| NEW YORK
NEW YORK Dec 9 The trustee seeking money for
Bernard Madoff's victims may be unable to pursue some claims
against investment firms that fed client funds into the
swindler's Ponzi scheme, a Manhattan federal judge said.
In a decision released on Monday, U.S. District Judge Jed
Rakoff also said the trustee Irving Picard could not pursue
"unjust enrichment" claims against spouses of Madoff's sons
Andrew and Mark, saying the women did not qualify as "insiders"
who could be held liable for fraud.
Amanda Remus, a spokeswoman for Picard, said the trustee is
reviewing the decision. Lawyers for Deborah Madoff, who married
Andrew Madoff in 1992, and Stephanie Mack, who married Mark
Madoff in 2004, were not immediately available for comment. Mark
Madoff committed suicide in December 2010.
The decision dated Dec. 5 is a setback for the recovery
efforts of Picard, who is liquidating at Bernard L. Madoff
Investment Securities LLC and has said Madoff's fraud caused
investors to lose $17.3 billion of principal.
Picard has recovered $9.5 billion, of which he has paid out
a little over half. Madoff was arrested nearly five years ago,
on Dec. 11, 2008, and is serving a 150-year prison term.
Rakoff's decision covered more than a dozen lawsuits against
principals and affiliates of "feeder funds" that sent customer
money to Madoff's firm, court records show.
Picard alleged that these feeder funds had been aware of red
flags signaling fraud, but ignored them because they were
receiving substantial payments through dealings with Madoff.
But the judge said a June 20 decision by a federal appeals
court in New York dismissing $30 billion of claims against such
banks as JPMorgan Chase & Co and HSBC Holdings Plc
"disposes of many of the trustee's arguments."
Citing the doctrine of "in pari delicto," meaning "in equal
fault," the appeals court concluded that Picard could not assert
claims on behalf of Madoff's firm to recover for fraud that the
firm itself caused.
But Rakoff said the court was not asked to decide if Picard
could seek some recoveries as an assignee of customer claims.
The judge concluded that Picard had standing to pursue some
of these claims, but that doing so against feeder funds may be
barred under the Securities Litigation Uniform Standards Act
That 1998 law limits a private party's ability to bring a
"covered class action," or single lawsuit seeking damages on
behalf of more than 50 people.
"Here," Rakoff wrote, "the trustee is not attempting to
pursue claims belonging to the debtor, a single entity, for the
benefit of many; rather, he seeks to assert claims belonging to
many creditors as a single entity."
Rakoff directed a federal bankruptcy judge to decide whether
SLUSA barred Picard's claims in given lawsuits.
As to the spouses, Picard alleged that Deborah Madoff and
Stephanie Mack were unjustly enriched by $54.5 million through
their marriages to Andrew and Mark Madoff.
But Rakoff said the trustee could not prevail by invoking an
exception to "in pari delicto" by claiming that the women were
corporate insiders who breached their fiduciary duties.
Rakoff noted that neither spouse was involved in fraud, that
both face other claims by the trustee, and that Picard can still
pursue money from Andrew Madoff and Mark Madoff's estate.
"Effectively, the trustee seeks to extend the definition of
insiders to include spouses solely by virtue of their marriage
to, and their receiving of joint transfers with, corporate
insiders," the judge wrote. "This novel proposition is
unsupported by any legal authority and extends the limited
insider exception beyond its proper bounds."
The case is Securities Investor Protection Corp v. Bernard
L. Madoff Investment Securities LLC, U.S. District Court,
Southern District of New York, No. 12-mc-00115.