Alison Frankel

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)

For vulture funds holding defaulted Argentinean bonds, the U.S. Court of Appeals for the Second Circuit has been a brick wall with only the tiniest of chinks. In recent years, the appellate court has rejected all sorts of clever stratagems the bondholders and their lawyers have dreamed up in an effort to get their hands on Argentine assets, including an attempt to attach assets belonging to Argentina’s central bank and pension system.

One notable exception to the rule of bondholder frustration at the Second Circuit was the appellate court’s 2006 ruling that a holder called Capital Ventures International had the right to attach Argentine collateral (in the form of U.S. and German government securities) held by the Federal Reserve Bank in New York. Argentina put up the securities to back its 1992 issuance of so-called “Brady bonds,” which, under a plan pushed by then-Treasury Secretary Nicholas Brady, exchanged $28.5 billion in defaulted bonds for collateralized Brady bonds due in 2023. The Second Circuit’s 2006 ruling meant that if Argentina attempted to restructure or exchange the Brady bonds before their 2023 maturity, CVI was first in line to get its hand on the securities held at the Fed.

There was just one big problem with the 2006 appellate ruling for CVI and its lawyers at Ballard Spahr and Cozen O’Connor: it came too late. By the time the Second Circuit overturned a lower court ruling and granted CVI a right to the Fed-held collateral, Argentina had already completed an exchange of $2.8 billion in Brady bonds. Because CVI only had a right to the collateral at the Fed if Argentina was engaged in a Brady bond exchange, CVI was out of luck, despite its appellate win. CVI was left holding a big-money judgment against Argentina — more than $200 million in CVI’s case — with no foreseeable way to collect on it.

Then Argentina pushed its luck. In 2010, the country proposed another exchange for holders of the collateral-backed Brady bonds. Mindful of CVI’s rights under the 2006 Second Circuit ruling, Argentina’s lawyers at Cleary Gottlieb Steen & Hamilton asked Manhattan federal court judge Thomas Griesa to modify CVI’s attachment order to permit the $100 million Brady exchange to go forward without giving CVI a chance to snare the collateral held at the Fed. Judge Griesa, who oversees all of the litigation between Argentina and its disgruntled bondholders, agreed to the modification. But he also stayed his order so CVI could return to the Second Circuit.

On Wednesday a three-judge appellate panel once again ruled in CVI’s favor. (Here’s Reuters’ story on the ruling; here’s the 23-page opinion by Judge Gerard Lynch for a panel that also included Judges Pierre Leval and Guido Calabresi.) The Second Circuit concluded that CVI is entitled to maintain its right to attach the collateral, even if that means Argentina’s $100 million Brady bond exchange will be blocked. The appeals court rejected various arguments by Cleary’s Carmine Boccuzzi Jr. about the Brady bondholders’ senior lien on the collateral and unilateral right to amend the original Brady exchange agreement. The judges also said Argentina’s situation wasn’t dire enough to justify curtailing CVI’s rights.

So can CVI collect the more than $200 million it’s owed via the Fed collateral? Not so fast, said M. Norman Goldberger of Ballard Spahr, who argued at the Second Circuit for CVI. If Argentina calls off the exchange and leaves the Brady bonds in place until the mature in 2023, CVI won’t be able to get its hands on the collateral held at the Fed.

“I wish [the ruling] meant I’d get CVI’s money right away, but it doesn’t,” Goldberger said. What it might mean, though, is that CVI can persuade Argentina to enter negotiations, Goldberger added. “We don’t have any interest in screwing [Brady bondholders],” he said. “We want Argentina to talk to us, and they won’t. We weren’t in this for leverage. We’re just playing by the rules.”

(Reporting by Alison Frankel)