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 In a decision released on Monday, U.S. District Judge Jed Rakoff
also said the trustee Irving Picard could not pursue "unjust
enrichment" claims against spouses of Madoff's sons Andrew and Mark,
saying the women did not qualify as "insiders" who could be held
liable for fraud.
Amanda Remus, a spokeswoman for Picard, said the trustee is
reviewing the decision. Lawyers for Deborah Madoff, who married
Andrew Madoff in 1992, and Stephanie Mack, who married Mark Madoff
in 2004, were not immediately available for comment. Mark Madoff
committed suicide in December 2010.
The decision dated December 5 is a setback for the recovery efforts
of Picard, who is liquidating at Bernard L. Madoff Investment
Securities LLC and has said Madoff's fraud caused investors to lose
$17.3 billion of principal.
Picard has recovered $9.5 billion, of which he has paid out a little
over half. Madoff was arrested nearly five years ago, on December
11, 2008, and is serving a 150-year prison term.
FEEDER FUNDS
Rakoff's decision covered more than a dozen lawsuits against
principals and affiliates of "feeder funds" that sent customer money
to Madoff's firm, court records show.
Picard alleged that these feeder funds had been aware of red flags
signaling fraud, but ignored them because they were receiving
substantial payments through dealings with Madoff.
But the judge said a June 20 decision by a federal appeals court in
New York dismissing $30 billion of claims against such banks as
JPMorgan Chase & Co and HSBC Holdings Plc "disposes of many of the
trustee's arguments."
Citing the doctrine of "in pari delicto," meaning "in equal fault,"
the appeals court concluded that Picard could not assert claims on
behalf of Madoff's firm to recover for fraud that the firm itself
caused.
But Rakoff said the court was not asked to decide if Picard could
seek some recoveries as an assignee of customer claims.
The judge concluded that Picard had standing to pursue some of these
claims, but that doing so against feeder funds may be barred under
the Securities Litigation Uniform Standards Act (SLUSA).
That 1998 law limits a private party's ability to bring a "covered
class action," or single lawsuit seeking damages on behalf of more
than 50 people.
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"Here," Rakoff wrote, "the trustee is not attempting to pursue
claims belonging to the debtor, a single entity, for the benefit of
many; rather, he seeks to assert claims belonging to many creditors
as a single entity."
Rakoff directed a federal bankruptcy judge to decide whether SLUSA
barred Picard's claims in given lawsuits.
MADOFF WIVES
As to the spouses, Picard alleged that Deborah Madoff and Stephanie
Mack were unjustly enriched by $54.5 million through their marriages
to Andrew and Mark Madoff.
But Rakoff said the trustee could not prevail by invoking an
exception to "in pari delicto" by claiming that the women were
corporate insiders who breached their fiduciary duties.
Rakoff noted that neither spouse was involved in fraud, that both
face other claims by the trustee, and that Picard can still pursue
money from Andrew Madoff and Mark Madoff's estate.
"Effectively, the trustee seeks to extend the definition of insiders
to include spouses solely by virtue of their marriage to, and their
receiving of joint transfers with, corporate insiders," the judge
wrote. "This novel proposition is unsupported by any legal authority
and extends the limited insider exception beyond its proper bounds."
The case is Securities Investor Protection Corp v. Bernard L. Madoff
Investment Securities LLC, U.S. District Court, Southern District of
New York, No. 12-mc-00115.
(Reporting by Jonathan Stempel in New
York; editing by Bernard Orr)
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