Why Rakoff dumped Picard’s $60 bln RICO case v. Unicredit

February 23, 2012

Over the last six months, U.S. Senior District Judge Jed Rakoff has made Irving Picard of Baker & Hostetler look more like Don Quixote than a white knight riding to the rescue of investors who lost billions in Bernard Madoff’s Ponzi scheme.

Rakoff has already squelched the Madoff trustee’s fraud claims against the banks that allegedly aided and abetted Madoff’s scheme, as well as cutting off Picard clawback claims that date back more than two years. On Tuesday, in Rakoff’s biggest-dollar ruling in the Madoff case, the judge said Picard does not have standing to pursue a $60 billion racketeering suit against UniCredit and two other foreign banks that allegedly participated in a scheme to funnel $9.1 billion to Madoff in exchange for kickbacks to a woman named Sonja Kohn. (Picard had claimed $20 billion in damages, which can be tripled under the Racketeer Influenced and Corrupt Organizations Act.)

Interestingly, Rakoff did not use the same analysis to dismiss the RICO claims as he did in tossing fraud claims against UniCredit and the other banks. In a quick dismissal of the fraud counts, the judge reiterated his July 2011 holding that Picard can’t stand in the shoes of Madoff investors to assert fraud against the financial institutions that allegedly abetted Madoff’s Ponzi scheme. He could have simply said the same is true in the trustee’s racketeering case (which is what I assumed he would do when I wrote about the fraud dismissal in July). Instead, Rakoff seemed to accept, for the purposes of considering the banks’ motion to dismiss, Picard’s argument that Sonja Kohn’s alleged racketeering scheme was, at least to some extent, distinct from Madoff’s scam.

That was, however, Picard’s only success. Rakoff, who is the co-editor of a leading guide to RICO litigation, found that Picard’s RICO suit against the foreign banks failed under at least three defense theories. First, Rakoff said, Picard couldn’t show a link between the banks’ alleged participation in Kohn’s kickback scheme and any injury to Madoff investors. The trustee tried to rely on a 1992 ruling by the U.S. Supreme Court in Holmes v. SIPC, which acknowledged the difficulty of proving indirect injuries under RICO. But Rakoff said Picard was misreading Holmes. According to the judge, the Supreme Court’s ruling requires RICO plaintiffs to establish a direct connection to the defendant’s conduct.

The judge also rejected Picard’s extremely nuanced argument for why his RICO claims against UniCredit and the other banks are not barred by the Private Securities Litigation Reform Act. According to Rakoff, the 2nd Circuit Court of Appeals has held, in a case called MLSMK v. JPMorgan Chase, that under the PSLRA, securities claims cannot serve as predicate acts in a civil RICO suit. (A related 3rd Circuit ruling specifically said that the bar applies to RICO claims related to a Ponzi scheme.) Picard tried a tricky argument, asserting that because Madoff investors can’t bring a securities case against UniCredit and the other banks under Morrison v. National Australia Bank, the PSLRA bar shouldn’t apply to their RICO suit. Rakoff rejected Picard’s reasoning, noting that RICO has its own limits under Morrison, according to the 2nd Circuit’s holding last month in Cedeno v. Castillo.

“[Picard’s argument] is too clever by half and would in many cases allow artful pleading to eviscerate either the territorial reach of the Securities Exchange Act or the purpose of the RICO Amendment to the PSLRA,” the judge wrote.

Finally, and most fundamentally, Rakoff said that Picard hadn’t alleged sufficient facts to proceed to discovery under the heightened pleading standards the U.S. Supreme Court established in Ashcroft v. Iqbal. In a fairly cursory consideration of the trustee’s complaint, Rakoff derided Picard’s “paltry and otherwise unexceptional” allegations, writing that the trustee casts his assertions in a “sinister” light only by “invoking the specter” of a RICO scheme.

UniCredit counsel Susan Saltzstein of Skadden, Arps, Slate, Meagher & Flom said the bank is pleased with Rakoff’s ruling. A spokesperson for Picard sent me an email statement: “The SIPA Trustee and his counsel remain confident in his RICO and common law claims against [UniCredit and related defendants]. The SIPA Trustee will appeal to the United States Court of Appeals for the Second Circuit.”

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