Opinion

Alison Frankel

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

Alison Frankel
Feb 23, 2012 15:48 UTC

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.

Inside the shadowy market for Madoff claims

Alison Frankel
Jan 14, 2012 00:19 UTC

One of the most intriguing offshoots of the mess Bernard Madoff created is the underground market for claims against the estate of his bankrupt securities firm. Last June, when the Wall Street Journal ran a revelatory story on big banks’ trading in Madoff claims, suits by Madoff trustee Irving Picard of Baker Hostetler seemed so promising that claims were trading at 75 cents on the dollar. But according to fascinating new litigation between Deutsche Bank and two Madoff feeder funds, the value of claims has been dropping ever since, and was down to 60 cents on the dollar last month. The billion-dollar declaratory judgment complaint by Kingate Global and Kingate Euro against Deutsche Bank doesn’t offer an explanation for the declining value of Madoff claims. But it’s not much of a leap of inference to guess that U.S. District Judges Jed Rakoff and Colleen McMahon of Manhattan federal district court have more than a little to do with it.

Some background: The British Virgin Islands-based Kingate funds channeled billions of dollars to Madoff before his Ponzi scheme was exposed in December 2008. When Madoff’s securities business collapsed, Kingate investors were out $3.5 billion, according to the funds’ complaint against Deutsche Bank. The funds asserted that they were net losers in Madoff’s scheme, meaning that their losses exceeded their withdrawals from Madoff accounts. They claimed more than $1.6 billion against the Madoff estate.

Picard had rather a different view of the Kingate funds, which he said ignored warning signs of Madoff’s fraud. He sued Kingate Global and Kingate Euro to claw back $1 billion in withdrawals the funds made in the run-up to Madoff’s collapse, as well as allegedly excessive compensation the funds paid top executives.

Are big banks now in the clear for allegedly aiding Madoff?

Alison Frankel
Nov 2, 2011 20:19 UTC

Irving Picard has given the bankruptcy laws one hell of a workout. As trustee in the Chapter 7 bankruptcy of Bernard Madoff’s securities firm, Picard, a partner at Baker & Hostetler, has been more aggressive and creative than any bankruptcy trustee in history in his search for defendants to blame for Madoff’s epic Ponzi scheme. His most ambitious gambit, as everyone knows, was a series of megabillion-dollar suits against the international financial institutions that Picard’s team of lawyers at Baker & Hostetler accused of willfully ignoring warnings of Madoff’s fraud.

The trustee’s suits were provocative headline-grabbers — and on Tuesday, a second Manhattan federal judge concluded that they’re fatally flawed. U.S. District Court Judge Colleen McMahon dismissed Picard’s common law tort claims against JPMorgan Chase and UBS (and related defendants), finding that Picard does not have standing. Her ruling expands and reinforces a previous decision on the same issue by her Manhattan federal court colleague Judge Jed Rakoff, who in July dismissed Picard’s common law claims against HSBC and UniCredit. Tuesday’s decision wipes out about $20 billion in alleged damages, leaving Picard with about $450 million in traditional bankruptcy court clawback claims against JPMorgan and about $80 million against UBS. It’s a huge win for JPMorgan’s lawyers at Wachtell, Lipton, Rosen & Katz — who were actually the first lawyers to ask a federal district court judge to hear one of Picard’s cases — and for UBS’s lawyers at Gibson, Dunn & Crutcher.

But now the question is whether Picard’s allegations that these global banks helped Madoff perpetuate his scheme are dead. The answer is not quite. The trustee’s spokesperson has already announced that Picard’s team from Baker & Hostetler intends to appeal McMahon’s ruling to the 2nd U.S. Circuit Court of Appeals; the trustee has already filed a notice of appeal of Rakoff’s decision. Moreover, as both McMahon and Rakoff discussed in their opinions, Madoff’s customers have the standing Picard lacks. Some enterprising plaintiffs lawyer could certainly capitalize on Picard’s spade work and file a class action against the banks on behalf of Madoff victims.

Mets ruling could upend Madoff bankruptcy

Alison Frankel
Sep 28, 2011 22:27 UTC

Helen Chaitman of Becker & Poliakoff represents more than 300 investors who had accounts with Bernard Madoff. For more than two years she’s hammered away at one particular argument in federal bankruptcy court, in Congress, even on YouTube: Madoff bankruptcy trustee Irving Picard of Baker & Hostetler shouldn’t be allowed to demand the return of profits that Madoff investors pulled out of their accounts as long ago as 2002, six years before the Ponzi scheme imploded in December 2008. On Tuesday night, Chaitman finally found vindication, even though it wasn’t in any of her cases. Manhattan federal judge Jed Rakoff, ruling in Picard’s fraud case against the owners of the New York Mets, concluded that a section of the federal bankruptcy code precludes Picard from attempting to claw back money Madoff investors pulled out of the Ponzi scheme before 2006.

“This is something I’ve been saying from the beginning,” Chaitman told me. “Anyone who didn’t withdraw their money in the last two years [of Madoff's scheme] is out completely.” Jonathan Landers of Milberg, who represents 30 clawback clients, agreed: “This is a very, very significant ruling.”

That’s putting it mildly. Judge Rakoff’s 18-page ruling could completely upend the Madoff bankruptcy. Among the big-name Madoff investors who would be off Picard’s hook completely if Rakoff’s ruling stands is former Securities and Exchange Commission general counsel David Becker, who’s in hot water for allegedly failing to alert SEC commissioners of a potential conflict of interest stemming from his parents’ long-closed Madoff account. Picard had filed a clawback suit against Becker, who inherited money after his parents’ account was liquidated in 2002; Rakoff’s ruling would wipe out Picard’s suit.

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

Alison Frankel
Jul 29, 2011 19:57 UTC

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.

Picard drops $2bl in claims against UBS? Um, no, he doesn’t

Alison Frankel
Jul 20, 2011 22:44 UTC

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.

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