Picard drops $2bl in claims against UBS? Um, no, he doesn’t
The damages claims in Irving Picard’s pursuit of the banks that allegedly helped Ponzi schemer Bernard Madoff are so outsized that even a simple two-page letter from a federal judge can lead to a $2 billion kerfuffle. On Tuesday, Manhattan federal district court judge Colleen McMahon sent a letter to lawyers for Picard, the bankruptcy trustee for Bernard L. Madoff Investment Securities, and to lawyers for UBS, which is a defendant in two of Picard’s suits. UBS’s counsel at Gibson, Dunn & Crutcher had moved in June to transfer two Picard suits naming the bank as a defendant out of bankruptcy court and into federal court; Judge McMahon, who is overseeing Picard’s case against JPMorgan Chase, agreed to take the cases on July 7 and began requesting information, by letter, from Picard counsel at Baker & Hostetler and UBS counsel at Gibson Dunn.
To understand Judge McMahon’s July 19 letter — and how it was misinterpreted — it’s important to know that in the two actions naming UBS defendants, Picard is asserting different causes of action and seeking different amounts of money. In the case known as Luxalpha, Picard and Baker & Hostetler claim that UBS breached its fiduciary duty and aided and abetted fraud. That suit demands $2 billion from UBS and other defendants. The other case, known as LIF, is a clawback action demanding the return of all the money the bank and other defendants redeemed from Madoff or earned in fees, a total of $550 million, according to Picard. Though the press release announcing the LIF suit refers to “alleged financial fraud” by UBS, the suit actually claims only unjust enrichment and another common-law cause of action as an alternative to the clawback theory.
In a July 14 letter, Judge McMahon told Baker & Hostetler and Gibson Dunn that she needed more explanation of how the LIF and Luxalpha cases intersected and overlapped, and warned the lawyers that she wasn’t going to slow down the JPMorgan case to address complications in the UBS suit. In response, the Picard lawyers decided to simplify matters, reasoning that if they dropped the alternative-theory common law claims in the $550 million LIF case, there would be no reason for the case to stay in federal court. Picard could simply go after the $550 million in a bankruptcy court clawback action.
Baker & Hostetler’s letter explaining its decision to drop LIF claims to Judge McMahon isn’t in the docket. But the judge entered into the record her July 19 letter, in which she notes (rather cryptically unless you know the background) that Picard “has withdrawn his non-bankruptcy claims.”
On Wednesday morning, Bloomberg put out a hot story, reporting that Picard “may drop $2 billion in claims against UBS AG,” and quoting a bankruptcy lawyer who’s not involved in the Madoff litigation saying that Picard may have made a tactical decision to retreat from bigger claims. Bloggers who picked up the story reported that Picard was only going to pursue clawback claims against UBS. (See here and here.) Bloomberg updated its story to indicate that UBS’s shares were up in both Switzerland and the United States “after the withdrawal of Picard’s claims was reported.”
But according to Picard’s lawyers, he hasn’t given up a penny of his demands against UBS. Oren Warshavsky of Baker & Hostetler told OTC Wednesday that the common-law claims Picard dropped from the $550 million LIF suit “were alternative theories of recovery,” to the bankruptcy-court clawback theory. “By dismissing the two common-law causes of action, our goal is to streamline the case and effect judicial economy. We did not diminish the amount sought in any way,” he said.
Moreover, Picard hasn’t dropped any claims in the $2 billion Luxalpha fraud case against UBS, in which both sides will now presumably brief the very serious questions of standing and pre-emption that Judge McMahon is considering in Picard’s JPMorgan case.
I contacted the editor of the Bloomberg story, asking for comment on my reporting that Picard hadn’t, in fact, dropped any valuable claims. “Our story is based on Judge McMahon’s letter to counsel filed in the district court docket yesterday,” he replied in an e-mail. Bloomberg updated its story Wednesday afternoon to include a comment from Picard’s spokesperson stating that the dropped claims don’t impact the damages sought against UBS. Bloomberg also reports that the bankruptcy lawyer quoted in early versions of the story had reviewed “Picard’s original suit against UBS” (it doesn’t say which one) and concluded, “The trustee ‘will get large sums of money using garden bankruptcy law, but he is giving up at least $2 billion based on common and state law claims.'”
UBS’s lawyers at Gibson Dunn didn’t respond to requests for comment.
There’s going to be big news coming soon in Picard’s cases against the banks. Judge Jed Rakoff has promised to rule by the end of this month on the threshold question of whether the trustee has standing to sue the banks that allegedly abetted Madoff’s fraud. If Rakoff agrees with the banks, that’s a titanic defeat for Picard.
But the trustee dropping duplicative claims to keep his case in the friendlier confines of bankruptcy court? Not so much.
(Reporting by Alison Frankel)