Last week, Manhattan federal district court judge Jed Rakoff agreed to hear a motion by dozens of Bernard L. Madoff Investment Securities investors to move the Madoff bankruptcy trustee’s clawback case against them from bankruptcy court to federal court. That ruling came a week after Judge Rakoff took over a similar action filed by the owners of the New York Mets. Rakoff now has control of five suits originally filed by Madoff trustee Irving Picard and the judge is poised to determine whether Picard can go forward with nearly $100 billion in fraud and clawback claims.
Next week Rakoff will hold a hearing on whether Picard has standing to bring a multibillion dollar suit against Madoff banker HSBC. If he decides Picard doesn’t have standing, the trustee’s megasuits against the banks Madoff used to facilitate his Ponzi scheme could be wiped out in a fell swoop.
How did Judge Rakoff come to control the fate of Picard’s sweeping litigation against banks and Madoff investors? There are three answers to that question: Rakoff’s colleague, Judge Richard Berman; the vagaries of the Southern District’s assignment wheel; and a little box on the cover sheet for New York federal court civil filings that asks lawyers about related cases.
Confused? Here’s what happened. Last winter, Picard and his colleagues from Baker & Hostetler filed a blizzard of suits in Manhattan federal bankruptcy court against everyone they could possibly tag with liability for Madoff’s fraud. That action prompted HSBC and its lawyers at Cleary Gottlieb Steen & Hamilton to move for what’s called a withdrawal of the reference to bankruptcy court. (Litigation involving a party in bankruptcy is supposed to take place in bankruptcy court, so anyone who wants a bankruptcy-related case to be heard in federal court has to ask a federal judge to withdraw the reference to bankruptcy court.) When HSBC asked for a court order to move Picard’s case to federal court, the bank’s lawyers indicated that HSBC’s motion was related to an ongoing class action Madoff investors had brought against the bank and several other defendants.
The class action was overseen by Judge Berman, so he was entitled to accept Picard’s HSBC case if he deemed it to be related. Judge Berman, however, declined to take it. The HSBC suit to remove Picard’s case from bankruptcy court went back to the Southern District clerk and was randomly assigned to Judge Rakoff on Feb. 16.
Meanwhile, JPMorgan Chase, also the subject of a Picard suit, filed its own withdrawal motion to move Picard’s case against it to federal court. JPMorgan’s lawyers at Wachtell, Lipton, Rosen & Katz indicated that the case was related to one before Judge Louis Stanton, but he declined it. On February 17, the Morgan case was randomly assigned to Judge Colleen McMahon.
Two cases, two judges. And both Judge Rakoff and Judge McMahon decided that the banks’ cases should be heard in federal court. Rakoff ruled first. At the end of a March 12 hearing, he informed lawyers for Picard and HSBC that the case raised standing and federal securities law issues that belonged before him. Judge McMahon ruled in May that Picard’s entire case against J.P Morgan belongs in federal court.
Of the four Picard cases that have come to federal court since Rakoff and McMahon accepted their assignments, all have ended up before Judge Rakoff. The suit involving UniCredit and Italian banker Sonia Kohn, which are represented by Skadden, Arps, Slate, Meagher & Flom, is entwined with the HSBC case, so Judge Rakoff accepted it as a related case in late February. (He ruled after a hearing last week that he has jurisdiction over Picard’s racketeering claims against Kohn.)
Then in late May, the owners of the New York Mets filed an action in the Southern District to move Picard’s billion-dollar clawback action against them to federal court. Their lawyers at Davis Polk & Wardwell indicated that the suit was related to both the J.P. Morgan and HSBC cases. The court clerk sent the case to Rakoff because the HSBC federal court case he’s overseeing preceded the Morgan suit before Judge McMahon. Rakoff took it, and then took the individuals’ clawback suit a week later, after the Madoff investors’ lawyer, Helen Chaitman of Becker & Poliakoff, indicated on the cover sheet that the clawback action is related to the other cases before Judge Rakoff. (He hasn’t ruled whether either of the clawback cases raises issues that belong in federal court.)
The Picard team also seems to want Judge Rakoff to oversee the Madoff federal court cases. When the trustee’s Baker & Hostetler lawyers filed a suit to stay the investor class action against HBSC and related defendants, they indicated that Rakoff should hear the case—even though the class action they’re asking to stay is before Judge Berman.
OTC called lawyers for the Picard defendants with cases before Judge Rakoff, but none wanted to comment. A Picard spokeswoman sent an e-mail statement: “We are confident in our positions and our claims and we are ready to proceed in district court with Judge Rakoff according to his decisions in each of the matters.”
(Reporting by Alison Frankel)