"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.