In the end, it wasn't even a close call.
Using words like "conjecture," "bootstrapping," and "a
stretch," Manhattan federal court judge Jed Rakoff on Thursday
decimated trustee Irving Picard's multibillion-dollar campaign
against the banks that allegedly helped Bernard Madoff engineer
his fraud, in a 26-page opinion that left no room for doubt.
Rakoff so thoroughly rejected each and every one of Picard's
arguments for why he had the right to bring common law fraud
claims against HSBC and UniCredit that the judge didn't even
cite much legal precedent through the first half of the ruling.
He simply applied what he calls "ordinary use of the English
language" to conclude that no reading of the relevant laws or
cases grants Picard standing to sue the banks for unjust
enrichment and aiding and abetting fraud and breach of
fiduciary duty. This ruling derived its power-and it is a very
powerful opinion-from its simplicity.
Rakoff's ruling immediately affected Picard's $6.6 billion
case against HSBC and a parallel $2.2 billion case against
UniCredit. But it's going to have huge repercussions beyond
those suits. Judge Rakoff is also presiding over Picard's $60
billion racketeering case against UniCredit and related
defendants, and it's a certainty that UniCredit's lawyers at
Skadden, Arps, Slate, Meagher & Flom will ask the judge to
apply his ruling on Picard's standing and bounce that suit as
well.
Meanwhile, Judge Colleen McMahon, who is Judge Rakoff's
neighbor on the 14th floor of the Manhattan federal courthouse,
is poised to rule on Picard's standing in his common-law suits
against UBS and JPMorgan Chase. McMahon is certainly an
independent-minded judge so it would be a mistake to assume
she'll simply follow Rakoff's lead. But Rakoff knew full well
how intensely his ruling on Picard's standing would be
scrutinized, and nevertheless showed no equivocation in his
opinion. It's hard to imagine Judge McMahon reaching a contrary
conclusion.
If McMahon-and, ultimately, the appellate courts-agree with
Rakoff, Picard's audacious attempt to hold the banks
responsible for failing to end Madoff's Ponzi scheme is doomed.
As I reported a few weeks back, Picard's standing to bring
common-law claims against the banks is a threshold issue. To
prosecute a suit, you have to be able to show that you were
injured. Picard, as the bankruptcy trustee in the Madoff
Chapter 11, stands in the shoes of the debtor, Bernard L.
Madoff Investment Securities. But his common-law claims against
the banks weren't brought on behalf of Madoff's now-defunct
investment company-which, as Rakoff explained in Thursday's
ruling, is barred from suing alleged co-conspirators like the
banks by a doctrine called in pari delicto. Instead, Picard's
lawyers at Baker & Hostetler said they were bringing claims
against the banks on behalf of Madoff's customers, who lost
billions when Madoff's scheme was exposed.
HSBC's lawyers at Cleary Gottlieb Steen & Hamilton and
UniCredit's Skadden counsel countered that as bankruptcy
trustee, Picard has no right to stand in the shoes of Madoff's
customers.
In Thursday's ruling, Rakoff analyzed each of Baker &
Hostetler's proposed justifications. In their most basic
argument, Picard's lawyers said the trustee has the power to
sue on behalf of Madoff investors under the Securities Investor
Protection Act. SIPA, they said, gives the trustee the right to
investigate claims against third parties, so, by extension, the
trustee has the power to prosecute those claims. Rakoff said
Picard was misreading the law. "Neither the language nor the
structure of SIPA supports this conjecture," he wrote. "The
trustee argues that [his] investigative authority would be
'academic' if he could not use the information discovered in
such investigations to commence law suits against third parties
on behalf of defrauded customers. To say this argument is a
stretch would be to give it more credence than it deserves.If
Congress had intended to confer upon the trustee authority to
seek contribution for payments of customer claims, it would
have said so in SIPA."
Baker & Hostetler also proposed that Picard has implied
standing under the Exchange Act of 1934, which has a provision
segregating customers' assets from those of a broker-dealer to
protect investors when an investment house goes under. Rakoff
said he was "mystified" by the argument that the Exchange Act
somehow confers powers that SIPA doesn't. In any event, he
said, the Exchange Act provision "cannot be read to grant the
trustee additional standing, because the rule, which requires
broker-dealers to segregate all cash in their possession for
the benefit of customers, says nothing about a SIPA trustee's
standing to bring common law claims against third
parties."
Finally, Rakoff rejected Picard's arguments that he has
standing to sue the banks under the common law theory of
bailment, which says someone who holds property on behalf of
someone else (like a dry cleaner who has temporary possession
of your clothes) can bring claims on the property owner's
behalf; and as the enforcer of the Securities Investor
Protection Corporation's derivative right to bring claims on
behalf of investors. Baker & Hostetler's support for those
theories rested on an old opinion by a divided panel of the
U.S. Court of Appeals for the Second Circuit in a case called
Redington v. Touche-Ross. The Redington ruling was later
overturned on different grounds by the U.S. Supreme Court, and
at the June 23 oral argument before Judge Rakoff on Picard's
standing, lawyers for the trustee and the banks split on
whether Redington's conclusion on a bankruptcy trustee's right
to sue is still good law, given that the decision was reversed
for other reasons.
Rakoff said in Thursday's opinion that Redington is no
longer good precedent-but went on to conclude that even if it
were, the ruling wouldn't confer standing on Picard in the
Madoff cases because the facts aren't parallel. "Redington does
not anywhere hold that a SIPA trustee has standing to pursue
common law claims against third parties as bailee of customer
property," Rakoff wrote.
As Jonathan Stempel reported for Reuters, Picard's
spokeswoman said the trustee's lawyers are analyzing the ruling
and can't yet comment on it. HSBC's Cleary lawyers didn't
return my calls. UniCredit counsel Marco Schnabl of Skadden
said, "We're pleased with the decision. We're analyzing it to
see where we'll go from here."
(Reporting by Alison Frankel)