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)

Well, here’s a big shocker: Grant & Eisenhofer and Bernstein Litowitz Berger & Grossmann aren’t the only shareholders’ firms that think Rupert Murdoch’s News Corp is ripe for the picking. It’s been a little more than a week since G&E and Bernstein amended the complaint in their already-underway Delaware Chancery Court shareholder derivative suit against the News Corp board to include allegations from the British phone-hacking and bribe-paying scandal. Turns out that’s plenty of time for other shareholder lawyers to fire up their word processors and lodge their own complaints.

On Friday, a Massachusetts union pension fund represented by Labaton Sucharow filed a Delaware derivative suit. And on Monday, Manhattan federal court docketed a derivative complaint filed by Glancy Binkow & Goldberg on behalf of an individual News Corp shareholder. So now what? Who gets to control the shareholder litigation against Murdoch’s embattled company?

There’s no clear answer to that question, which means we may be in for a tussle between the Delaware and New York plaintiffs firms. As I mentioned in a post yesterday, Chancery Court judges are increasingly irritated that shareholders are filing mergers and acquisition and corporate governance suits in courts outside of Delaware. But there’s no formal framework for determining where cases like this should proceed. (That’s in contrast to federal securities class actions, in which the litigation process is strictly governed by the Private Securities Litigation Reform Act.)

As an initial matter, Labaton Sucharow’s Delaware case will be consolidated with the pending News Corp derivative suit, under the judicial order that first combined Grant & Eisenhofer’s case with Bernstein Litowitz’s back in March. Labaton partner Christine Azar told OTC that the firm won’t oppose consolidation and plans to work with G&E and Bernstein Litowitz. I asked Azar if she filed a separate suit just to get the Massachusetts fund a seat at the table alongside the other plaintiffs firms. “My client very much wanted to get involved in this one, as you might imagine,” she said. “A seat at the table may be putting it mildly.”

The New York case, unlike the Labaton suit, isn’t an exact parallel to the pending Delaware suit. The Glancy firm’s complaint includes a federal law claim that News Corp. failed to disclose the true nature of its internal controls to shareholders in proxy materials, and calls for a new board election.

Typically, in these kinds of jurisdictional duels, the defendant makes the opening move, asking for one of the cases to be stayed in favor of the other. (News Corp’s counsel in the Delaware suit, Edward Welch of Skadden, Arps, Slate, Meagher & Flom, didn’t return a call.) Then it’s really up to the judges presiding over the cases to decide which case to stay. Vice-Chancellor John Noble, who’s overseeing the Delaware suit, certainly has a good justification for letting Delaware lead the way, since the Chancery Court suit has been underway for months and Delaware law will govern any court’s consideration of allegations against the Delaware-chartered News Corp.

Bernstein Litowitz, moreover, plans to stay in control, along with Grant & Eisenhofer, of the litigation against News Corp. “My firm and our co-counsel are representing institutions that decided months ago that enough is enough,” said partner Mark Lebovitch. “We have every intention of pursuing our claims and righting the ship at News Corp.”

Lebovitch told OTC he’s all the more fired up about the derivative suit because of comments Monday by News Corp. independent board member Thomas Perkins, the Silicon Valley venture capitalist. Perkins reportedly said that the News Corp. board solidly supports the company’s top officers, including Rupert Murdoch. “I can assure you, there has been no discussion at the board level in connection with this current scandal of making any changes,” Perkins said. “Mr. Perkins’ quote shows what we’ve been saying all along,” Lebovitch said. “So much for any semblance of this board acting like it’s going to conduct a fair and independent inquiry.”

But Glancy Binkow contends the Delaware suit should be halted so it can proceed with the New York case. Glancy associate Louis Boyarsky told OTC the Delaware case originally focused on blocking News Corp’s acquisition of Shine Limited, the production company owned by Elisabeth Murdoch (one of Rupert’s daughters), and not on the phone hacking allegations. “The derivative claims with regard to the hacking scandal are add-ons [in that suit],” Boyarsky said. By contrast, he said, those claims are central to the New York suit. “We believe a stay would be inappropriate in our case,” he said. “We believe the court will look at how aggressively we’re litigating the action and the comprehensiveness of our complaint.” I asked how the firm has demonstrated its aggressiveness; he declined to disclose Glancy’s strategy but said, “We’re prepared to move swiftly.”

Meanwhile, Forbes columnist Robert Lenzner is floating a intriguing idea that could end all of this shareholder trouble for News Corp. Murdoch and his family already own 47 percent of the News Corp voting rights, Lenzner said in a Huffington Post item. The company’s just-announced $5 billion buyback plan will deliver another 6 percent into Murdoch hands. “This $5 billion move,” Lenzner wrote, “could be the first step in taking out the public shareholders-and ensuring that the media and entertainment empire stays in the control of his children.” If Murdoch took the company private, under Chancellor Strine’s reasoning in the recent (and controversial) Massey ruling, shareholders’ derivative claims could essentially be wiped out.

(Reporting by Alison Frankel)