A courtroom win by HSBC Holdings may reduce the $100 billion (Dh367.2 billion) trustee Irving Picard is seeking on behalf of Bernard Madoff's clients, undercutting bets traders have made on victims' claims.
US District Judge Jed Rakoff last week threw out almost $9 billion in damages that Picard demanded from HSBC and feeder funds, saying the trustee was free to pursue $2 billion in bankruptcy claims. Picard has no right to sue on behalf of customers or the Madoff estate, using common-law claims against parties, "who allegedly violated a duty to Madoff Securities' customers by failing to detect Madoff's fraud," Rakoff ruled.
Much of the $100 billion Picard is seeking from banks such as JPMorgan Chase & Co involves similar claims to the HSBC case, or other claims being scrutinised by two district judges. Rakoff's ruling, "is clearly bad news for Picard," said New York bankruptcy lawyer Harvey Miller. "Picard was pushing the envelope in his zeal to recover against alleged wrongdoers and overlooked existing constraints and precedents as pointed out by Judge Rakoff."
Picard demanded $19 billion in damages from the con man's banker, JPMorgan, equal to all the money lost by all investors in Madoff's Ponzi scheme. He seeks as much as $59 billion — including trebled racketeering charges that Rakoff is examining — from Bank Medici AG, its founder, Sonja Kohn, and UniCredit SpA.
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If the suits are scaled back as HSBC's was, Madoff clients will have a smaller pot of damages from which to recover losses, and investors who bought some of their claims at a discount may lose the bets they made. Madoff claims are trading at about 70 cents on the dollar.
"The HSBC ruling probably changes the assumption you're making as to how much the trustee can settle for on similar suits where he has the same kind of claims," said Andrew Gottesman, who heads bankruptcy claims trading at SecondMarket in Manhattan. "If you were bearish, it edifies your position. If you were bullish, it maybe changes you to neutral."
Amanda Remus, a Picard spokeswoman, said the trustee is, "reviewing the district court decision as well as preparing to move forward in the bankruptcy court on the remaining," claims of more than $2 billion. UBS AG, sued for $2.6 billion, has said that more than $2 billion of common-law claims were brought by Picard.
The Mets owners, Fred Wilpon and Saul Katz, face a $1 billion suit, as Picard bids to recoup $300 million in so-called fictitious profit and $700 million in principal.
There are no common-law claims against the Mets owners, according to Remus. However, Rakoff is scrutinising Picard's demands that were based on allegations they suspected the fraud and failed in their duty to investigate it. Wilpon and Katz may not have had a legal duty to investigate whether Madoff was running a fraud, Rakoff said at a court hearing this month. For investors who settled with Picard before the HSBC ruling, it may be too late to change anything, said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll and McDonald PLLC in Kentucky.
"It would be nearly impossible to undo it if it has been approved by the courts," he said.