JP Morgan Files Brief in Support of Effort to Dismiss Madoff Trustee's Case

JP Morgan filed a strongly-worded reply in support of its effort to win dismissal of Madoff trustee Irving Picard's suit seeking billions from the bank.  In a September 16th filing, JPMorgan ("JPM") argued not only that Picard was "mistaken" in bringing the claims, but that his rationale was contrary to established legal precedent and was "clearly wrong".  Picard is currently seeking nearly $20 billion in damages from JPM, claiming that their longstanding banking relationship with Madoff both lent an air of legitimacy to the scheme and further allowed Madoff to continue defrauding victims despite numerous red flags.  While he initially sought $5.4 billion, Picard later tripled the amount sought in an amended complaint, asserting numerous common law claims.  

JPM is quick to point out that Picard's approach in seeking damages from various financial entities associated with Madoff based on common law theories has not been well received, most recently in Judge Jed Rakoff's dismissal of similar claims asserted against HSBC.  The crux of Judge Rakoff's reasoning, and unsurprisingly strongly asserted by JPM, rested in the premise that a bankruptcy trustee, who stands in the shoes of the debtor, cannot simultaneously bring claims on behalf of creditors.  As JPM states, 

Since the Supreme Court’s decision in Caplin v. Marine Midland, 406 U.S. 416 (1972), it has been settled law that a trustee for a bankrupt corporation does not have power to assert claims belonging to the debtor’s creditors. 

In his Response to JPM's Motion to Dismiss, Picard had stated that his authority to pursue claims against JPM stemmed from Section 544(a) of the Bankruptcy Code, which endows a trustee with the rights of a “creditor that extends credit to the debtor at the time of the commencement of the case.” 11 U.S.C. § 544(a).  However, such a grant of rights does not equate to a carte blanche to pursue claims that, according to JPM, rest solely with third-party creditors.  As JPM so eloquently states, Picard does not represent the interests of third-party creditors, but rather, "stands in the shoes of a thief."  

JPM also reverts to its original claim that Picard had failed to sufficiently plead his claims above the required legal standard, pointing to the "massive gap between the Trustee’s blustering accusations and the facts that he has actually alleged to support them. Despite taking extensive pre-trial discovery, the Trustee has still completely failed to allege facts showing that any individual at JPMorgan had actual knowledge of Madoff’s fraud."  In doing so, JPM highlights the increasingly heightened standard in which financial institutions can be held liable for fraud committed by customers.  Courts have increasingly adopted an "actual knowledge" standard, rather than what an institution should have known based on the presence of red flags.

Finally, JPM contests Picard's claim that a trustee appointed under the Securities Investor Protection Act ("SIPA") has even greater powers than a trustee proceeding under the United States Bankruptcy Code.  In doing so, JPM argues that nothing provides Picard with authority for such an interpretation, and cites Judge Rakoff's rationale in the recent HSBC decision that "the Trustee’s powers are cabined by Title 11, and SIPA conveys no authority to a SIPA trustee to bring the common law claims here in issue.”  

With this filing, absent the request by Picard to file a sur-reply, briefing of the issue is now complete.  A hearing may also be scheduled before United States District Judge Colleen McMahon, who is overseeing the case.  

JPMorgan's Reply in Support of its Motion to Dismiss is here.

The Amended Complaint filed against JPMorgan is here.

Madoff Trustee's Disagreement With HSBC Ruling Takes Center Stage in Response to JP Morgan Motion to Dismiss

"Without arguing the Trustee’s appeal in this case, the Trustee respectfully submits that the HSBC decision is unsound in multiple respects and should not be followed by this Court."

Late this past week, the trustee appointed to recover funds for the benefit of investors defrauded by Bernard Madoff's massive Ponzi scheme filed his response to an effort by JP Morgan ("JPM") to dismiss a suit seeking billions in damages for JPM's alleged role in the scheme. In the amended complaint filed in June, Irving Picard tripled the amount sought from JP Morgan from $5.4 billion to nearly $20 billion based on JPM's willingness 

to assist in the daily operation of a Ponzi scheme on an unprecedented scale: to routinely enable billions of dollars to bounce back and forth between BLMIS and its customers with an evident lack of legitimate business purpose, to overlook the lack of securities trading, to decline to inquire into or report fictitious account activity, and to cloak the whole enterprise in the respectability of a renowned financial institution. 

In his 168-page opposition to JPM's Motion to Dismiss, Picard makes several arguments in response to JPM's claims, including (1) that Picard has standing under SIPA and the Bankruptcy Code to bring a contribution claim, (2) that Picard has standing to stand in the shoes of a judgment creditor and assert common law claims, (3) that Picard has sufficient standing as bailee and subrogee to bring common law claims, (4) that Wagoner and the doctrine of in Pari Delicto are inapplicable to his claims, (5) that Picard's claims are not barred by the Securities Litigation Uniform Standards Act, (6) that Picard has sufficiently pled each cause of action under which he is proceeding against JPM, and (7) the specific transfers sought to be avoided are in fact avoidable.  Many of the issues are hardly new to Picard, who has faced steady opposition in his quest to recover damages outside the "comfort zone" of bankruptcy clawback suits and settlements with various feeder funds.  Both UBS and HSBC, among other banking institutions facing similar suits from Picard, have asserted some form of these arguments in their efforts to win dismissal.  

But it is not Picard's latest legal wrangling with these issues that stands out in this filing.  Instead, perhaps most notable is the fact that it is one of the first substantive filings since Judge Rakoff's ruling that Picard lacked standing to assert the same common law claims against HSBC - potentially erasing $9 billion in prospective damages for Madoff's victims. And while Picard appealed that ruling to the Second Circuit Court of Appeals several days ago, he lays out his discontent with Judge Rakoff's ruling in this filing.  

The focal point of Picard's discontent lies in the differing interpretations of the standing conferred on a trustee proceeding under the authority of the Securities Investor Protection Act ("SIPA") or the Bankruptcy Code.  The term "standing" refers to the ability of a party to show a sufficient connection to and harm from the matters at issue to justify that party's involvement in the case.  Such an issue has been hotly contested in the forum of court-appointed receivership and bankruptcy proceedings, where often the most common claims pursued by the receiver or trustee are on behalf of the class of defrauded victims.  

Perhaps luckily for Picard, Judge Rakoff is not overseeing the suit against JP Morgan.  Instead, the suit is before United States District Court Judge Colleen McMahon.  In accordance with the Federal Rules of Civil procedure, JP Morgan will now have an opportunity to file a Reply to Picard's Response.

A Copy of Picard's Amended Complaint against JP Morgan is here.

A Copy of Picard's Response is here.