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In re Bernard L. Madoff Investment Securities LLC

United States Court of Appeals, Second Circuit

June 20, 2013

IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC.
v.
JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN SECURITIES LLC, J.P. MORGAN SECURITIES LTD., Defendants-Appellees, IRVING H. PICARD, Plaintiff-Appellant, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor. IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor .IRVING H. PICARD, Plaintiff-Appellant, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor,
v.
UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPES LIMITED, ACCESS INTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE) SA, ACCESS MANAGEMENT LUXEMBOURG SA, as represented by its Liquidator MAITRE FERDINAND ENTRINGER, FKA ACESS INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, as represented by its Liquidator MAITRE FERDINAND ENTRINGER, PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, in her capacity as Executrix under the WILL OF THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la Villehuchet), individually and as the sole beneficiary under the WILL OF THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la Villehuchet), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICA V, as represented by its Liquidators MAITRE ALAIN RUKAVINA and PAUL LAPLUME, ROGER HARTMANN, RALE SHROETER, RENE EGGER, ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN RUKAVINA, in his capacity as liquidator and representative of LUXALPHA SICA V, PAUL LAPLUME, in his capacity as liquidator and representative of LUXALPHA SICA V, UBS THIRD PARTY MANAGEMENT COMPANY SA, Defendants-Appellees. IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. IRVING H. PICARD, Plaintiff-Appellant,
v.
HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., HSBC BANK BERMUDA LIMITED, HSBC FUND SERVICES (LUXEMBOURG) S.A., HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, UNICREDIT S.p.A., PIONEER ALTERNATIVE INVESTMENT MANAGEMENT LIMITED, UNICREDIT BANK AUSTRIA AG, ALPHA PRIME FUND LIMITED, Defendants-Appellees, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor. IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. IRVING H. PICARD, Plaintiff-Appellant,
v.
HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES (LUXEMBOURG) S.A., Defendants-Appellees, SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor.

Argued: November 21, 2012

A trustee appointed pursuant to the Securities Investor Protection Act appeals from the dismissal of his claims brought on behalf of the debtor and the debtor's customers, asserting that various financial institutions and other defendants aided and abetted the debtor's fraud. The United States District Court for the Southern District of New York (McMahon and Rakoff, JJ.) held that the claims were barred by the doctrine of in pari delicto and that the trustee lacked standing to pursue claims on behalf of customers. We affirm.

OREN J. WARSHAVSKY (David J. Sheehan, Deborah H. Renner, Lan Hoang, Geoffrey A. North on the brief) Baker & Hostetler LLP, New York, New York for Plaintiff-Appellant.

CHRISTOPHER H. LAROSA (Josephine Wang, Kevin H. Bell, on the brief) Securities Investor Protection Corporation, Washington, D.C. for Intervenor Securities Investor Protection Corporation.

JOHN F. SAVARESE (Douglas K. Mayer, Stephen R. DiPrima, Emil A. Kleinhaus, Lauren M. Kofke, Jonathon R. La Chapelle on the brief) Wachtell, Lipton, Rosen & Katz, New York, New York for Defendant-Appellee JPMorgan Chase & Co., et al.

THOMAS J. MOLONEY (Evan A. Davis, David E. Brodsky, Marla A. Decker, Charles J. Keeley, Jason B. Frasco on the brief) Cleary Gottlieb Steen & Hamilton LLP, New York, New York for Defendant-Appellee HSBC Bank plc, et al.

MARCO E. SCHNABL (Susan L. Saltzstein, Jeremy A. Berman on the brief) Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York for Defendants-Appellees UniCredit S.p.A. and Pioneer Alternative Investment Management Ltd.

MARSHALL R. KING, Gibson, Dunn & Crutcher LLP, New York, New York for Defendant-Appellee UBS AG, et al.

FRANKLIN B. VELIE (Jonathan G. Kortmansky, Mitchell C. Stein on the brief) Sullivan & Worcester LLP, New York, New York for Defendant-Appellee UniCredit Bank Austria AG.

Robert W. Gottlieb, Katten Muchin Rosenman LLP, New York, New York for Defendant-Appellee Access International Advisers, LLC, et al.

Brett S. Moore, Porzio Bromberg & Newman P.C., New York, New York for Defendant-Appellee Luxalpha Sicav, et al.

Robert Knuts, Park & Jensen LLP, New York, New York for Defendant-Appellee Theodore Dumbauld.

Before: JACOBS, Chief Judge, WINTER and CARNEY, Circuit Judges.

DENNIS JACOBS, Chief Judge:

Irving Picard ("Picard" or the "Trustee") sues in his capacity as Trustee under the Securities Investor Protection Act ("SIPA") on behalf of victims in the multi-billion-dollar Ponzi scheme worked by Bernard Madoff. The four actions presently before this Court allege that numerous major financial institutions aided and abetted the fraud, collecting steep fees while ignoring blatant warning signs. In summary, the complaints allege that, when the Defendants were confronted with evidence of Madoff's illegitimate scheme, their banking fees gave incentive to look away, or at least caused a failure to perform due diligence that would have revealed the fraud. The Trustee asserts claims for unjust enrichment, breach of fiduciary duty, aiding and abetting fraud, and negligence, among others. The Trustee's position is supported by the Securities Investor Protection Corporation ("SIPC"), a statutorily created nonprofit corporation consisting of registered broker-dealers and members of national securities exchanges, which intervened to recover some or all of the approximately $800 million it advanced to victims.

As we will explain, the doctrine of in pari delicto bars the Trustee (who stands in Madoff's shoes) from asserting claims directly against the Defendants on behalf of the estate for wrongdoing in which Madoff (to say the least) participated. The claim for contribution is likewise unfounded, as SIPA provides no such right. The decisive issue, then, is whether the Trustee has standing to pursue the common law claims on behalf of Madoff's customers. Two thorough well-reasoned opinions by the district courts held that he does not. See Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.).

Our holding relies on a rooted principle of standing: A party must "assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, 422 U.S. 490, 499 (1975). This prudential limitation has been consistently applied in the bankruptcy context to bar suits brought by trustees on behalf of creditors. See, e.g., Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991).

Picard offers two theories for why a SIPA liquidation is a different creature entirely, and why therefore a SIPA trustee enjoys third-party standing: (1) He is acting as a bailee of customer property and therefore can pursue actions on customers' behalf to recover such property; and (2) he is enforcing SIPC's rights of equitable and statutory subrogation to recoup funds advanced to Madoff's customers. Neither is compelling. Although a SIPA liquidation is not a traditional bankruptcy, a SIPA trustee is vested with the "same powers and title with respect to the debtor and the property of the debtor . . . as a trustee in a case under Title 11." 15 U.S.C. § 78fff-1(a). At best, SIPA is silent as to the questions presented here. And analogies to the law of bailment and the law of subrogation are inapt and unconvincing.[1]

BACKGROUND

In December 2008, federal agents arrested Bernard L. Madoff, who had conducted the largest Ponzi scheme yet uncovered. Madoff purported to employ a "split-strike conversion strategy" that involved buying S&P 100 stocks and hedging through the use of options. In reality, he engaged in no securities transactions at all.[2]

In March 2009, Madoff pleaded guilty to securities fraud and admitted that he had used his brokerage firm, Bernard L. Madoff Investment Securities LLC ("BLMIS"), as a vast Ponzi scheme. The details of Madoff's fraud have been recounted many times. See, e.g., In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert. denied, 133 S.Ct. 25 (2012); In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 126–32 (Bankr. S.D.N.Y. 2010).

Following Madoff's arrest, SIPC filed an application under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS required protection. The district court appointed Picard as the firm's Trustee and referred the case to the bankruptcy court.

SIPA was enacted in 1970 to speed the distribution of "customer property" back to investors following a firm's collapse.[3] Customer property is cash and securities held separately from the general estate of the failed brokerage firm. "SIPA serves dual purposes: to protect investors, and to protect the securities market as a whole." In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d at 235. A SIPA liquidation confers priority on customer claims by an expeditious alternative to a traditional bankruptcy proceeding. Under SIPA, each customer shares ratably in the fund of customer property according to the customer's "net equity."

If (as is often the case) the assets are not enough to satisfy all net equity claims, SIPC advances money (up to $500, 000 per customer) to the SIPA trustee, who is charged with assessing customer claims and making the ratable distributions. At the time of this appeal, SIPC had advanced approximately $800 million.

A trustee also has authority to investigate the circumstances surrounding the insolvency and to recover and distribute any remaining funds to creditors. Picard alleges that his investigation has uncovered evidence of wrongdoing by third parties who aided and abetted Madoff, and seeks to replenish the fund of customer property by taking action against various financial institutions that serviced BLMIS.

Picard presses claims against JPMorgan Chase & Co., UBS AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated persons and entities. The allegations against each are summarized one by one. We distill the detailed allegations from the consolidated complaints, and recount only the background needed to understand our analysis. At this stage of the litigation, the allegations are assumed to be true. See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009).

JPMorgan.

Madoff maintained a checking account at JPMorgan Chase & Co. ("JPMorgan")[4] for more than twenty years, beginning in 1986. In the years prior to BLMIS's bankruptcy, JPMorgan collected an estimated half billion dollars in fees, interest payments, and revenue from BLMIS. The Trustee alleges that JPMorgan was "at the very center" of Madoff's fraud and was "thoroughly complicit" in it. A 662¶ 1.[5] Madoff's primary account with JPMorgan, the "703 Account, " was where hundreds of billions of dollars of customer money were "commingled and ultimately washed." A 663¶ 2. The customer funds deposited into the 703 Account for "split-strike" securities transactions were instead funneled to other customers to sustain the illusion of large and reliable returns on investment.

The 703 Account was a retail checking account, not a commercial account. Billions of dollars from thousands of investors were deposited without being segregated or transferred to separate sub-accounts. These accounts exhibited, on their face, a "glaring absence of securities activity." A 714 ¶ 190. At the same time, numerous multimillion-dollar checks and wire transfers having no apparent business purpose were exchanged between Madoff and his close friend, Norman Levy (now dead).

In 2006, due diligence conducted by JPMorgan revealed strong and steady yields by Madoff's feeder funds during a time when the S&P 100 dropped thirty percent. As one money manager later acknowledged, that was too good to be true. In June 2007, JPMorgan's Chief Risk Officer John Hogan learned at a lunch with JPMorgan money manager Matt Zames that "there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme." A 695 ¶ 119. Hogan asked a junior analyst to run a Google search on Madoff, and made no further inquiries when the search yielded no hard evidence.

Faced with "numerous indications of Madoff's fraud, " in the fall of 2008 JPMorgan redeemed $276 million of its investments in Madoff's feeder funds. A 705 ¶¶ 156-60; A 710 ¶ 178. But the company failed to tip off regulators or other investors. Though JPMorgan was uniquely positioned to put an end to Madoff's fraud, it quietly continued collecting its large fees.

UBS and Access.

Defendants UBS AG[6] ("UBS") and Access International Advisors LLC[7] ("Access") are sued for aiding and abetting Madoff's fraud by creating feeder funds and collecting investments from abroad. UBS acted as sponsor, manager, administrator, custodian, and primary banker of the funds. UBS reaped at least $80 million in fees as it facilitated investments in BLMIS, despite clear indicia of fraud. The "prestigious name" of UBS was used "to legitimize and attract money to Madoff's fraud, " but UBS agreed to "look the other way and to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did." A 916 ¶ 5.

UBS observed but ignored Madoff's lack of transparency and his uncanny ability to generate consistently high returns, except insofar as UBS declined to invest its own money in BLMIS or endorse Madoff's funds to its clients. In 2009, the Luxembourg regulator, the Commission de Surveillance du Secteur Financier, indicated that the failure of UBS to identify Madoff as a possible fraud was a violation of Luxembourg law.

Access was also alerted to Madoff's suspicious investment activities. In 2006, internal managers at Access became worried about the volume of options trades being reported by Madoff, and hired an independent consultant to investigate. The consultant concluded that Madoff could not possibly have executed the volume of options or equities trades he reported, and that his trading revealed "either extremely sloppy errors or serious omissions" that suggest he "doesn't really understand the costs of the option strategy." A 977 ΒΆ 218 (emphasis removed). Access concealed the ...


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