the threshold question of whether a plaintiff has standing—the right to bring a
suit—is pretty simple. If you’ve been harmed, you can sue. But the multibillion
dollar cases that Irving Picard, the Bernard L. Madoff Investment
Securities bankruptcy trustee, has brought against the banks that allegedly
abetted Madoff’s Ponzi scheme are anything but simple.
a jam-packed Manhattan federal courtroom Thursday, Judge Jed Rakoff
heard lawyers for two of the banks Picard has sued, HSBC and UniCredit, assert that neither case law nor federal statute
give the bankruptcy trustee the right to bring suit against them. Picard’s
counsel from Baker & Hostetler argued just the opposite, claiming that
Picard’s standing is grounded in judicial precedent and consumer protection
laws—as well as common sense. An uncharacteristically quiet Rakoff promised
both sides that he’d have a ruling for them by the end of July.
stake is at least $70 billion, and quite probably a lot more. If Judge Rakoff
decides Picard doesn’t have standing in the $10 billion HSBC and $60 billion
UniCredit cases, that’s the end of those cases (in their current formulation).
Moreover, Rakoff’s ruling will carry a lot of weight with Judge Colleen
McMahon, the Manhattan federal district court judge overseeing JPMorgan Chase’s
challenge to Picard’s
newly amended $19 billion claim. If HSBC and UniCredit
prevail, Rakoff’s ruling will likely spur tagalong standing challenges by the
other banks Picard has sued. It’s no stretch to say that Rakoff’sruling on standing could decide the fate of Picard’s bank suits.
certainly seems to regard the question with great gravity. “I have purposely,
as may have been obvious, asked very few questions and that's not my usual
style, as my wife will tell you,” he said at the end of Thursday’s hour-long
hearing. “And the reason is [that] in a
matter of this importance, it seems to me that it is important for the court to
very carefully reflect on all the arguments of counsel rather than indulge in
momentary suggestions of where the court is leaning on any given issue. So I am
going to spend a lot of time rereading the papers, thinking about the
additional points that have been raised here.” (Like at least one of the
lawyers at the hearing, the judge may have assumed that speculators
engaged in trading Madoff claims were among the
spectators spilling out of his courtroom.)
took a lot of comfort in the idea that Picard’s claims were before [Manhattan
federal bankruptcy court judge Burton] Lifland,” said Kenneth Krys, the British
Virgin Islands-based liquidator of the Fairfield Sentry Madoff feeder fund, adding that a bankruptcy court judge could be perceived
as favoring recovery efforts for the estate. “They may take a different
view since [the claims] are now before Judge
a fool’s errand to predict how Rakoff will rule when Rakoff himself has said he
hasn’t made up his mind. But OTC has read the briefs on standing by HSBC, UniCredit, Picard, and the Securities Investor Protection Corporation
(under whose auspices Picard was appointed by the bankruptcy court), as well as Rakoff’s April ruling in which
he claimed jurisdiction and the transcript of Thursday’s hearing. They
don’t dictate answers, but they do crystallize the issues Judge Rakoff will
face as he ponders Picard’s standing over the next several weeks.
An everyday analogy explains the Picard theory.
As Baker & Hostetler’s Oren Warshavsky said at last week’s hearing, imagine you take your suit to the dry cleaners. That creates
a legal relationship, called a bailment,
between you and the cleaner. While your
clothing is at the cleaner’s, the building catches on fire and your suit is
destroyed. Because of the bailment, the dry
cleaner can sue the building owner on behalf of everyone whose clothes were in
his possession at the time of the fire. Under the Securities Investor
Protection Act and the federal rules of civil procedure, the Picard lawyer
argued, the bankruptcy trustee holds the same right as the dry cleaner in his
little homily. Picard stands in the shoes of Madoff’s investors, Warshavsky said, and has the power to bring claims
on their behalf.
SIPC agrees with Picard’s interpretation. HSBC and UniCredit do not. Their
lawyers (Cleary Gottlieb Steen & Hamilton for HSBC; Skadden,
Arps, Slate, Meagher & Flom for UniCredit) told Judge Rakoff that SIPA
gives Picard the right to sue to regain investors’ property, but that’s not
what he’s doing in his fraud litigation against the banks. Fraud claims, the
banks argue, belong only to the alleged victims of the fraud, not to Picard as
their surrogate. (Indeed, some purported Madoff victims have already sued the
banks on their own, Cleary and Skadden assert,
which underscores the distinction between
their standing and Picard’s.)
only Second Circuit ruling that squarely addressed the scope of a bankruptcy
trustee’s power to bring suit on behalf of a brokerage customer came in a 1978
case called Redington v. Touche
Ross. Redington was the trustee for a bankrupt brokerage, Weis Securities.
He sued Weis’s auditor, Touche, for negligence and malpractice on behalf of the
brokerage’s customers. A three-judge Second
Circuit panel affirmed the lower-court
ruling that the securities laws provide a private cause of action for a
bankruptcy trustee, and that Redington had standing to sue.
would seem to favor Picard’s interpretation of his right to sue HSBC and
UniCredit, but in 1979, the
U.S. Supreme Court reversed the Second Circuit. You may be thinking that
the high court decision settles the standing issue in the banks’ favor. Think again.
The Supreme Court found that there was no
private right of action against Touche and reversed on those grounds. The
Justices made no finding on the question of Redington’s standing.
Baker & Hostetler team maintain that the
Second Circuit’s affirmation of Redington’s standing is the last judicial word
on the subject. Skadden and Cleary counter that the appellate court’s ruling
was tossed, so Rakoff isn’t bound by it. Rakoff, in other words, will have to
rule not only on the rare question of the trustee’s standing, but also on the
novel question of whether one portion of a Second Circuit ruling can survive a
Supreme Court decision that reverses the core finding.
spokesperson sent OTC an e-mail statement: “We await the final decision from
the judge.” UniCredit counsel Marco Schnabl of Skadden declined comment.
Cleary partners Evan Davis and Thomas Moloney didn’t respond to
calls and e-mails requesting comment.
by Alison Frankel)
An earlier version
incorrectly stated that Kenneth Krys is based in the Cayman Islands. He is
based in the British Virgin Islands.