In a decision that may have larger implications, the Second Circuit Court of Appeals dismissed a lawsuit against JP Morgan brought by a Florida partnership alleging that JP Morgan conspired with Bernard Madoff to continue his Ponzi scheme. MLSMK Investment Co., out of Palm Beach, Florida, lost $12.8 million as a result of Madoff's scheme. In its lawsuit, it sought to hold JP Morgan under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), which is enticing in that treble damages are available to successful litigants.
However, and as recognized by Judge Robert Sack writing for the majority, a federal ban on civil RICO claims based on securities fraud also applies to claims of aiding and abetting securities fraud, under which MLSMK had sought to hold JP Morgan liable. The federal ban referred to by Judge Sack is the Private Securities Litigation Reform Act of 1995 ("PSLRA"), (15 U.S.C.A. § 77 et seq.). Under the PSLRA, civil RICO claims brought on the basis of securities fraud are not allowed unless an underlying criminal conviction for securities fraud has already been successfully concluded.
The decision may have a much larger impact than those investors of MLSMK Investment Co., however. Irving Picard, the trustee appointed to liquidate Bernard Madoff's failed brokerage, recently amended his complaint against JP Morgan to seek treble damages under the same theory. This outcome, while not dispositive of Picard's litigation, resolves a current circuit split and also signifies the leanings of the Second Circuit, which handle appeals from New York District Courts, where Picard's litigation is currently pending. Picard, who has filed over 1,000 lawsuits seeking over $100 billion for defrauded investors, is currently seeking nearly $60 billion from a variety of defendants under the treble damages theory. He has recovered nearly $10 billion to date.
A copy of the Opinion is here.