More Banks Dodge $20B Claims by Madoff Trustee

MANHATTAN (CN) - Irving Picard, the bankruptcy trustee heading compensation for victims of Bernard Madoff, hit another stumbling block Tuesday as a federal judge threw out $21 billion in claims against JPMorgan Chase and UBS for many of the same reasons Picard's claims against HSBC failed.

The trustee had sought to hold the banks liable on claims that they allowed Madoff to funnel billions of fraudulently obtained dollars through their accounts. He also claims that they lent their prestigous names to Madoff's funds, shunted their due diligence obligations and turned "a blind eye in order to collect lucrative fees for servicing the funds."

U.S. District Judge Colleen McMahon wasted no time in showing how Picard's earlier unsuccessful case against HSBC laid the groundwork for her findings in the case against JPMorgan and UBS.

In the case against HSBC, decided on July 28, U.S. District Judge Jed Rakoff slammed Picard for feigning standing as a representative of the creditors, rather than the debtor - in this case, Madoff.

McMahon faulted Picard for the same maneuver.

"Practically, giving the trustee the power to pursue claims on behalf of creditors would usurp the creditors' right to determine whether and in what forum to vindicate their legal injuries, and would raise difficult issues of preclusion," McMahon wrote.

"There is no doubt" that the claims alleged by Picard against the banks belong to Madoff's victims, not to Madoff himself," she added.

As with Rakoff, McMahon relied on the doctrine of in pari delicto, which precludes the courts from resolving "a dispute between two wrongdoers."

"Here, in pari delicto would preclude Madoff from recovering against defendants, and, under general principles of agency law, his wrongdoing as BMIS's agent is imputed to BMIS itself," she wrote, abbreviating the name of Bernard Madoff Investment Securities.

Also as with the case against HSBC, Picard unsuccessfully claimed that the Securities Investor Protection Act empowered his case against the banks where bankruptcy law fails.

McMahon said the problems with Picard's claims under New York law "are legion." Later in the 33-page decision, she bats down a "fanciful" theory that paints BMIS as a bailee.

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