114, 118 (2d Cir. 1991) [an enhanced version of this opinion is available to lexis.com
subscribers]. Under this authority, the Second Circuit reasoned
Picard alleges that the Defendants were complicit
in Madoff's fraud and facilitated his Ponzi scheme by
providing (well-paid) financial services while ignoring
obvious warning signs. These claims fall squarely within the rule of
Wagoner and the ensuing cases: Picard stands in the shoes of BLMIS and may
not assert claims against third parties for participating in a fraud that
Dismissing Picard's claims that the doctrine did not
apply or, in the event that it did, he was exempted as a trustee under the
Securities Investor Protection Act, chief Judge Dennis Jacobs remarked that
"Picard's scattershot responses are resourceful, but they all miss the
While Picard appealed to principles of equity in
contending he should be permitted to bring the claims, the Court questioned the
merits of this approach, remarking "it is not obvious why customers
cannot bring their own suits against the Defendants." As the
Financial Institutions pointed out, indeed some victims have already done so.
While Picard still holds bankruptcy claims against the
Financial Institutions totaling more than $4 billion, the Second Circuit's
decision is a significant setback in the quest to recover funds for Madoff's
victims, who to date have received three
distributions of approximately 43% of approved losses. To date, Picard
has approved approximately $11 billion in claims, while he has recovered
approximately $9.3 billion.
A copy of the Court's decision is here.
For more news and analysis of Ponzi schemes, visit
Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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