Madoff Ponzi Aftermath

In the aftermath of Bernie Madoff’s Ponzi scheme, financial victims are still suffering losses, and looking for any possible route to recover a fraction of investments. One potential road to recovery is from “feeder funds”.

Feeder firms sent investors’ funds to Madoff Securities. These firms failed to detect the fraud. However, collecting from the feeder firms may be a dead end. The US District Court for the Southern District of New York held in Picard v. HSBC Bank PLC, 2011 WL 3200298 (S.D.N.Y., July 28, 2011) that the Madoff bankruptcy estate trustee, Irving H. Picard, has no standing to pursue certain common law claims against the funds. This decision stopped the pursuit of approximately $8.5 billion of claims against the feeder funds.

Picard was appointed trustee pursuant to the Securities Investor Protection Act (SIPA). The decision may also stop Picard from pursuing lawsuits based on similar claims like the $19 billion damages from JPMorgan Chase and $8.5 billion against HSBC Holdings for allegedly assisting in forwarding cash from investors into Madoff’s business. Picard argued the feeder funds violated a duty to Madoff’s investors by failing to investigate and detect the fraud, even though being hit with “myriad red flags and indicia of fraud.” Picard sought to recover from the defendants on common law theories, including aiding and abetting fraud, unjust enrichment, and aiding and abetting breach of fiduciary duty.

The court decided Picard did not have standing to bring the common law claims because such claims belonged to third parties, the defrauded investors, not the trustee. The trustee stood in the shoes of Madoff Securities not the investors. The trustee represented the creditors. Standing means a party must assert his/her own legal rights and interests, and cannot rest claim to relief on the legal rights or interests of third parties. The court held neither the Bankruptcy Code nor SIPA authorized standing to the trustee to bring the common law claims.

The court also cited the common law doctrine of in pari delicto which means “in equal fault”. The court held Picard cannot assert the common law claims because a wrongdoer like Madoff Securities may not recover from another wrongdoer. The trustee for Madoff Securities, into the shoes of a wrongdoer, is barred from pursuing the common law claims.

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