Opinion

Alison Frankel

$90 bln answer: Rakoff says Picard has no standing in bank suits

By Alison Frankel
July 29, 2011

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)

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