Latest Setback for Madoff Trustee Illustrates Difficulty of Legal Strategy

A New York federal court today became the fourth court in recent weeks to agree to review claims brought by Irving Picard on behalf of victims of Bernard Madoff's massive Ponzi scheme.  Picard, the court-appointed trustee tasked with recovering funds for the benefit of defrauded Madoff investors, had previously filed suit against UBS accusing the Swiss bank and various "feeder funds" of profiting from directing investors to Madoff's fraud and ignoring red flags that should have alerted them of the ongoing fraud.  Picard sought at least $2.6 billion in that suit.  However, today Judge Colleen McMahon, a United States District Judge for the Southern District of New York, agreed with UBS that claims brought by the trustee were more appropriately decided in a New York federal court, which is better able to deal with the legal issues employed in Picard's strategy.  Picard had opposed the motion to transfer the case, arguing that a bankruptcy court was the appropriate forum.

UBS becomes the fourth target of Picard to successfully invoke the jurisdiction of the federal district court.  Judge McMahon earlier approved JP Morgan's request to have the New York district court review the validity of its lawsuit, under which Picard seeks at least $19.9 billion.  In another high profile case involving Picard's attempt to recover not only false profits but also the underlying principal investment from New York Mets team executives, United States District Judge Judge Jed S. Rakoff agreed that the legal issues were better addressed in a federal court rather than a bankruptcy court. Rakoff is also reviewing Picard's lawsuit against Austria's BankMedici and its founder Sonja Kohn where the amount of damages sought is nearly $60 billion.

Collectively, these several lawsuits alone represent over $90 billion of the amount Picard is seeking in the 1,050 lawsuits filed to date on behalf of defrauded investors.  While Picard has recovered nearly $10 billion to date, a victory on just one of these high-profile suits could easily enable Madoff victims to receive 100% of their investment in the failed scheme - an unprecedented accomplishment in the admittedly infant world of Ponzi scheme receiverships.  And until recently, Picard had been enjoying continued success in the United States Bankruptcy Court,  including the decision affirming Picard's view on who constituted a victim entitled to compensation.  Additionally, Picard may have be more at ease in a legal arena that places emphasis on enhancing the potential estate available to bankruptcy creditors.  Finally, a federal court also allows for jury trials, which are not available in bankruptcy courts.

While a decision has not yet been issued in any of the cases removed to federal court, a recent case brought on behalf of Madoff victims against JP Morgan sought damages based on the same federal RICO statute iinvoked by Picard.  Detailed in a recent Ponzitracker post, a New York appellate court agreed with JP Morgan that a federal ban on civil RICO claims also covers aiding and abetting claims.  While Picard has not yet commented on the repurcussions of that ruling, District Court Judges Rakoff and McMahon will surely be made aware of the Second Circuit's stance.  Efforts by similarly-situated targets of Picard's suits will also take heed, further threatening the possibility of a streamlined process.  

Judge Rakoff has promised to issue a ruling in Picard's case against HSBC by the end of July.