Why does SCOTUS want SG view on Madoff trustee suits vs bank enablers?
Last Wednesday, JPMorgan Chase resolved civil and criminal allegations of enabling Bernard Madoff to swindle customers of his defunct broker by agreeing to pay $2.6 billion, including $543 million to Irving Picard of Baker & Hostetler as trustee for Madoff’s defrauded investors. Two days later, the U.S. Supreme Court gave Picard and his Baker & Hostetler team reason to hope that JPMorgan won’t be the last bank to cough up millions to Madoff customers: The court invited the U.S. solicitor general to submit a brief expressing the federal government’s position on Picard’s request that the Supreme Court review the 2nd Circuit Court of Appeals’ dismissal of Picard’s claims against the banks he has accused of enabling Madoff’s scheme.
Picard has to be encouraged by the justices’ request. Every certiorari petition faces long odds, and the Madoff trustee is asking the court to review an emphatic appellate decision on arcane issues that have arisen in only a handful of cases in the last 40 years. So any indication that the petition has piqued the justices’ interest is good news for the trustee and bad news for the banks that want the 2nd Circuit’s decision to stand as the last word on Picard’s claims.
Picard’s petition, moreover, doesn’t raise questions that would usually prompt the Supreme Court to ask for the SG’s views. Remember, Picard operates under the auspices of the Securities Investor Protection Corporation, a nonprofit that was established by Congress in the Securities Investor Protection Act but is not a federal agency. The trustee’s suits against Madoff’s bankers don’t implicate obvious federal government interests, as, for example, a case involving a foreign government would. Nor is this a circumstance in which the Supreme Court is weighing an issue that’s percolating in the lower courts and wants the SG’s view of whether a particular case presents a good vehicle to decide it. As I mentioned, the three questions presented in the trustee’s cert petition are obscure indeed: When the SIPC has advanced payments to defrauded investors, does it then have the right to pursue those investors’ claims against third parties under the theory of subrogation; does the SIPA give the trustee a right to sue third parties under state law for contributing to a brokerage’s wrongdoing; and does an SIPC trustee have standing to sue third parties on behalf of a brokerage’s customers through another mechanism, such as the federal bankruptcy code? (Believe it or not, I’ve attempted to strip those questions of legalese; that’s the best I could do.)
The 2nd Circuit didn’t leave any doubt about its answers to those questions. In a decision last June by Judge Dennis Jacobs, the appeals court tossed Picard and all of his theories, just as U.S. District Judges Jed Rakoff and Colleen McMahon had in the trial-court rulings under appellate review. McMahon, in dismissing Picard’s claims against JPMorgan in November 2011, actually called one of his theories on standing – that New York law permits a judgment creditor in a bankruptcy to assume causes of action belonging to other creditors – “preposterous.”
The bank briefs opposing Picard’s bid for Supreme Court review argue that there’s no reason for the justices to jump into issues that are either a matter of New York law on which the 2nd Circuit is properly the last word; have already been addressed by the Supreme Court, which restricted the reach of bankruptcy trustees in 1972, in Caplin v. Marine Midland; have procedural deficiencies that make this case an improper vehicle; or do not present “important or frequently recurring” questions, to quote a joint cert opposition brief by Wachtell, Lipton, Rosen & Katz (for JPMorgan) and Gibson, Dunn & Crutcher (for UBS). It is true, the banks concede, that in a 1995 ruling called Appleton v. National Bank of Ohio, the 6th Circuit Court of Appeals held that a SIPC trustee may pursue claims belonging to defrauded investors. But according to the opposition brief of HSBC and Unicredit, represented by Skadden, Arps, Slate, Meagher & Flom and Cleary Gottlieb Steen & Hamilton, the 6th Circuit relied on discredited 2nd Circuit precedent – a since overturned case called Redington v. Touche Ross – that was expressly rejected in the 2nd Circuit’s Madoff trustee opinion in June. (There’s also arguably a 3rd Circuit decision that supports Picard, but the banks claim it’s mere dicta from a 1977 case with facts distinguishable from those in the Madoff litigation.)
Given all of the reasons for the Supreme Court to pass on the Madoff cert petition, why has it instead invited the SG to opine? One theory is that the justices – or, at least, the Supreme Court clerks who prepare memos on certiorari petitions – were swayed by headlines about JPMorgan’s big settlement of Madoff-related claims. With JPMorgan chipping up $2.6 billion for its ties to Madoff, that theory goes, the Supreme Court wanted to be sure it considered every possible argument for holding Madoff’s bankers liable. And while SIPC did submit a brief supporting Supreme Court review, the nonprofit investor corporation didn’t analyze all of the implications for the U.S. government of restricting the ability of SIPC trustees to pursue claims against fraud abettors; SIPC, after all, is not a federal agency.
A distinct but related theory is that, regardless of JPMorgan’s big settlement, the Supreme Court wants to understand all of the policy implications of the trustee’s arguments. Baker & Hostetler’s reply to the banks asserts with great vehemence that if the Supreme Court denies cert, it “will permanently hobble SIPC and SIPA trustees from carrying out their duty to make whole the customers of failed brokerages.” The justices must hold banks accountable for enabling Ponzi schemers, the brief said, and unless the court steps in to reverse the 2nd Circuit, “SIPA will prove unequal in every case to adequately compensating those injured by financial fraud.”
Under standard operating procedure, both sides will now meet with the solicitor general in an attempt to receive his office’s support. The SG, as you know, has complete discretion to recommend that the cert petition be granted or denied, to submit a brief that takes no position on cert, or to decline altogether the court’s invitation to submit a brief. It’s unlikely that the office will respond to the invitation before May or June, which means the Supreme Court may not decide whether to grant Picard’s petition for review before its June recess and, if it does grant cert, certainly won’t hear the case until next term.
By then JPMorgan will probably be out of the Supreme Court litigation, as long as the bankruptcy judge overseeing the Madoff case approves its settlement with Picard. The other banks, however, were less entwined with Madoff than JPMorgan and are expected to continue battling Picard, all the way through Supreme Court arguments, if need be.
(Reporting by Alison Frankel)