The trustee of Bernard L. Madoff Investment Securities, LLC (“BLMIS”), Irving Picard, recently suffered a severe setback in his efforts to recover money on behalf of investors in BLMIS at the expense of the banks and other financial firms that provided services to BLMIS. In Picard v. HSBC Bank PLC, No. 11 Civ. 763 (JSR) (S.D.N.Y.), and Picard v. Alpha Prime Fund Ltd., No. 11 Civ. 836 (S.D.N.Y.), Judge Jed S. Rakoff of the United States District Court for the Southern District of New York determined that Picard lacked standing to bring common law claims arising from the Madoff fraud on behalf of BLMIS’s customers. This decision essentially eliminates Picard’s standing to pursue claims that effectively belong to BLMIS customers arising from third parties’ alleged participation in the Madoff fraud.


Picard’s Claims Against BLMIS’s Bankers
 

In these two actions, Picard brought a number of fraudulent conveyance claims and several common law claims against HSBC and other financial institutions. The common law claims included unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty. Picard based these claims on allegations that HSBC served as a banker and a conduit for BLMIS investments and, in so doing, failed to investigate BLMIS adequately, despite being aware of myriad red flags and indicia of fraud.


Picard initially brought these claims in the Bankruptcy Court for the Southern District of New York, but in an earlier decision Judge Rakoff ordered that the case be withdrawn from the Bankruptcy Court, finding that it presented substantial, unresolved issues of federal non-bankruptcy law. Subsequently, HSBC and a couple other defendants moved to dismiss Picard’s claims for, among other things, lack of standing.


Picard Lacks Standing


On July 28, 2011, the court issued an opinion dismissing the common law claims that Picard brought against HSBC, but allowing the fraudulent conveyance claims to go forward. In that opinion, the court held that Picard does not have standing to bring claims against third parties on behalf of the creditors of BLMIS. The court initially reasoned that Picard’s powers as trustee of BLMIS arise from the Bankruptcy Code and the Securities Investor Protection Act (“SIPA”), which collectively establish the procedure for the liquidation of a securities brokerage. The court then analyzed the Bankruptcy Code and SIPA and determined that neither authorizes a trustee to bring claims on behalf of the customers of a brokerage firm that is being liquidated. Instead, the court found that the Bankruptcy Code and SIPA allow a trustee to bring claims solely on behalf of the estate — in this case, on behalf of BLMIS itself.


Picard made various arguments in support of his contention that either SIPA or the Bankruptcy Code implicitly permits him to bring such common law causes of action on behalf of
BLMIS customers.


First, Picard argued that a SIPA provision allowing the SIPA Trustee to “report to the court any . . . fraud, misconduct, mismanagement, and irregularities, and any causes of action available to the estate” permitted him to bring suit for the enumerated types of misconduct (fraud, misconduct, etc.) on behalf of the brokerage’s customers. The court found, however, that the provision merely means that the SIPA Trustee must report such information to the court, and thereby to the public. The court concluded that finding that such language permitted Picard to commence a suit that is not otherwise authorized by statute would “go[] far beyond any accepted legal principle defining implied rights of action.”


Next, Picard argued that, since the Trustee may recover customer property, which is defined as, vided services to BLMIS. In Picard v. HSBC Bank PLC, No. 11 Civ. 763 (JSR) (S.D.N.Y.), and Picard v. Alpha Prime Fund Ltd., No. 11 Civ. 836 (S.D.N.Y.), Judge Jed S. Rakoff of the United States District Court for the Southern District of New York determined that Picard lacked standing to bring common law claims arising from the Madoff fraud on behalf of BLMIS’s customers. This decision essentially eliminates Picard’s standing to pursue claims that effectively belong to BLMIS customers arising from third parties’ alleged participation in the Madoff fraud.
Picard’s Claims Against BLMIS’s Bankers
In these two actions, Picard brought a number of fraudulent conveyance claims and several common law claims against HSBC and other financial institutions. The common law claims included unjust enrichment, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty. Picard based these claims on allegations that HSBC served as a banker and a conduit for BLMIS investments and, in so doing, failed to investigate BLMIS adequately, despite being aware of myriad red flags and indicia of fraud.
Picard initially brought these claims in the Bankruptcy Court for the Southern District of New York, but in an earlier decision Judge Rakoff ordered that the case be withdrawn from the Bankruptcy Court, finding that it presented substantial, unresolved issues of federal non-bankruptcy law. Subsequently, HSBC and a couple other defendants moved to dismiss Picard’s claims for, among other things, lack of standing.
Picard Lacks Standing
On July 28, 2011, the court issued an opinion dismissing the common law claims that Picard brought against HSBC, but allowing the fraudulent conveyance claims to go forward. In that opinion, the court held that Picard does not have standing to bring claims against third parties on behalf of the creditors of BLMIS. The court initially reasoned that Picard’s powers as trustee of BLMIS arise from the Bankruptcy Code and the Securities Investor Protection Act (“SIPA”), which collectively establish the procedure for the liquidation of a securities brokerage. The court then analyzed the Bankruptcy Code and SIPA and determined that neither authorizes a trustee to bring claims on behalf of the customers of a brokerage firm that is being liquidated. Instead, the court found that the Bankruptcy Code and SIPA allow a trustee to bring claims solely on behalf of the estate — in this case, on behalf of BLMIS itself.
Picard made various arguments in support of his contention that either SIPA or the Bankruptcy Code implicitly permits him to bring such common law causes of action on behalf of
BLMIS customers.
First, Picard argued that a SIPA provision allowing the SIPA Trustee to “report to the court any . . . fraud, misconduct, mismanagement, and irregularities, and any causes of action available to the estate” permitted him to bring suit for the enumerated types of misconduct (fraud, misconduct, etc.) on behalf of the brokerage’s customers. The court found, however, that the provision merely means that the SIPA Trustee must report such information to the court, and thereby to the public. The court concluded that finding that such language permitted Picard to commence a suit that is not otherwise authorized by statute would “go[] far beyond any accepted legal principle defining implied rights of action.”
Next, Picard argued that, since the Trustee may recover customer property, which is defined as,