July 28, 2011 / 9:30 PM / 9 years ago

UPDATE 2-Madoff trustee set back in lawsuits vs banks

* Picard lacks standing to pursue common law claims

* HSBC, UniCredit win dismissal of these claims

* Trustee earlier announced $1 bln Tremont accord (Adds details from ruling, background, bylines)

By Jonathan Stempel and Nick Brown

NEW YORK, July 28 (Reuters) - Banks accused of failing to detect Bernard Madoff’s fraud won a big court victory as a Manhattan federal judge rejected efforts by the trustee seeking money for Ponzi scheme victims to pursue many of his claims.

U.S. District Judge Jed Rakoff said his decision eliminates damage claims totaling $6.6 billion against HSBC Holdings Plc (HSBA.L) and $2 billion against three dozen defendants, including Italy’s UniCredit SpA (CRDI.MI) and Dublin-based Pioneer Alternative Investment Management Ltd.

The ruling came the same day the trustee, Irving Picard, announced a more than $1 billion settlement with Tremont Group Holdings Inc, one of the largest “feeders” of customer money to Madoff.

Picard said that accord boosted the amount he has recovered for victims so far to $8.6 billion. [ID:nN1E76R193] The trustee had filed roughly 1,050 lawsuits to recover more than $103 billion. Many Madoff victims are pursuing separate claims.

In his complaint, Picard accused HSBC, UniCredit and Pioneer of violating a duty to Madoff’s customers by failing to detect the Ponzi scheme and ignoring “red flags” of the fraud.

But Rakoff said a federal law addressing the liquidation of brokerages “conveys no authority” on a trustee to bring such claims. These claims included aiding and abetting fraud, aiding and abetting a breach of fiduciary duty and unjust enrichment.

“Not every litigant has the right to appear in federal court,” Rakoff said.

He directed that what remains of the lawsuit, including efforts to recover $2 billion of so-called “preferential or fraudulent transfers” involving HSBC, return to Manhattan bankruptcy court for further proceedings.

In a statement, a Picard spokeswoman said the trustee and his lawyers are reviewing the decision.

“Prior to a thorough evaluation of the ruling, we have no comment,” she added.

Marco Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom representing UniCredit, said: “We are pleased with the decision. We’re analyzing it to see where we go from here.”

HSBC spokeswoman Juanita Gutierrez declined to comment.

Steven Thel, a Fordham University School of Law professor, said the decision could spur new litigation against the banks.

“The claims, if they’re good, can still be brought, but they’ll have to be brought by the customers,” he said. “It will probably come in the form of a class action.”


Picard had argued that case law, consumer protection laws and common sense allow him to sue banks he believes aided or abetted Madoff in his fraud, rather than simply try to “claw back” money from alleged beneficiaries of that fraud.

The Securities Investor Protection Corp, which handles claims for investors whose brokerages fail, agreed.

Banks disagreed. They said that, while the law allows Picard to sue to recover investors’ property, the trustee had no right to pursue fraud claims against them, because such claims could be brought only by victims of a fraud.

Rakoff said “neither the language nor the structure” of the Securities Investor Protection Act, which created SIPC, lets Picard raise his claims as he did.

UniCredit is also a defendant in Picard’s $58.8 billion lawsuit against Austria’s Bank Medici and its founder Sonja Kohn and others, which alleges racketeering violations.

One of Rakoff’s colleagues, Judge Colleen McMahon, is handling lawsuits by Picard against two other banks: JPMorgan Chase & Co (JPM.N) and UBS AG UBSN.VX.

JPMorgan spokesman Jennifer Zuccarelli declined to comment. UBS was not immediately available for comment.

Thel said an appeal of Rakoff’s decision would likely fail.

Rakoff “has pressed to protect investor rights in the past, which is a sign that this ruling is not simply a reflexive action,” Thel said. “My sense is, it’s a pretty good opinion and it’s probably right.”

Madoff, 73, pleaded guilty in March 2009 and is serving a 150-year prison sentence in North Carolina.

The case are Picard v. HSBC Bank Plc et al, U.S. District Court, Southern District of New York, No. 11-00763; and Picard v. Alpha Prime Fund Ltd et al in the same court, No. 11-00836. (Additional reporting by Knut Engelmann and Alison Frankel; editing by Andre Grenon)

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