Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, June 20, 2013

Madoff Trustee Lacked Standing to Pursue Banks On Behalf of Investors

By Lene Powell, J.D.

A three-judge panel of the Second Circuit Court of Appeals affirmed the dismissal of Madoff investor claims by the district court for the Southern District of New York. The court held that the claims, brought by Madoff trustee Irving Picard, were barred by the doctrine of in pari delicto, and Picard lacked standing to pursue claims on behalf of customers (Picard v. JPMorgan Chase & Co., June 20, 2013, Jacobs, D.).

Background. Picard sued a group of major banks in his capacity as Trustee under the Securities Investor Protection Act (SIPA) on behalf of victims of the multi-billion-dollar Ponzi scheme carried out by Bernard Madoff. Picard asserted claims for unjust enrichment, breach of fiduciary duty, aiding and abetting fraud, and negligence, among other common law claims.

Picard argued that when the banks were confronted with evidence of Madoff’s illegitimate scheme, the banks looked away, or at least failed to perform due diligence that would have revealed the fraud, because of the banking fees they received.

Two opinions by the district court below, which the Second Circuit panel called “thorough” and “well-reasoned,” held that the Trustee did not have standing to pursue common law claims on behalf of Madoff’s customers.

Trustee lacked standing. The Second Circuit observed that the basic principle of standing, that a party must assert his own legal rights and defenses without resting his claims to relief on the rights of third parties, has been consistently applied in bankruptcy cases in actions brought by trustees on behalf of creditors. Although a SIPA liquidation is not a traditional bankruptcy, a SIPA trustee is vested with the same rights as a trustee in a case under Title 11, said the court.

The court rejected Picard’s argument that he was acting as a bailee of customer property, finding analogies to the law of bailment “inapt and unconvincing.” Madoff’s commingling of customer funds defeated any analogy to bailment. The court also was not impressed by the reverse argument, asserted by SIPC, that the Madoff fund was the bailee, and Picard was acting on the fund’s behalf in recovering the property. The court noted that Madoff took the investment money from the customers in order to defraud them, and a thief is not a bailee of stolen property.

The court disagreed with Picard’s assertion that he was enforcing SIPC’s rights of equitable and statutory subrogation. Picard contended that because SIPC advanced funds to customers at the outset of the liquidation, SIPC was subrogated to those customers’ claims against the defendants and could assert them as subrogee, and Picard was authorized to enforce that right on SIPC’s behalf. The court said that although it was true that a SIPA trustee advances money to pay claims, the statute went no further. The court said SIPC was a “creature of statute,” and neither the plain language of the statute nor its legislative history supported Picard’s position.

Contribution. As to a claim of contribution, the court held that the SIPA payments for which Picard sought contribution were not compelled by the Madoff firm’s state law fraud liability to its customers. Instead, his obligation to pay customers their ratable share of customer property arose under SIPA, which is federal. However, SIPA provides no right to contribution, said the court, and it is settled in the Second Circuit that there is no claim for contribution unless the operative federal statute provides one.

Dismissal affirmed. Because Picard as trustee lacked standing to pursue claims on behalf of the injured customers, the court affirmed the dismissal of the cases by the district court.

The case is Nos. 11-5044, 11-5051, 11-5175, and 11-5207.

Attorneys: David J. Sheehan, Esq. (Baker & Hostetler, LLP) for Irving H. Picard. John Ford Savarese (Wachtell, Lipton, Rosen & Katz) for JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities, LLC and J.P. Morgan Securities Ltd. Lauren T. Attard, Esq. for the Securities Investor Protection Corporation.

Companies: JPMorgan Chase & Co.; JPMorgan Chase Bank, N.A.; J.P. Morgan Securities, LLC; J.P. Morgan Securities Ltd.; Securities Investor Protection Corporation

MainStory: TopStory FraudManipulation ConnecticutNews NewYorkNews VermontNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.