Madoff Trustee Withdraws Several Claims Against UBS

As reported in conflicting news reports today, Irving Picard, the trustee appointed to liquidate the Bernard Madoff Ponzi scheme, has withdrawn several legal claims in one of the cases filed against UBS and various entities collectively seeking nearly $2.6 billion.  While Bloomberg reported that Picard sought to drop up to $2 billion of that amount in a 'tactical' move by Picard, further analysis into the issue reveals that while Picard may indeed be making a tactical decision, he is by no means throwing in the towel on nearly $2 billion of potential recovery for defrauded victims.  

Some background on the UBS litigation helps provide clarity.  Picard filed two lawsuits against UBS and various feeder funds in November and December 2010.  The November 2010 lawsuit was against UBS and several international feeder funds including Luxalpha and Groupement Financier (the "UBS/Luxalpha Complaint").  In that lawsuit, Picard accused those entities of withdrawing nearly $2 billion from Madoff in the six years before the scheme collapsed.  Included in the various counts alleged in the UBS/Luxalpha Complaint were counts for aiding and abetting fraud and aiding and abetting breach of fiduciary duty.  These counts were based on Picard's assertion that various indicia of fraud meant that UBS knew or should have known of Madoff's fraud and instead turned a blind eye.

In December 2010, Picard filed suit against UBS and various feeder funds, including a fund created by UBS solely to invest with Madoff called the Luxembourg Investment Fund (the "UBS/LIF Complaint").  In that suit, Picard did not assert claims for the aiding and abetting of fraud or breach of fiduciary duty, but rather nearly all claims based in bankruptcy seeking money withdrawn by the UBS/LIF defendants during the six years prior to the filing of bankruptcy by Madoff's defunct investment firm.  In total, Picard sought approximately $555 million in avoidable transfers.

As covered in an earlier Ponzitracker post, United States District Judge Colleen McMahon agreed last week that Picard's suits against UBS, originally filed in bankruptcy court, were better suited for review by a federal district judge because of non-bankruptcy issues raised in the suits.  This move was widely seen as a blow to Picard's chance of succeeding on the suits, as he had enjoyed continuing success litigating in the United States Bankruptcy Court.  Additionally, recent decisions rejecting similar claims by federal judges out of the Southern District of New York illustrated the uphill battle faced by Picard.

On the same day that Judge McMahon agreed to review the UBS/Luxalpha and UBS/LIF cases, she issued a letter (the "July 14 Letter") to attorneys in the UBS/LIF case questioning whether there were overlapping claims and background between the two lawsuits, and asking the attorneys to clarify that understanding.  Several days later, Mr. Picard apparently provided Judge McMahon with clarification that he intended to withdraw his non-bankruptcy claims in the UBS/LIF suit and that, as a result, the case should remain in the Bankruptcy Court.  These non-bankruptcy claims included several claims for unjust enrichment.  In a July 19th letter, Judge McMahon reiterated that position in a letter to counsel for UBS, requesting a reply as to how the withdrawn claims would affect the case going forward.  Notably, she questions whether "there remain in the LIF case issues of federal law that do not arise under Title 11, and whether there are corresponding jury trial rights as to those issues."

Mr. Picard's change in position yields an takeaway.  By removing non-bankruptcy claims from the UBS/LIF lawsuit, Mr. Picard will now argue that there is no reason for the federal district court to hear the case, as the main argument from UBS in favor of being in federal court is no longer applicable; that is, there no longer remain any non-bankruptcy issues in the UBS/LIF case that are better heard by a federal district judge.  Picard would likely rather to have these issues heard in the bankruptcy court, where he has received a much more favorable reception.  Additionally, while Picard has not shown much interest in settlement with larger banking entities, this tactic may provide some leverage as UBS obviously wanted the issues heard outside of bankruptcy court.  Finally, Judge Jed Rakoff is set to issue a ruling by the end of July whether Picard may bring fraud claims on behalf of investors against banking giants HSBC and Unicredit.  At stake is up to $70 billion in damages sought.



Another excellent analysis of this issue is here.

Another Guilty Plea in $200 Million Minnesota Ponzi Scheme

Another of the principals in a failed $200 million currency arbitrage Ponzi Scheme pled guilty Tuesday in a Minneapolis federal court.  Christopher Pettengill, 54, pled guilty to charges of securities fraud, wire fraud, and money laundering as part of his role in the failed scheme.  The alleged mastermind of the scheme, Trevor Cook, was sentenced in August to 25 years in prison and ordered to pay restitution of $155 million to the identified victims.

While Pettengill faces a maximum of twenty years under the charges, prosecutors are asking for a sentence of 15 - 19 years based on federal sentencing guidelines.  Pettengill's lawyers argue that the appropriate range is 12-15 years; sentencing has not yet been scheduled.  The ultimate length of the sentence may be reduced, as authorities have indicated that Pettengill has been cooperating since January.  Other associates of the firm have denied wrongdoing.

Beginning in 2006, Pettengill and his associates pitched a currency arbitrage strategy in which investors were promised steady annual returns ranging from 10.5 to 12 percent with virtually no risk.  Originally called Universal Brokerage Services, the entities involved were renamed to various funds with the word "Oxford" in their names after a trademark infringement lawsuit from UBS Bank.  In his plea agreement,Pettengill admitted that investors were provided with fictitious account statements that bore no relation to the actual fund performance.  

Unbeknownst to investors, Pettengill and associates had invested some portion of the asset pool with Crown Forex SA in Switzerland.  Yet, when Crown Forex began having financial problems, Pettengill and associates worked to keep the news quiet.  The Oxford entities eventually collapsed during the height of the financial crisis in late 2009.  Cook and radio host Patrick Kiley were charged in November 2009.


See the SEC Litigation Release here and the SEC Complaint here.