July 27, 2011 / 8:20 PM / 8 years ago

UPDATE 2-UBS wins Madoff case transfer, GAO probes trustee

* UBS may defend in district court, in defeat for Picard

* Trustee challenged over standing to pursue fraud cases

* Trustee’s lawsuits vs UBS, others seek $2.6 billion

* GAO opens evaluation of trustee, SEC, SIPC (Adds details from ruling, GAO probe, byline)

By Jonathan Stempel

NEW YORK, July 27 (Reuters) - UBS AG UBSN.VX (UBS.N) won a U.S. judge’s order transferring a $550 million lawsuit by the trustee seeking money for victims of Bernard Madoff’s fraud to federal district court from bankruptcy court.

U.S. District Judge Colleen McMahon in Manhattan had already agreed to hear issues in a separate $2 billion lawsuit against UBS by the trustee, Irving Picard, turning on whether the Swiss bank knew Madoff was running a criminal enterprise.

“That issue should not be litigated simultaneously in two separate courts, the bankruptcy court and this court,” she said. McMahon added that UBS is entitled to a jury trial, which the bankruptcy court cannot provide.

McMahon also rejected bids by the Luxembourg Investment Fund and Landmark Investment Fund Ireland, together known as the “LIF” funds, for her to hear their challenges to the $550 million case, saying Picard’s “garden-variety” claims to “claw back” money are bankruptcy issues that belong in bankruptcy court.

Also on Wednesday, the Government Accountability Office has agreed to evaluate whether Picard is treating the Ponzi scheme victims fairly, according to Representative Scott Garrett of New Jersey, who chairs the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises and requested a probe.

The GAO will also examine the U.S. Securities and Exchange Commission’s role, and the Securities Investor Protection Corp’s oversight in the liquidation of Bernard L. Madoff Investment Securities LLC, Garrett said.

Amanda Remus, a spokeswoman for Picard, had no immediate comment on the UBS ruling. “We will provide our full cooperation in conjunction with any inquiry by the GAO,” she added.

Representatives for the LIF funds could not immediately be located. An SEC spokesman declined immediate comment. SIPC did not immediately return a request for comment.

Madoff, 73, is serving a 150-year prison sentence for his Ponzi scheme, which was uncovered on Dec. 11, 2008.


McMahon’s ruling for UBS is a defeat for Picard, who oversees the Madoff firm’s liquidation, and has filed roughly 1,050 lawsuits to recover more than $103 billion for victims.

He has argued that case law, consumer protection laws and common sense let him sue banks and others that he believes helped Madoff commit fraud, rather than simply claw back money from beneficiaries of the Ponzi scheme.

Banks such as UBS have vehemently disagreed. They say that while the law lets Picard sue to recover investors’ property, it does not let him pursue fraud claims that can be brought only by victims. They also say Picard’s lawsuits raise non-bankruptcy claims that a bankruptcy judge cannot resolve.

U.S. Bankruptcy Judge Burton Lifland, who oversees the Madoff firm liquidation, has endorsed Picard’s methodology for deciding which customers are “net winners” who should be forced to turn over money. That ruling is being appealed.

Picard’s $550 million lawsuit demands the return by UBS and the two European funds of fees and other sums obtained improperly from the Ponzi scheme.

His $2 billion lawsuit, known as the Luxalpha case, accuses UBS of aiding the fraud by sponsoring foreign feeder funds, including Luxalpha SICAV, that sent money to Madoff, lending them “an aura of legitimacy.” [ID:nSGE6B7032] [ID:nSGE6AN0EK]

McMahon also oversees the trustee’s $19.9 billion case against JPMorgan Chase & Co (JPM.N). Her colleague Jed Rakoff oversees a $58.8 billion case against Italy’s UniCredit SpA (CRDI.MI), Austria’s Bank Medici and its founder Sonja Kohn, and a $9 billion case against HSBC Holdings Plc (HSBA.L).

Rakoff has said he expects to decide this month whether Picard has standing to pursue some of his largest claims.

The cases are Picard v. UBS AG et al, U.S. District Court, Southern District of New York, Nos. 11-04212 and 11-04213. (Reporting by Jonathan Stempel; Additional reporting by Sarah N. Lynch in Washington, D.C.; Editing by Tim Dobbyn)

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