Second Circuit Affirms Dismissal Of Suits Brought By Madoff Trustee Against Banks Accused Of Aiding Madoff Fraud

In In re Bernard L. Madoff Investment Securities LLC, Nos. 11-5044, 11-5051, 11-5175, 11-5207, 2013 WL 3064848 (2d Cir. June 20, 2013), the United States Court of Appeals for the Second Circuit held that the Trustee of Bernard L. Madoff Investment Securities LLC ("BLMIS") appointed under the Securities Investor Protection Act ("SIPA"), 15 U.S.C §§ 78aaa, et seq., lacked standing to pursue common law claims on behalf of Madoff's customers against various banks that maintained checking accounts, created feeder funds, and collected investments from abroad for BLMIS. The Trustee sued under SIPA — which gives a SIPA trustee the "same powers and title with respect to debtor and the property of debtor . . . as a trustee in a case under Title 11" of the bankruptcy code — and alleged that when the defendants "were confronted with evidence of Madoff's illegitimate scheme," banking fees from BLMIS provided an incentive to look away, or "at least caused a failure to perform due diligence that would have revealed the fraud." The Second Circuit affirmed decisions of the United States District Court for the Southern District of New York holding that the doctrine of in pari delicto — the principle that a wrongdoer may not profit from his own misconduct — barred the Trustee's claims. The ruling significantly restricts the Trustee's ability to pursue billions of dollars' worth of claims against alleged aiders and abettors of Madoff's Ponzi scheme, offers clarity on the issue of a SIPA trustee's standing to bring actions on behalf of a defunct broker-dealer's estate or the estate's creditors.

In 2009, the Trustee initiated a proceeding in the United States Bankruptcy Court for the Southern District of New York against more than thirty-five major international banks, alleging unjust enrichment, breach of fiduciary duty, aiding and abetting fraud, negligence (collectively, the "common law claims") and contribution, and seeking recovery of $2 billion in preferential or fraudulent transfers. The district court dismissed the common law claims and the contribution claim on the grounds that Trustee was in pari delicto with the defendants, lacked standing to assert the common law claims on customers' behalf and could not demonstrate a right to contribution. See Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011). Similarly in 2010, the Trustee commenced adversary proceedings against two other major international banks, seeking billions more on behalf of the...