March 7, 2021

Judge’s Ruling in Madoff Case Could Reduce Money for Victims

The ruling, by United States District Judge Jed S. Rakoff in Manhattan, could reduce by billions of dollars how much the trustee may ultimately be able to recover for Mr. Madoff’s victims. Those who were taken in by the scheme say they had a total of $65 billion invested with Mr. Madoff on the eve of his arrest in December 2008.

Judge Rakoff made the ruling in an action challenging the broad fraud claims that were included in a lengthy lawsuit that the trustee, Irving H. Picard, filed in 2010 against HSBC, the global bank based in London, and a second pair of defendants that includes Unicredit, the Italian bank holding company.

The judge also made it clear that his ruling would apply to other defendants in those cases. Moreover, other similar challenges to the trustee’s standing to sue are also pending before Judge Rakoff, potentially making the ruling even more damaging to the trustee’s lawsuits.

The decision would greatly benefit the giant banks and other financial institutions taken to court by Mr. Picard in a blizzard of litigation last year. Those lawsuits accused the defendants of willfully turning a blind eye to evidence that Mr. Madoff was operating a fraud, thereby allowing it to continue and increasing the financial destruction it caused.

All told, Mr. Picard has filed more than 1,000 lawsuits seeking nearly $100 billion in damages and fictional profits.

But the ruling by Judge Rakoff instantly subtracted $8.6 billion in claims from Mr. Picard’s case against the HSBC and Unicredit defendants, leaving roughly $1 billion in claims the trustee can still pursue in bankruptcy court.

A spokeswoman for Mr. Picard declined to discuss the ruling on Thursday, but released a statement saying that the trustee and his counsel were reviewing it.

The opinion will most likely be closely read by lawyers for the owners of the New York Mets baseball team, who are also before Judge Rakoff challenging a case Mr. Picard has filed that seeks $1 billion in fictional profits and damages from the team’s owners, the Wilpon family.

At a hearing on the HSBC issue earlier this year, Judge Rakoff indicated that he saw a different set of issues arising in the challenge by the Wilpon family, so it was not clear what effect this new ruling would have on that suit.

Judge Rakoff’s latest ruling, however, has sharply limited Mr. Picard’s ability to seek billions of dollars from anyone who did not actually receive cash, directly or indirectly, from Mr. Madoff’s Ponzi scheme before it collapsed. That would include the banks, hedge fund sponsors and other third parties that played a role in creating, managing or marketing the funds that did invest directly with Mr. Madoff.

At the heart of the decision was Judge Rakoff’s conclusion that when Mr. Picard went to court against third parties, he stood in the shoes of the debtor — Mr. Madoff and his firm — and not in the shoes of the creditors like Mr. Madoff’s victims.

In this case, he said, he was being asked to determine whether Mr. Picard, as the trustee for the defunct Madoff firm, had standing to sue “third parties who allegedly violated a duty to Madoff Securities’ customers by failing to detect Madoff’s fraud.” He said his answer was no.

In a sharply worded dismissal of Mr. Picard’s “convoluted theories,” Judge Rakoff rejected all the various arguments the trustee had put forward.

The ruling did not surprise some veteran bankruptcy lawyers. Jeff Marwil, who is the court-appointed receiver unwinding another large-scale fraud involving the Bayou Funds, said he had various third-party claims that arose in that case. “Ultimately I determined that I couldn’t pursue those claims, for precisely the reasons outlined in the judge’s order,” Mr. Marwil said.

But he noted that the judge’s ruling did not bar the victims from pursuing claims in court.

The ruling came just hours after Mr. Picard announced a $1 billion settlement with Tremont Partners, one of the giant feeder funds that channeled cash to Mr. Madoff over the years.

The trustee has previously reached large settlements with several Madoff investors, including the hedge fund unit of Banco Santander and the family of Carl Shapiro, a longtime Madoff investor. There is no indication that those settlements would be affected by this latest ruling.

The Tremont settlement brings to $8.2 billion the amount Mr. Picard has accumulated to cover what he estimates are just over $17 billion in cash claims by people who had not recovered all they had invested with Madoff before the fraud collapsed.

William D. Zabel, the lawyer who helped negotiate a $7.2 billion settlement with Mr. Picard on behalf of the widow of a longtime Madoff investor, Jeffry Picower, said it was definitely an adverse ruling for the trustee.

“It’s been a good news, bad news day for the trustee — but the bad news was very bad indeed,” Mr. Zabel said.

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