Big Banks Dodge Madoff Trustee’s Reckoning

(CN) - A man tasked with compensating the victims of Bernie Madoff's colossal Ponzi scheme lacks standing to sue major banks that allegedly aided and abetted the fraud, the 2nd Circuit ruled.

The decision Thursday affirms the dressing-down U.S. District Judge Jed Rakoff gave Madoff trustee Irving Picard two years go for attempting to sue HSBC.

"Though it sometimes seems otherwise, not every litigant has the right to appear in federal court," Rakoff wrote. "A would-be litigant must first establish 'standing' to pursue his or her claims, by demonstrating, among other things, the existence of a 'case or controversy' and a personal stake in the outcome of the case."

Though Picard's efforts benefit his victims, he nevertheless represents Madoff, Rakoff said.

"Accordingly, even though a bankruptcy trustee can seek to recover monies on behalf of the debtor's estate that will ultimately be used to help satisfy creditors' claims, it is settled law that the federal Bankruptcy Code (Title II, United States Code) does not itself confer standing on a bankruptcy trustee to assert claims against third parties on behalf of the estate's creditors themselves, because the trustee stands in the shoes of the debtor, not the creditors," the order states.

This is known as the doctrine of "in pari delicto," which is Latin for "of equal fault."

It indeed presents a hurdle that Picard cannot vault, in his separate lawsuits against JP Morgan, UBS. Unicredit and HSBC, according to the decision Chief Judge Dennis Jacobs wrote for a three-person panel of the 2nd Circuit.

The 60-page appellate opinion opens with a summary of the various claims at issue.

Picard alleged that JP Morgan had been "thoroughly complicit" and placed itself "at the very center" of the Ponzi scheme, by letting Madoff set up a primary account where customer money was "commingled and ultimately washed," the ruling states.

"Though JPMorgan was uniquely positioned to put an end to Madoff's fraud, it quietly continued collecting its large fees," the summary of Picard's claims continues.

Picard accused UBS of creating feeder funds and collecting investments from abroad, reaping at least $80 million in the process.

The claims against Unicredit, an Austrian bank, also involve feeder funds, in this case allegedly used to funnel nearly $3 billion into Madoff's securities fun.

Picard last barb alleged that HSBC "engineered a labyrinth of hedge funds, management companies, and service providers that, to unsuspecting outsiders, seemed to compose a formidable system of checks and balances,' yet, in reality, 'it provided different modes for directing money to Madoff while avoiding scrutiny and maximizing fees,'" the opinion states.

But Picard could not reach the substance of his allegations because he has no right of action, the court found.

Indeed, Picard's proposition that he had standing on behalf of the banks' customers represents a "long, long reach," Judge Jacobs wrote.

"There is no sign that Congress intended an expansive increment of power to SIPA trustees," he added.

Justice for the victims, and against those that allegedly defrauded them, does not change Picard's procedural burden, the court found.

"Picard argues under principles of equity that unless he can spearhead the litigation on behalf of defrauded customers, the victims will not be made whole, [Securities Investor Protection Corporation] will be unable to recoup its advances, and third-party tortfeasors will reap windfalls," Jacobs wrote. "No doubt, there are advantages to the course Picard wants to follow. But equity has its limits; it may fill certain gaps in a statute, but it should not be used to enlarge substantive rights and powers."

The judges pointed out in a footnote that customers could sue the banks without Picard purporting to represent them.

"In fact, the defendants make clear that customers have already filed such actions," the footnote states.

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