Picard v. UBS Fund Services (Luxembourg)
Filing
OPINION, affirming the judgment of the district court, by DJ, RKW, SLC, FILED.[970517] [11-5051]
Case: 11-5051
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11-5044; 11-5051; 11-5175; 11-5207
In re: Bernard L. Madoff Investment Securities
Picard v. JP Morgan Chase & Co., 11-5044
Picard v. Egger, 11-5051
Picard v. UniCredit Bank Austria AG, 11-5175
Picard v. HSBC Bank PLC, 11-5207
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2012
(Argued: November 21, 2012
Decided: June 20, 2013)
Docket Nos. 11-5044
11-5051
11-5175
11-5207
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IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC.
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IRVING H. PICARD,
Plaintiff-Appellant,
- v.JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN
SECURITIES LLC, J.P. MORGAN SECURITIES LTD.,
Defendants-Appellees,
and
SECURITIES INVESTOR PROTECTION CORPORATION,
Intervenor.
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Case: 11-5051
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IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
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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, RALF 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.
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IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
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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.
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IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
Debtor.
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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.
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Before:
JACOBS, Chief Judge, WINTER and CARNEY,
Circuit Judges.
A trustee appointed pursuant to the Securities Investor
29
Protection Act appeals from the dismissal of his claims
30
brought on behalf of the debtor and the debtor’s customers,
31
asserting that various financial institutions and other
32
defendants aided and abetted the debtor’s fraud.
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States District Court for the Southern District of New York
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(McMahon and Rakoff, JJ.) held that the claims were barred
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by the doctrine of in pari delicto and that the trustee
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lacked standing to pursue claims on behalf of customers.
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affirm.
4
The United
We
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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 DefendantsAppellees 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.
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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.
& Newman
York for
Luxalpha
Moore, Porzio Bromberg
P.C., New York, New
Defendant-Appellee
Sicav, et al.
Robert Knuts, Park & Jensen LLP,
New York, New York for
Defendant-Appellee Theodore
Dumbauld.
DENNIS JACOBS, Chief Judge:
Irving Picard (“Picard” or the “Trustee”) sues in his
28
capacity as Trustee under the Securities Investor Protection
29
Act (“SIPA”) on behalf of victims in the multi-billion-
30
dollar Ponzi scheme worked by Bernard Madoff.
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actions presently before this Court allege that numerous
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major financial institutions aided and abetted the fraud,
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collecting steep fees while ignoring blatant warning signs.
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In summary, the complaints allege that, when the Defendants
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were confronted with evidence of Madoff’s illegitimate
6
The four
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1
scheme, their banking fees gave incentive to look away, or
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at least caused a failure to perform due diligence that
3
would have revealed the fraud.
4
for unjust enrichment, breach of fiduciary duty, aiding and
5
abetting fraud, and negligence, among others.
6
position is supported by the Securities Investor Protection
7
Corporation (“SIPC”), a statutorily created nonprofit
8
corporation consisting of registered broker-dealers and
9
members of national securities exchanges, which intervened
10
to recover some or all of the approximately $800 million it
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advanced to victims.
12
The Trustee asserts claims
The Trustee’s
As we will explain, the doctrine of in pari delicto
13
bars the Trustee (who stands in Madoff’s shoes) from
14
asserting claims directly against the Defendants on behalf
15
of the estate for wrongdoing in which Madoff (to say the
16
least) participated.
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unfounded, as SIPA provides no such right.
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issue, then, is whether the Trustee has standing to pursue
19
the common law claims on behalf of Madoff’s customers.
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thorough well-reasoned opinions by the district courts held
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that he does not.
22
(S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase &
23
Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.).
The claim for contribution is likewise
The decisive
Two
See Picard v. HSBC Bank PLC, 454 B.R. 25
7
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Our holding relies on a rooted principle of standing: A
2
party must “assert his own legal rights and interests, and
3
cannot rest his claim to relief on the legal rights or
4
interests of third parties.”
5
499 (1975).
6
consistently applied in the bankruptcy context to bar suits
7
brought by trustees on behalf of creditors.
8
Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416
9
(1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d
10
Warth v. Seldin, 422 U.S. 490,
This prudential limitation has been
See, e.g.,
114, 118 (2d Cir. 1991).
11
Picard offers two theories for why a SIPA liquidation
12
is a different creature entirely, and why therefore a SIPA
13
trustee enjoys third-party standing: (1) He is acting as a
14
bailee of customer property and therefore can pursue actions
15
on customers’ behalf to recover such property; and (2) he is
16
enforcing SIPC’s rights of equitable and statutory
17
subrogation to recoup funds advanced to Madoff’s customers.
18
Neither is compelling.
19
traditional bankruptcy, a SIPA trustee is vested with the
20
“same powers and title with respect to the debtor and the
21
property of the debtor . . . as a trustee in a case under
22
Title 11.”
Although a SIPA liquidation is not a
15 U.S.C. § 78fff-1(a).
8
At best, SIPA is silent
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as to the questions presented here.
2
law of bailment and the law of subrogation are inapt and
3
unconvincing.1
And analogies to the
4
5
6
BACKGROUND
In December 2008, federal agents arrested Bernard L.
7
Madoff, who had conducted the largest Ponzi scheme yet
8
uncovered.
9
conversion strategy” that involved buying S&P 100 stocks and
Madoff purported to employ a “split-strike
10
hedging through the use of options.
11
in no securities transactions at all.2
In reality, he engaged
12
1
The Defendants also argue that the Trustee has not
met constitutional standing requirements, violates the
Securities Litigation Uniform Standards Act, and fails to
plead with particularity SIPC’s purported subrogation
claims. Given our holding, we decline to address these
arguments.
2
Although Madoff simply appropriated his clients’
money without ever purchasing securities on their behalf, we
have held that Madoff’s victims are nonetheless “customers”
under the Act. See In re Bernard L. Madoff Inv. Sec. LLC,
654 F.3d 229, 236 (2d Cir. 2011) (“SIPA . . . ensur[es] that
claimants who deposited cash with a broker for the purpose
of purchasing securities, are treated as customers with
claims for securities. This is so because the critical
aspect of the ‘customer’ definition is the entrustment of
cash or securities to the broker-dealer for the purposes of
trading securities.”) (internal citations and quotation
marks omitted), cert. denied, 133 S. Ct. 25 (2012).
9
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1
In March 2009, Madoff pleaded guilty to securities
2
fraud and admitted that he had used his brokerage firm,
3
Bernard L. Madoff Investment Securities LLC (“BLMIS”), as a
4
vast Ponzi scheme.
5
recounted many times.
6
Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert.
7
denied, 133 S. Ct. 25 (2012); In re Bernard L. Madoff Inv.
8
Sec. LLC, 424 B.R. 122, 126–32 (Bankr. S.D.N.Y. 2010).
9
The details of Madoff’s fraud have been
See, e.g., In re Bernard L. Madoff
Following Madoff’s arrest, SIPC filed an application
10
under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS
11
required protection.
12
the firm’s Trustee and referred the case to the bankruptcy
13
court.
14
The district court appointed Picard as
SIPA was enacted in 1970 to speed the distribution of
15
“customer property” back to investors following a firm’s
16
collapse.3
17
separately from the general estate of the failed brokerage
18
firm.
19
to protect the securities market as a whole.”
20
L. Madoff Inv. Sec. LLC, 654 F.3d at 235.
Customer property is cash and securities held
“SIPA serves dual purposes: to protect investors, and
3
In re Bernard
A SIPA
For a succinct overview of the statute’s history, see
Securities Investor Protection Corp. v. BDO Seidman, LLP, 49
F. Supp. 2d 644, 649 (S.D.N.Y. 1999).
10
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liquidation confers priority on customer claims by an
2
expeditious alternative to a traditional bankruptcy
3
proceeding.
4
fund of customer property according to the customer’s “net
5
equity.”
6
Under SIPA, each customer shares ratably in the
If (as is often the case) the assets are not enough to
7
satisfy all net equity claims, SIPC advances money (up to
8
$500,000 per customer) to the SIPA trustee, who is charged
9
with assessing customer claims and making the ratable
10
distributions.
11
advanced approximately $800 million.
12
At the time of this appeal, SIPC had
A trustee also has authority to investigate the
13
circumstances surrounding the insolvency and to recover and
14
distribute any remaining funds to creditors.
15
that his investigation has uncovered evidence of wrongdoing
16
by third parties who aided and abetted Madoff, and seeks to
17
replenish the fund of customer property by taking action
18
against various financial institutions that serviced BLMIS.
Picard alleges
19
Picard presses claims against JPMorgan Chase & Co., UBS
20
AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated
21
persons and entities.
22
summarized one by one.
The allegations against each are
We distill the detailed allegations
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from the consolidated complaints, and recount only the
2
background needed to understand our analysis.
3
of the litigation, the allegations are assumed to be true.
4
See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir.
5
2009).
6
JPMorgan.
At this stage
Madoff maintained a checking account at
7
JPMorgan Chase & Co. (“JPMorgan”)4 for more than twenty
8
years, beginning in 1986.
9
bankruptcy, JPMorgan collected an estimated half billion
In the years prior to BLMIS’s
10
dollars in fees, interest payments, and revenue from BLMIS.
11
The Trustee alleges that JPMorgan was “at the very center”
12
of Madoff’s fraud and was “thoroughly complicit” in it.
13
662 ¶ 1.5
14
Account,” was where hundreds of billions of dollars of
15
customer money were “commingled and ultimately washed.”
16
663 ¶ 2.
17
for “split-strike” securities transactions were instead
18
funneled to other customers to sustain the illusion of large
19
and reliable returns on investment.
A
Madoff’s primary account with JPMorgan, the “703
A
The customer funds deposited into the 703 Account
4
Throughout this brief, “JPMorgan” refers to the four
JPMorgan defendants: JPMorgan Chase & Co., JPMorgan Chase
Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan
Securities Ltd.
5
Record citations refer to the joint appendix filed in
the action under discussion.
12
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The 703 Account was a retail checking account, not a
2
commercial account.
3
investors were deposited without being segregated or
4
transferred to separate sub-accounts.
5
exhibited, on their face, a “glaring absence of securities
6
activity.”
7
million-dollar checks and wire transfers having no apparent
8
business purpose were exchanged between Madoff and his close
9
friend, Norman Levy (now dead).
Billions of dollars from thousands of
A 714 ¶ 190.
These accounts
At the same time, numerous multi-
10
In 2006, due diligence conducted by JPMorgan revealed
11
strong and steady yields by Madoff’s feeder funds during a
12
time when the S&P 100 dropped thirty percent.
13
manager later acknowledged, that was too good to be true.
14
In June 2007, JPMorgan’s Chief Risk Officer John Hogan
15
learned at a lunch with JPMorgan money manager Matt Zames
16
that “there is a well-known cloud over the head of Madoff
17
and that his returns are speculated to be part of a [P]onzi
18
scheme.”
19
a Google search on Madoff, and made no further inquiries
20
when the search yielded no hard evidence.
21
22
A 695 ¶ 119.
As one money
Hogan asked a junior analyst to run
Faced with “numerous indications of Madoff’s fraud,” in
the fall of 2008 JPMorgan redeemed $276 million of its
13
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investments in Madoff’s feeder funds.
2
710 ¶ 178.
3
other investors.
4
put an end to Madoff’s fraud, it quietly continued
5
60
collecting its large fees.
6
A 705 ¶¶ 156-60; A
But the company failed to tip off regulators or
Though JPMorgan was uniquely positioned to
UBS and Access.
Defendants UBS AG6 (“UBS”) and Access
7
International Advisors LLC7 (“Access”) are sued for aiding
8
and abetting Madoff’s fraud by creating feeder funds and
9
collecting investments from abroad.
UBS acted as sponsor,
10
manager, administrator, custodian, and primary banker of the
11
funds.
12
facilitated investments in BLMIS, despite clear indicia of
13
fraud.
14
legitimize and attract money to Madoff’s fraud,” but UBS
UBS reaped at least $80 million in fees as it
The “prestigious name” of UBS was used “to
6
“UBS” includes UBS AG, UBS (Luxembourg) S.A., UBS
Fund Services (Luxembourg) S.A., UBS Third Party Management
Company S.A., Roger Hartmann, Ralf Schroter, Rene Egger,
Bernd Stiehl, Alain Hondequin, and Hermann Kranz.
7
“Access” includes Access International Advisors LLC,
Access International Advisors Europe Limited, Access
International Advisors Ltd., Access Partners (Suisse) S.A.,
Access Management Luxembourg S.A., Access Partners S.A.,
Patrick Littaye, Claudine Magnon de la Villehuchet (in her
capacities as Executrix and sole beneficiary of the Will of
Thierry Magnon de la Villehuchet), Pierre Delandmeter, and
Theodore Dumbauld. The Trustee also sues feeder funds
created by UBS and Access such as Defendants Luxalpha SICA V
and Groupement.
14
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agreed to “look the other way and to pretend that they were
2
truly ensuring the existence of assets and trades when in
3
fact they were not and never did.”
4
A 916 ¶ 5.
UBS observed but ignored Madoff’s lack of transparency
5
and his uncanny ability to generate consistently high
6
returns, except insofar as UBS declined to invest its own
7
money in BLMIS or endorse Madoff’s funds to its clients.
8
In 2009, the Luxembourg regulator, the Commission de
9
Surveillance du Secteur Financier, indicated that the
10
failure of UBS to identify Madoff as a possible fraud was a
11
violation of Luxembourg law.
12
Access was also alerted to Madoff’s suspicious
13
investment activities.
14
became worried about the volume of options trades being
15
reported by Madoff, and hired an independent consultant to
16
investigate.
17
possibly have executed the volume of options or equities
18
trades he reported, and that his trading revealed “either
19
extremely sloppy errors or serious omissions” that suggest
20
he “doesn’t really understand the costs of the option
21
strategy.”
22
concealed the consultant’s findings and continued active
In 2006, internal managers at Access
The consultant concluded that Madoff could not
A 977 ¶ 218 (emphasis removed).
15
Access
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1
recruitment of investors for Madoff’s feeder funds in order
2
to keep churning its fees.
3
Unicredit.
Madoff’s fraud drew billions from abroad.
4
With the help of UniCredit Bank Austria AG (“Bank Austria”)
5
and 20:20 Medici AG (“Bank Medici”), one Sonja Kohn
6
established several Madoff feeder funds (the “Medici
7
Funds”).
8
BLMIS.
9
Alternative Investment Management Limited (“Pioneer”) and
Together, they funneled nearly $3 billion into
UniCredit S.p.A. and its two subsidiaries, Pioneer
10
Bank Austria (collectively, the “UniCredit entities”),
11
helped to promote the Medici Funds and thereby facilitated
12
the fraud.
13
The UniCredit entities and their affiliates made a lot
14
of money servicing the Medici funds: Bank Medici took more
15
than $15 million in fees; and BA Worldwide, more than $68
16
million.
17
Madoff’s returns were highly suspicious, and that the extent
18
of BLMIS’s trading activities was facially impossible.
19
they continued to aggressively market the Madoff feeder
20
funds to new customers while purporting to provide
21
oversight.
22
entities were Madoff’s failure to identify counterparties to
The UniCredit entities were well aware that
Yet
Among the signs overlooked by the UniCredit
16
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BLMIS’s options transactions, BLMIS’s atypical fee
2
structure, and Madoff’s impossibly high volume of
3
transactions.
4
research analyst at Pioneer wrote, “[w]e should be the
5
professionals protecting investors from this fraud . . .
6
[but] there is not one [due diligence] report in the files
7
except for one in May 2005.”
8
original).
9
HSBC.
Shortly after Madoff’s arrest, a senior
A 136 ¶ 314 (brackets in
HSBC Bank plc (“HSBC”)8 established Madoff
10
feeder funds (at least eighteen in seven different
11
countries) that injected capital into the Ponzi scheme while
12
ignoring obvious warning signs.
13
administrator of the funds, HSBC was required to hold the
14
fund assets and handle day-to-day operations.
15
created derivative products, such as notes and swaps, to
16
increase the flow of investment.
8
As custodian and
HSBC also
These funds fed at least
The HSBC Defendants include HSBC Bank plc, HSBC
Holdings plc, HSBC Securities Services (Luxembourg) S.A.,
HSBC Institutional Trust Services (Ireland) Limited, HSBC
Securities Services (Ireland) Limited, HSBC Institutional
Trust Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC
Securities Services (Bermuda) Limited, HSBC Bank (Cayman)
Limited, HSBC Private Banking Holdings (Suisse) S.A., HSBC
Private Bank (Suisse) S.A., HSBC Fund Services (Luxembourg)
S.A., and HSBC Bank Bermuda Limited.
17
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$8.9 billion into Madoff’s scheme, a sum representing nearly
2
forty percent of BLMIS’s capital under management.
3
HSBC represented to customers that it exercised
4
supervision and control over fund assets, whereas BLMIS
5
itself took the role of custodian.
6
oversight diligently, it would have seen thousands of
7
instances in which Madoff’s purported trades exceeded the
8
total market volume of such trades on the given day.
9
Repeatedly, industry analysts and HSBC’s own due diligence
10
team openly questioned Madoff’s extraordinary success, lack
11
of transparency, and incredible trading volume.
12
Had HSBC performed
In September 2005, HSBC commissioned KPMG LLP to detect
13
potential fraud in BLMIS’s operations.
14
2006 and 2008 warned that BLMIS’s role as custodian of its
15
own funds posed a risk that the trades were “a sham in order
16
to divert client cash.”
17
continued to “enable[]” Madoff in order to reap a windfall.
18
A 35 ¶ 1.
19
funds, management companies, and service providers that, to
20
unsuspecting outsiders, seemed to compose a formidable
21
system of checks and balances,” yet, in reality, “it
22
provided different modes for directing money to Madoff while
23
avoiding scrutiny and maximizing fees.”
A 89 ¶ 168.
Resulting reports in
Nonetheless, HSBC
In sum, HSBC “engineered a labyrinth of hedge
18
A 36 ¶ 4.
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Procedural History.
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On July 15, 2009, the Trustee
2
commenced an adversary proceeding in the United States
3
Bankruptcy Court for the Southern District of New York
4
against HSBC and thirty-six others, including UniCredit and
5
Pioneer.9
6
billion in preferential or fraudulent transfers (Counts 1
7
through 19), and asserted four common law causes of action:
8
aiding and abetting fraud, aiding and abetting breach of
9
fiduciary duty, unjust enrichment, and money had and
The Amended Complaint sought recovery of $2
10
received (collectively, the “common law claims”).
11
common law claims sought $6.6 billion from HSBC and $2
12
billion from the remaining defendants.
13
was asserted under New York law.
14
These
A contribution claim
On a motion by the UniCredit entities, the district
15
court withdrew the reference to the bankruptcy court, for
16
the limited purpose of deciding two threshold issues: (1)
17
the Trustee’s standing to assert the common law claims, and
18
(2) preemption of these claims by the Securities Litigation
19
Uniform Standards Act (“SLUSA”).
20
21
The common law claims and the contribution claim were
dismissed by Judge Rakoff in July 2011, on the grounds that
9
This proceeding consolidated two actions, one against
HSBC and one against UniCredit and Pioneer.
19
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the Trustee was in pari delicto with the defendants, lacked
2
standing to assert the common law claims on customers’
3
behalf, and could not demonstrate a right to contribution.
4
See Picard v. HSBC Bank PLC, 454 B.R. 25, 37 (S.D.N.Y.
5
2011).
6
bars the Trustee’s claims.
7
The court did not reach the question whether SLUSA
Id.
The Trustee’s adversary proceeding against JPMorgan was
8
commenced in December 2010.
9
HSBC and UniCredit, the Trustee asserted common law claims
As in the proceedings against
10
seeking $19 billion for, inter alia, aiding and abetting
11
fraud, aiding and abetting breach of fiduciary duty, unjust
12
enrichment, and conversion.
13
The adversary proceeding against UBS followed.
Also
14
named were Access, several of its affiliates, and two feeder
15
funds.
16
aiding and abetting fraud, aiding and abetting breach of
17
fiduciary duty, unjust enrichment, and conversion, among
18
others.
19
behalf of the customers of BLMIS (rather than BLMIS itself).
20
All Defendants (except Luxalpha and two individual
Again, the Trustee asserted common law claims for
Damages of approximately $2 billion were sought on
21
Defendants) moved to dismiss the common law claims and the
22
contribution claim.
23
the motions.
In November 2011, Judge McMahon granted
See Picard v. JPMorgan Chase & Co., 460 B.R.
20
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84 (S.D.N.Y. 2011).
2
Rakoff) that the Trustee lacks standing to bring an action
3
on behalf of third parties and has no valid claim for
4
contribution.
Judge McMahon concluded (as did Judge
Id. at 106.
5
DISCUSSION
6
We review de novo a district court’s dismissal of
7
causes of action for failure to state a claim for relief or
8
lack of standing.
9
Cir. 2009).
See Fulton v. Goord, 591 F.3d 37, 41 (2d
Point I considers the Trustee’s claims as
10
asserted by him on behalf of BLMIS itself; Point II
11
considers claims asserted by the Trustee on behalf of
12
BLMIS’s customers.
13
14
I
We agree with the district courts that the Trustee’s
15
common law claims asserted on behalf of BLMIS are barred by
16
the doctrine of in pari delicto.
17
A
18
Under New York law,10 one wrongdoer may not recover
19
against another.
See Kirschner v. KPMG LLP, 938 N.E.2d 941,
10
“In a bankruptcy proceeding, state law . . .
determines whether a right to sue belongs to the debtor or
to the individual creditors.” Wight v. BankAmerica Corp.,
219 F.3d 79, 86 (2d Cir. 2000) (citation and internal
quotation marks omitted). New York law governs here.
21
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950 (N.Y. 2010).
2
profit from his own misconduct “is . . . strong in New
3
York.”
4
Department, has long applied the doctrine of in pari delicto
5
to bar a debtor from suing third parties for a fraud in
6
which he participated.
7
536, 539 (App. Div. 1st Dep’t 1925) (“The bankrupts could
8
not recover against these defendants for bucketing orders
9
because they were responsible for the illegal transaction
The principle that a wrongdoer should not
Id. at 964.
The New York Appellate Division, First
See Barnes v. Hirsch, 212 N.Y.S.
10
and parties to the fraud.”), aff’d, 152 N.E. 424 (N.Y.
11
1926).
12
A “claim against a third party for defrauding a
13
corporation with the cooperation of management accrues to
14
creditors, not to the guilty corporation.”
15
Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991)
16
(citing Barnes, 212 N.Y.S. at 537).
17
is imputed to the trustee because, innocent as he may be, he
18
acts as the debtor’s representative.
19
BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000)
20
(“[B]ecause a trustee stands in the shoes of the
21
corporation, the Wagoner rule bars a trustee from suing to
22
recover for a wrong that he himself essentially took part
22
Shearson Lehman
The debtor’s misconduct
See Wight v.
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in.”); accord Breeden v. Kirkpatrick & Lockhart LLP (In re
2
Bennett Funding Grp., Inc.), 336 F.3d 94, 99-100 (2d Cir.
3
2003) (applying Wagoner rule in the context of “the greatest
4
Ponzi scheme [then] on record” and holding that “the
5
defrauded investors and not the bankruptcy trustee” were
6
entitled to pursue malpractice claims against attorneys and
7
accountants arising from the fraud).11
8
9
Picard alleges that the Defendants were complicit in
Madoff’s fraud and facilitated his Ponzi scheme by providing
10
(well-paid) financial services while ignoring obvious
11
warning signs.
12
of Wagoner and the ensuing cases: Picard stands in the shoes
13
of BLMIS and may not assert claims against third parties for
14
participating in a fraud that BLMIS orchestrated.
These claims fall squarely within the rule
15
11
See also Kirschner v. Grant Thornton LLP, No. 07
Civ. 11604 (GEL), 2009 WL 1286326, at *10 (S.D.N.Y. Apr. 14,
2009) (applying Wagoner rule to dismiss fraud and breach of
fiduciary claims where the debtor “participated in, and
benefitted from, the very wrong for which it seeks to
recover”), aff’d, 626 F.3d 673 (2d Cir. 2010); Hirsch v.
Arthur Andersen & Co., 72 F.3d 1085, 1094-95 (2d Cir. 1995)
(holding that even though “there [was] at least a
theoretical possibility that some independent financial
injury to the Debtors might be established,” the Wagoner
rule precluded standing “because of the Debtors’
collaboration with the defendants-appellees in promulgating
and promoting the Colonial Ponzi schemes”).
23
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Picard’s scattershot responses are resourceful, but
2
they all miss the mark.
3
exempt from the Wagoner rule, but adduces no authority.
4
argues that the rationale of the in pari delicto doctrine is
5
not served here because he himself is not a wrongdoer; but
6
neither were the trustees in the cases cited above.12
7
contends that in pari delicto should not impede the
8
enforcement of securities laws, citing Bateman Eichler, Hill
9
Richards, Inc. v. Berner, 472 U.S. 299 (1985); but Bateman
He contends that a SIPA trustee is
He
He
10
Eichler is inapposite.
11
pari delicto would not prevent defrauded tippee from
12
bringing suit against defrauding tipper, at least absent
13
further inquiry into “relative culpabilities” of tippee and
14
tipper).13
See id. at 315-16 (holding that in
He invokes the “adverse interest” exception,
12
Relatedly, he argues that in a typical bankruptcy in
pari delicto is designed to bar corporate malefactors,
including shareholders, from recovering, whereas in a SIPA
liquidation the trustee marshals assets for the benefit of
the customer property estate. Accordingly, there is no
similar concern here that funds collected by the trustee
would be distributed to wrongdoers. But, in Kirschner v.
KPMG LLP, the New York Court of Appeals declined to make an
exception to the in pari delicto doctrine despite the
trustee’s urging that proceeds would “benefit blameless
unsecured creditors . . . and shareholders.” Kirschner v.
KPMG LLP, 938 N.E.2d 941, 958 (N.Y. 2010).
13
Like the Supreme Court in Bateman Eichler, we
recently declined to apply in pari delicto to bar suit in a
private civil antitrust action, “where private actions play
24
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1
which directs a court not to impute to a corporation the bad
2
acts of its agent when the fraud was committed for personal
3
benefit.
4
Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997).
5
However, “this most narrow of exceptions” is reserved for
6
cases of “outright theft or looting or embezzlement . . .
7
where the fraud is committed against a corporation rather
8
than on its behalf.”14
Kirschner v. KPMG LLP, 938 N.E.2d
9
941, 952 (N.Y. 2010).
It is not possible thus to separate
See The Mediators, Inc. v. Manney (In re
a significant role in the enforcement scheme.” Gatt
Commc’ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 80 (2d
Cir. 2013) (dismissing action on threshold question of
antitrust standing). Here, in contrast, barring claims
brought by Madoff’s successor-in-interest would not preclude
his victims from bringing suit individually. See infra p.
58 n.29. In pari delicto does not apply to all wrongdoers;
the doctrine targets those who “actively participate in the
illegal scheme and who are substantially at fault.” Gatt
Commc’ns, 711 F.3d at 84 (Wesley, J., concurring). The
pleadings here leave us with no doubt that BLMIS--in whose
shoes the Trustee stands--bore at least “substantially equal
responsibility” for the injuries the Trustee now seeks to
redress. See Bateman Eichler, 472 U.S. at 310-11.
Accordingly, application of the rule in this context is well
established. See, e.g., Wagoner, 944 F.2d at 120; Wight,
219 F.3d at 87.
14
When, as here, principal and agent are “one and the
same . . . the adverse interest exception is itself subject
to an exception styled the ‘sole actor’ rule,” which
“imputes the agent’s knowledge to the principal
notwithstanding the agent’s self-dealing.” In re Mediators,
Inc., 105 F.3d at 827.
25
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BLMIS from Madoff himself and his scheme.
2
argues that the district courts should not have applied the
3
in pari delicto doctrine at the pleadings stage; but the New
4
York Court of Appeals has held otherwise.
5
n.3; see also Wagoner, 944 F.2d at 120.
6
appropriate where (as here) the outcome is plain on the face
7
of the pleadings.
8
9
Finally, Picard
See id. at 947
Early resolution is
B.
The Trustee’s claim for contribution is the only one
10
that may escape the bar of in pari delicto.
11
United States, 853 F.2d 124, 127 n.3 (2d Cir. 1988)
12
(explaining that parties seeking contribution are
13
necessarily in pari delicto).15
14
contribution for payments made to BLMIS customers under
15
SIPA, on the theory that the Defendants are joint
16
tortfeasors with BLMIS under New York law.
See Barrett v.
The Trustee seeks
17
15
Some courts have suggested that Wagoner nevertheless
bars a contribution claim. See, e.g., Devon Mobile Commc’ns
Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia
Commc’ns Corp.), 322 B.R. 509, 529 (Bankr. S.D.N.Y. 2005);
Silverman v. Meister Seelig & Fein, LLP (In re Agape World,
Inc.), 467 B.R. 556, 580-81 (Bankr. E.D.N.Y. 2012). We need
not decide whether such a claim would survive a Wagoner
challenge because, as explained in text, there is no
contribution right under SIPA.
26
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The New York statute provides that “two or more persons
2
who are subject to liability for damages for the same
3
personal injury, injury to property or wrongful death, may
4
claim contribution among them whether or not an action has
5
been brought or a judgment has been rendered against the
6
person from whom contribution is sought.”
7
§ 1401 (McKinney).
8
compulsion; that is, the party seeking contribution must
9
have been compelled in some way, such as through the entry
N.Y. C.P.L.R.
Section 1401 “requires some form of
10
of a judgment, to make the payment against which
11
contribution is sought.”
12
FirstEnergy Corp., No. 3:03-CV-0438 (DEP), 2007 WL 1434901,
13
at *7 (N.D.N.Y. May 11, 2007) (emphasis added).
N.Y. State Elec. & Gas Corp. v.
14
However, the SIPA payments for which Picard seeks
15
contribution were not compelled by BLMIS’s state law fraud
16
liability to its customers; his obligation to pay customers
17
their ratable share of customer property is an obligation of
18
federal law: SIPA.
19
and it is settled in this Circuit that there is no claim for
20
contribution unless the operative federal statute provides
21
one.
22
Am., AFL-CIO, 451 U.S. 77, 97 n.38, 97-99 (1981); see also
SIPA provides no right to contribution,
See Nw. Airlines, Inc. v. Transp. Workers Union of
27
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1
Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 144 (2d Cir.
2
1999) (affirming dismissal of New York state law
3
contribution claims for liability under the Fair Labor
4
Standards Act); KBL Corp. v. Arnouts, 646 F. Supp. 2d 335,
5
341 (S.D.N.Y. 2009) (“[A] plaintiff cannot use New York
6
State common law as an end-around to make a claim for
7
contribution that it could not make under the federal
8
statutory scheme.”); Lehman Bros., Inc. v. Wu, 294 F. Supp.
9
2d 504, 505 n.1 (S.D.N.Y. 2003) (“[W]hether contribution is
10
available in connection with a federal statutory scheme is a
11
question governed solely by federal law.”) (citation and
12
quotation marks omitted).
13
Picard emphasizes that he is not seeking contribution
14
for violations of SIPA or any other federal statute, but
15
that is beside the point.
16
contribution under state law must be an obligation imposed
17
by state law.”
18
Supp. 1333, 1349 (S.D.N.Y. 1996) (emphasis added).
19
issue is therefore whether the payments made by the Trustee,
20
for which he is seeking contribution, are required by state
21
or federal law--an easy question.
“The source of a right of
LNC Invs., Inc. v. First Fid. Bank, 935 F.
22
28
The
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The $800 million paid out to customers fulfilled an
2
obligation created by SIPA, a federal statute that does not
3
provide a right to contribution “either expressly or by
4
clear implication,” Texas Industries, Inc. v. Radcliff
5
Materials, Inc., 451 U.S. 630, 638 (1981).
6
Bankruptcy Act, SIPA does not require customers to establish
7
a basis of liability as a prerequisite for the Trustee’s
8
disbursement obligation.
9
U.S.C. § 78fff-2(c) (the Trustee “shall allocate customer
10
property of the debtor . . . to customers of such debtor,
11
who shall share ratably in such customer property on the
12
basis and to the extent of their respective net equities”);
13
cf. Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737,
14
753-56 (Bankr. S.D. Tex. 2008) (holding that Texas law
15
governed contribution claim where debtor sought contribution
16
for obligations set forth in proofs of claim alleging fraud
17
under state law).
18
were imposed by a federal law that does not provide a right
19
to contribution, the district courts properly dismissed
20
these claims.
Unlike the
The loss itself is enough.
See 15
Because the Trustee’s payment obligations
21
22
29
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II
Having rejected the Trustee’s claims asserted on behalf
3
of BLMIS, we consider next whether the Trustee may assert
4
such claims on behalf of BLMIS’s customers.
5
these claims, the Trustee must first establish his standing.
6
This he cannot do.
7
To proceed with
Standing is a “threshold question in every federal
8
case, determining the power of the court to entertain the
9
suit.”
Warth v. Seldin, 422 U.S. 490, 498 (1975).
Standing
10
depends, first, on whether the plaintiff has identified a
11
“case or controversy” between the plaintiff and the
12
defendants within the meaning of Article III of the
13
Constitution.
14
Camp, 397 U.S. 150, 152 (1970).
15
plaintiff must [1] allege personal injury [2] fairly
16
traceable to the defendant’s allegedly unlawful conduct and
17
[3] likely to be redressed by the requested relief.’”
18
Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir.
19
1995) (alterations in original) (quoting Allen v. Wright,
20
468 U.S. 737, 751 (1984)).
21
comply with “prudential” limitations on standing, of which
22
the salient one here is that a party must “assert his own
Ass’n of Data Processing Serv. Orgs., Inc. v.
“To have standing, ‘[a]
In addition, the plaintiff must
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legal rights and interests and cannot rest his claim to
2
relief on the legal rights or interests of third parties.”
3
Warth, 422 U.S. at 499.
4
We consider below Picard’s arguments that: (A) existing
5
Second Circuit precedent allows for third-party standing in
6
a SIPA liquidation; and (B) SIPA itself confers standing,
7
both by creating a bailment relationship between the Trustee
8
and the debtor’s customers, and by authorizing SIPC to
9
pursue subrogation claims on customers’ behalf.16
10
11
A
The implied prohibition in Article III against third-
12
party standing applies to actions brought by bankruptcy
13
trustees.
14
N.Y., 406 U.S. 416 (1972), the Supreme Court ruled that
15
federal bankruptcy law does not empower a trustee to collect
16
money owed to creditors.
17
trustee is not empowered “to collect money not owed to the
18
estate”; the trustee’s proper task “is simply to collect and
In Caplin v. Marine Midland Grace Trust Co. of
That is because a bankruptcy
16
In proceedings before one of the district courts,
the Trustee grounded his standing argument in large part on
Section 544(a) of the Bankruptcy Code, which gives a trustee
the rights of a hypothetical lien creditor. The court
considered this argument at length and ultimately rejected
it, see Picard v. JPMorgan Chase & Co., 460 B.R. 84, 92-97
(S.D.N.Y. 2011) (McMahon, J.), and the Trustee has abandoned
it on appeal.
31
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reduce to money the property of the estates for which (he is
2
trustee).”
3
marks omitted).
4
any suggestion that the trustee in reorganization is to
5
assume the responsibility of suing third parties” on behalf
6
of creditors.
7
their own assessment of the respective advantages and
8
disadvantages, not only of litigation, but of various
9
theories of litigation,” id. at 431; no consensus is needed
10
as to “the amount of damages to seek, or even on the theory
11
on which to sue,” id. at 432; and disputes over inconsistent
12
judgments and the scope of settlements can be avoided, id.
13
at 431-32.
14
Id. at 428-29 (citation and internal quotation
“[N]owhere in the statutory scheme is there
Id. at 428.
This way, creditors can “make
Our Court has hewed to this principle.
In Wagoner, the
15
misappropriation of funds by the owner and president of the
16
debtor company was facilitated by stock transactions
17
effected through a third-party brokerage firm.
18
Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.
19
1991).
20
abetted the fraud was dismissed on summary judgment, and we
21
affirmed, observing that “[i]t is well settled that a
22
bankruptcy trustee has no standing generally to sue third
Shearson
The trustee’s claim that the brokerage aided and
32
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parties on behalf of the estate’s creditors, but may only
2
assert claims held by the bankrupt corporation itself.”
3
at 118 (citing Caplin, 406 U.S. at 434); see also Hirsch v.
4
Arthur Andersen & Co., 72 F.3d 1085, 1094 (2d Cir. 1995)
5
(holding that Chapter 11 trustee had no standing to bring
6
creditor claims against accountants and law firms that had
7
provided services to the debtor, a real estate partnership
8
operated as a Ponzi scheme); The Mediators, Inc. v. Manney
9
(In re Mediators, Inc.), 105 F.3d 822, 826 (2d Cir. 1997)
Id.
10
(affirming dismissal of breach of fiduciary duty claim
11
brought by creditors’ committee functioning as bankruptcy
12
trustee, against bank and law firm for allegedly aiding and
13
abetting debtor’s fraud).
14
The Trustee makes little effort to explain why Caplin
15
and its progeny do not control.
16
single Second Circuit case that was overruled by the Supreme
17
Court, and on dicta in another.
18
precedential force, both cases are readily distinguishable.
19
1
20
In Redington v. Touche Ross & Co., 592 F.2d 617 (2d
Instead, he relies on a
Apart from lacking
21
Cir. 1978), rev’d, 442 U.S. 560 (1979), a SIPA trustee sued
22
the accountant of an insolvent brokerage for violations of
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record-keeping provisions of Section 17(a) of the Securities
2
Exchange Act, as well as violations of state common law.
3
The district court dismissed the Section 17(a) claim for
4
lack of an implied private right of action, and concluded
5
that it lacked jurisdiction over the common law claims.
6
Redington v. Touche Ross & Co., 428 F. Supp. 483, 492-93
7
(S.D.N.Y. 1977).
8
9
See
In reversing, we held that Section 17(a) did create an
implied private right of action.
See Redington v. Touche
10
Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560
11
(1979).
12
is responsible for marshalling and returning [customer]
13
property; to the extent that he is unable to do so, he
14
argues, he may sue on behalf of the customer/bailors any
15
wrongdoer whom they could sue themselves.”
16
Relying on the Federal Rules of Civil Procedure, Redington
17
concluded that “the Trustee, as bailee, is an appropriate
18
real party in interest,” id., and that “SIPC is subrogated
19
to the right of action implied in section 17 in favor of
20
brokers’ customers against third parties such as
21
accountants.”
22
case, except that Redington is no longer good law.
We then considered the trustee’s claim that “[h]e
Id. at 624.
Id. at 625.
Redington would favor Picard’s
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The Supreme Court granted certiorari in Redington to
2
decide whether Section 17(a) created an implied right of
3
action and whether a SIPA trustee and SIPC had standing to
4
assert that claim.
5
U.S. 560 (1979).
6
action existed under Section 17(a), id. at 579, and
7
therefore considered it “unnecessary to reach” the standing
8
issue, id. at 567 n.9.
9
whether an alternative basis for jurisdiction existed, but
See Touche Ross & Co. v. Redington, 442
The Court held that no private right of
The case was remanded to consider
10
none was found.
11
F.2d 68, 70 (2d Cir. 1979).
12
See Redington v. Touche Ross & Co., 612
Picard argues that the Supreme Court left the standing
13
question “untouched” because the opinion was “limited to a
14
merits-based reversal on the issue of whether a private
15
right of action existed under section 17(a).”
16
31 (11-5044).
17
right of action is presented ordinarily only if a right of
18
action has been found to exist.
19
Corp. v. Nat. Assoc. of R.R. Passengers, 414 U.S. 453, 456
20
(1974) (“[T]he threshold question clearly is whether the
21
Amtrak Act . . . creates a [private] cause of action . . .
22
for it is only if such a right of action exists that we need
Appellant Br.
However, the question of who may assert a
35
See Nat. R.R. Passenger
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consider whether the respondent had standing to bring the
2
action[.]”).17
3
threshold question drained the Second Circuit Redington
4
opinion of force on other questions.
5
Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010)
6
(“[W]hen the Supreme Court reverses a lower court’s decision
7
on a threshold question,” the Court “effectively holds the
8
lower court erred by reaching [other issues].”).
9
The Supreme Court’s reversal on the
See Newdow v. Rio
Following the Supreme Court’s reversal, this Court
10
vacated its original judgment on the ground that subject
11
matter jurisdiction was lacking.
12
Touche Ross, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979);
13
Appellee Br. Addendum A (11-5207).
14
vacatur dissipates precedential force.
17
See Order, Redington v.
As the Trustee concedes,
See Appellant Br. 30
The Trustee attempts to distinguish National
Railroad on the ground that that case involved a single
federal statute without additional claims, so a
determination that the Amtrak Act did not create a private
right of action ended the case. Because Redington also
involved state law claims over which the Court exercised
pendent jurisdiction, Picard reasons, “a determination on
the existence of a private right of action tied to a federal
statute does not end the court’s inquiry into a trustee’s
standing to assert state common law claims.” Appellant Br.
36 (11-5044). In Redington, however, we did not consider
specifically whether the trustee had standing to bring
claims under common law. As explained in text, Redington‘s
standing analysis was entirely dependent on the Court’s
antecedent ruling that the statute created an implied
private right of action--a ruling that was later overturned.
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(11-5044).
2
577 n.12 (1975) (observing that vacatur “deprives [the]
3
court’s opinion of precedential effect”); Brown v. Kelly,
4
609 F.3d 467, 476-77 (2d Cir. 2010).
See also O’Connor v. Donaldson, 422 U.S. 563,
5
Since Redington, at least six judges in this Circuit
6
have questioned or rejected third-party claims brought by
7
SIPA trustees, beginning with Judge Pollack in Mishkin v.
8
Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 556-58
9
(S.D.N.Y. 1990).18
See also Picard v. JPMorgan Chase & Co.,
10
460 B.R. 84, 100-101 (S.D.N.Y. 2011) (McMahon, J.); Picard
11
v. HSBC Bank PLC, 454 B.R. 25, 33-34 (S.D.N.Y. 2011)
12
(Rakoff, J.); Picard v. Taylor (In re Park South Sec., LLC),
13
326 B.R. 505, 516 (Bankr. S.D.N.Y. 2005) (Drain, J.);
14
Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.),
15
280 B.R. 794, 804 (Bankr. S.D.N.Y. 2002) (Beatty, J.); SIPC
16
v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653 (S.D.N.Y. 1999)
17
(Preska, J.), rev’d on other grounds, 222 F.3d 63 (2d Cir.
18
2000).
19
18
In a hearing in the Mishkin case, Judge Pollack
concluded, as we do, that Redington “was reversed in all
respects not on other grounds” and “does not stand as the
law of this circuit.” SPA 17 (11-5175).
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Yet Redington has enjoyed something of a half-life,
2
with several courts (including this one) assuming without
3
deciding that Redington retains residual force.19
4
should be put to rest; it has no precedential effect.
5
Redington
Even if Redington retained some persuasive value, it
6
would not decide this case.
7
chiefly whether the trustee and SIPC had standing to bring a
8
cause of action under Section 17 of the Exchange Act; the
9
opinion said nothing about a SIPA trustee’s ability to
First, Redington considered
10
orchestrate mass tort actions against third parties.
11
Redington v. Touche Ross & Co., 592 F.2d 617, 618 (2d Cir.
12
1978), rev’d, 442 U.S. 560 (1979) (“[W]e are presented with
13
the question whether a private cause of action exists under
14
section 17 of the Securities Exchange Act of 1934 against
19
See
Assuming that Redington was still good law, Judges
Drain and Beatty instead rejected SIPA trustees’ standing
arguments on the ground that only SIPC, not a SIPA trustee,
could enforce its rights of subrogation. See In re Park
South Sec., LLC, 326 B.R. at 516; In re A.R. Baron & Co.,
Inc., 280 B.R. at 804. In BDO Seidman, LLP, Judge Preska
held that although Mishkin‘s interpretation of SIPC’s
subrogation power was “more faithful to the letter and
purpose of the Act,” she was nonetheless “bound by Redington
to find that SIPC has standing to bring suit.” 49 F. Supp.
2d at 653. On appeal, this Court “assume[d], without
deciding, that . . . SIPC has standing as the customers’
subrogee,” SIPC v. BDO Seidman, LLP, 222 F.3d 63, 69 (2d
Cir. 2000), and ultimately dismissed its claims on
substantive grounds, id. at 71-76.
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accountants who prepare misleading statements of a broker’s
2
financial affairs, and if so, who may maintain such an
3
action.”).
4
part, on an analysis of Fed. R. Civ. P. 17(a), which sets
5
forth rules concerning real parties in interest, and which
6
has no application here.
7
51 n.25.
8
accounting firm for a few discrete instances of alleged
9
misconduct (the preparation of misleading financial
Second, our holding in Redington turned, in
See id. at 625; see also infra p.
Third, Redington involved claims against a single
10
statements).
As a result, the policy concerns we express
11
below (see infra pp. 59-69) would have been considerably
12
diminished--and, indeed, were not even addressed by the
13
Court.
14
was not complicit in the wrongdoing, but rather “an entity
15
distinct from its conniving officers [that] was directly
16
damaged by Touche Ross’ unsatisfactory audit.”
17
620.
18
consider whether the doctrine of in pari delicto barred all
19
or part of the suit.
20
and inapposite.
Fourth, and finally, in Redington the brokerage firm
592 F.2d at
The Redington Court therefore did not have occasion to
In sum, Redington is both non-binding
21
22
23
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2
The Trustee relies on St. Paul Fire & Marine Insurance
3
Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), for the
4
proposition that a trustee may assert creditors’ claims if
5
they are generalized in nature, and not particular to any
6
individual creditor.
7
no application here.
8
9
However, the holding of that case has
PepsiCo had been guarantor of bonds issued by a
subsidiary that later was acquired by a subsidiary of Banner
10
Industries.
11
bonds, PepsiCo sued Banner, alleging diversion of assets and
12
alter ego.
13
sued Banner for misappropriation.
14
trustee--and not PepsiCo--could pursue Banner because Ohio
15
law allowed a subsidiary to assert an alter ego claim
16
against its parent, so that “[t]he cause of action therefore
17
becomes property of the estate of a bankrupt subsidiary, and
18
is properly asserted by the trustee in bankruptcy.”
19
703-04.
20
When the (later) merged entity defaulted on the
The merged entity went bankrupt, and the trustee
We ruled that the
Id. at
Picard directs us to a passage in St. Paul--stating
21
that a trustee may bring a claim if the “claim is a general
22
one, with no particularized injury arising from it, and if
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that claim could be brought by any creditor of the debtor,”
2
id. at 701--and contends that the third-party claims here
3
are common to all customers because all customers were
4
similarly injured by Madoff’s fraud and the Defendants’
5
facilitation.
6
•
This argument is flawed on many levels:
St. Paul decided the “specific question” whether a
7
creditor may bring an alter ego claim against the debtor’s
8
parent when the debtor itself also possesses such a claim.
9
Id. at 699.
10
11
But Picard seeks to assert claims that are
property only of the creditors, not of the debtor.
•
The Trustee’s broad reading of St. Paul would
12
bring the Court’s holding into conflict with a line of cases
13
that came before and after it.
14
34, it is settled that a trustee may not assert creditors’
15
claims against third parties.
16
Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991).
17
of course, St. Paul could not alter the Supreme Court’s
18
ruling in Caplin.
19
Supreme Court and Second Circuit precedent.
20
In re Stanwich Fin. Servs. Corp., 317 B.R. 224, 228 n.4
21
(Bankr. D. Conn. 2004) (highlighting this tension).
As discussed supra pp. 32-
See, e.g., Shearson Lehman
And,
Picard’s argument thus conflicts with
22
41
See generally
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The language cited by Picard from St. Paul is not
2
a pronouncement about third-party standing; it voices the
3
maxim that only a trustee, not creditors, may assert claims
4
that belong to the bankrupt estate.
5
states: “‘[T]he Trustee in bankruptcy has standing to
6
represent only the interests of the debtor corporation.’
7
Our decision today goes no further than to say that causes
8
of action that could be asserted by the debtor are property
9
of the estate and should be asserted by the trustee.”
10
Paul, 884 F.2d at 702 n.3 (internal citation omitted)
11
(quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass,
12
754 F.2d 57, 62 n.4 (2d Cir. 1985)).
13
Paul, when a creditor seeks relief against third parties
14
that pushed the debtor into bankruptcy, the creditor is
15
asserting a derivative claim that arises from harm done to
16
the estate.
17
18
19
20
21
22
23
24
25
26
27
28
As St. Paul elsewhere
St.
As illustrated by St.
Judge Posner described this distinction:
The point is simply that the trustee is confined
to enforcing entitlements of the corporation. He
has no right to enforce entitlements of a
creditor. He represents the unsecured creditors
of the corporation; and in that sense when he is
suing on behalf of the corporation he is really
suing on behalf of the creditors of the
corporation. But there is a difference between a
creditor’s interest in the claims of the
corporation against a third party, which are
enforced by the trustee, and the creditor’s own
direct--not derivative--claim against the third
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2
3
4
Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994).
5
See generally Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863
6
A.2d 772, 792 (Del. Ch. 2004).
party, which only the creditor himself can
enforce.
7
•
The customers’ claims against the Defendants are
8
not “common” or “general.”
9
party is “general” if it seeks to augment the fund of
A debtor’s claim against a third
10
customer property and thus affects all creditors in the same
11
way.
12
thousands of customers against third-party financial
13
institutions for their handling of individual investments
14
made on various dates in varying amounts.
15
alleged wrongful acts, then, could not have harmed all
16
customers in the same way.20
Picard, however, seeks to assert claims on behalf of
20
The Defendants’
A recent case arising out of the BLMIS bankruptcy
provides a useful contrast. In Fox v. Picard (In re
Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012), the district
court relied on St. Paul in holding that certain Madoff
customers could not pursue fraudulent transfer claims “that
were the property of the BLMIS estate.” Id. at 478. The
customer claims were “duplicative and derivative of the
Trustee’s fraudulent transfer claim.” Id. at 479 n.2.
Accordingly, the court found the claims to be “general” in
the sense articulated in St. Paul, in that they arose from
“a single set of actions that harmed BLMIS and all BLMIS
customers in the same way.” Id. at 480. Here, however, the
customers’ claims are not derivative of claims held by the
BLMIS estate.
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B
The Trustee attempts to blunt the force of Caplin and
3
its progeny by arguing that a SIPA liquidation is unique and
4
is therefore not controlled by precedent under the
5
bankruptcy code.
6
trustee enjoys standing to assert third-party claims.
He advances two theories for why a SIPA
7
8
9
1
Picard contends that, for SIPA purposes, the customers
of a failed brokerage are bailors, and that he--acting as
10
bailee--“has a sufficient possessory interest to permit him
11
to ‘recover for the wrongful act of a third party resulting
12
in the loss of, or injury to, the subject of the bailment.’”
13
United States v. Perea, 986 F.2d 633, 640 (2d Cir. 1993)
14
(quoting Rogers v. Atl., Gulf & Pac. Co., 107 N.E. 661, 664
15
(N.Y. 1915)).
16
We disagree.
First, the statute is not written or cast in terms of
17
bailment.
18
this chapter, a liquidation proceeding shall be conducted in
19
accordance with, and as though it were being conducted under
20
[the Bankruptcy Code].”
21
rule, SIPA vests trustees with “the same powers and title
22
with respect to the debtor and the property of the debtor
“To the extent consistent with the provisions of
15 U.S.C. § 78fff(b).
44
As a general
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. . . as a trustee in a case under Title 11.”
2
78fff-1(a).
3
conferred on a trustee under Title 11.
4
creates a fund of customer property that is separate from
5
the debtor estate and that has priority over other
6
creditors’ claims, and authorizes the trustee to ratably
7
distribute those funds based on customers’ net equity.
8
15 U.S.C. § 78fff–2(c)(1)(B); In re Bernard L. Madoff
9
Investment Secs., 654 F.3d 229, 231 (2d Cir. 2011), cert.
15 U.S.C. §
True, a SIPA trustee has some powers not
Most notably, SIPA
See
10
denied, 133 S. Ct. 25 (2012).
11
confer upon SIPA trustees a power, denied all other
12
bankruptcy trustees, to sue third parties on claims that
13
belong to persons other than the estate.
14
statute reference bailment, or characterize customers as
15
“bailors” or trustees as “bailees,” or in any way indicate
16
that the trustee is acting as bailee of customer property.
17
But the statute does not
Nowhere does the
Picard alternatively invokes the principle of bailment
18
under the common law.
19
to avoid overlaying common law principles onto a statutory
20
framework, even when (unlike here) the statute makes clear
21
reference to common law.
22
189 F.3d 165, 179-80 (2d Cir. 1999) (“That the statute . . .
This is dubious: courts are careful
See Moore v. PaineWebber, Inc.,
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borrow[s] in part from the common law should not mislead us:
2
it remains the statute and its purpose that governs.”).
3
This caution is especially apt here because the statute
4
creates a ramified scheme that makes no mention of common
5
law.
6
In any event, the analogy to the common law of bailment
7
is flawed from start to finish.
8
of personalty for some particular purpose, or on mere
9
deposit, upon a contract express or implied, that after the
A bailment is “a delivery
10
purpose has been fulfilled it will be redelivered to the
11
person who delivered it, or otherwise dealt with according
12
to that person’s directions, or kept until it is reclaimed.”
13
9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (West 2013).
14
Even assuming that the customers’ investments could be
15
deemed bailed property, the only delivery that took place
16
was when customers made their investments, either in BLMIS
17
directly, or through the feeder funds.
18
Hammerstein, 39 N.Y.S. 1039, 1040 (App. Div. 1st Dep’t
19
1896); see also United States v. $79,000 in Account No.
20
2168050/6749900 at Bank of N.Y., 96 CIV. 3493 (MBM), 1996 WL
21
648934, at *6 (S.D.N.Y. Nov. 7, 1996) (“Delivery to the
22
bailee is required to create a bailment.”).
46
See Pattison v.
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supposed bailment pre-dated Picard’s appointment; he was not
2
entrusted with any customer property until after it had been
3
impaired; and he never had control over the missing funds
4
that he now seeks to recoup.
5
party to bring such an action.
6
and Chattel Leases § 115 (West 2013) (explaining that bailee
7
may only “bring an action to recover for the loss of or
8
injury to the bailed property while in his or her
9
possession”).21
10
He therefore is not the proper
See 9 N.Y. Jur. 2d Bailments
Moreover, Picard is not seeking to recover specific
11
bailments for return to individual bailors.
12
2d Bailments and Chattel Leases § 82 (West 2013) (“One of
13
the most important rights of the bailor is that, on the
14
termination of the bailment, the bailor will return to him
15
or her the identical thing bailed . . . .”).
16
“customer name securities,” which are separately held and
17
returned to individual customers outside the normal
18
distribution scheme,22 Picard’s claims are intended to
See 9 N.Y. Jur.
Unlike
21
Judge McMahon likened the Trustee’s position to that
of a parking garage attendant who is handed the keys to a
car that was recently in an accident and decides to sue the
culpable party on the owner’s behalf. See Picard v.
JPMorgan Chase & Co., 460 B.R. 84, 104-05 (S.D.N.Y. 2011).
22
See 15 U.S.C. § 78lll(4) (excluding “customer name
securities delivered to the customer” from definition of
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augment the general fund of customer property so that it can
2
be distributed ratably based on customers’ net equity.
3
arrangement is not an analog to a bailment, in which the
4
bailee is entrusted with an item that is to be recovered by
5
the bailor at some later time.
6
This
SIPC urges that we view the transaction as though
7
BLMIS, not the Trustee, acted as the bailee of customer
8
property, and that the Trustee is simply acting on BLMIS’s
9
behalf to recover the bailed property.
The short answer is
10
that Madoff (and, by extension, BLMIS) took the investment
11
money from the customers in order to defraud them--and a
12
thief is not a bailee of stolen property.
13
Graduate Sch. of Figurative Art of the N.Y. Acad. of Art,
14
735 N.Y.S. 2d 522, 522 (App. Div. 1st Dep’t 2002) (holding
15
that a bailment relationship arises if the bailee takes
See Pivar v.
customer property); see also In re New Times Sec. Servs.,
Inc., 371 F.3d 68, 72-73 (2d Cir. 2004). This contrast, and
its ramifications, are illuminated by SIPC’s own statements
to Congress regarding the passage of the 1978 amendments to
SIPA. SIPC’s then-Chairman, Hugh F. Owens, explained that
customer name securities “will be treated, in short, as
though they are not part of the debtor’s estate, but merely
held by the debtor as bailee”--implying that most other
commingled property, such as cash, would simply become part
of the debtor’s estate. SIPA Amendments: Hearings on H.R.
8331 Before the Subcomm. on Sec., Comm. on Banking, Hous.
and Urban Affairs, 95th Cong. 41-42 (1978) (Statement by
Hugh F. Owens, Chairman of SIPC).
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“lawful possession” of property “without present intent to
2
appropriate”).
3
Madoff’s commingling of customer funds also defeats any
4
analogy to bailment.
5
failed to maintain customers’ investments in separate named
6
accounts.
7
account (the 703 Account) and distributed those new
8
investments to earlier customers in lieu of actual returns.
9
This arrangement, which enabled the fraud, made a bailment
Notwithstanding Madoff’s pretense, he
He deposited all customer funds into a general
10
impossible.
11
961 F.2d 327, 330 (2d Cir. 1992) (distinguishing special
12
accounts from general accounts); see also United States v.
13
Khan, No. 97-6083, 1997 WL 701366, at *2 (2d Cir. 1997)
14
(holding that a deposit into a general bank account
15
“destroys a potential bailment” under New York law).23
See Peoples Westchester Sav. Bank v. F.D.I.C.,
16
23
“With a few exceptions, such as commingled fungible
goods in a warehouse, the general rule is that the bailee
can only discharge his or her liability to the bailor by
returning the identical thing received, in its original or
an altered form, according to the terms of the bailment.” 9
N.Y. Jur. 2d Bailments and Chattel Leases § 84 (West 2013).
Rahilly v. Wilson, a case relied on by SIPC, is not to the
contrary. See Rahilly v. Wilson, 20 F. Cas. 179, 182 (Cir.
Ct. D. Minn. 1873) (comparing commingled bales of wheat to
“an ordinary general deposit of money in a bank” and holding
that no bailment had taken place).
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SIPC attempts to obviate these difficulties by relying
2
on SEC Rule 15c, which establishes bookkeeping segregation
3
requirements for brokers.
4
Rakoff was “mystified” by this argument, Picard v. HSBC Bank
5
PLC, 454 B.R. 25, 32 (S.D.N.Y. 2011), as are we.
6
17 C.F.R. § 240.15c3-3.
Judge
Rule 15c requires brokers to maintain a minimum cash
7
balance in a reserve account and segregate all such cash for
8
customers’ benefit.
9
“specifically contemplates the commingling of customer
See 17 C.F.R. § 240.15c3-3.
It also
10
monies and the lending of customer securities.”
11
PaineWebber, Inc., 159 F.3d 698, 706 (2d Cir. 1998).
12
Whatever Rule 15c may do, it does not confer power on a SIPA
13
trustee to sue on behalf of customers.
14
not a part of SIPA.
15
scope of agency rule-making.
16
Sandoval, 532 U.S. 275, 291 (2001) (“Language in a
17
regulation may invoke a private right of action that
18
Congress through statutory text created, but it may not
19
create a right that Congress has not.”).
20
Rule does not suggest that the broker (or the Trustee)
21
serves as a bailee of customer property, or that the Trustee
22
may assert claims on behalf of customers.
Levitin v.
First, the Rule is
Second, such a rule would exceed the
See generally Alexander v.
50
In any event, the
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Finally, SIPC and the Trustee infer a bailment
2
relationship from federal common law and the Federal Rules
3
of Civil Procedure.
4
Federal common law, which does not speak to the powers of a
5
SIPA trustee, offers no useful insight.24
6
Federal Rules of Civil Procedure.25
7
8
9
The inferences are strained at best.
Nor do the
2
The Trustee argues that, because SIPC advanced funds to
customers at the outset of the liquidation, SIPC is
24
SIPC suggests that it is appropriate to resort to
federal common law where a significant conflict exists
between state and federal law and where the need for
uniformity in the treatment of brokerage customers is
paramount. But no legal authority is offered to support the
application of federal common law here. And there is no
evident conflict between New York bailment law (on the one
hand) and (on the other) SIPA, Rule 15c, or some broader
federal policy.
25
The Trustee invokes Rule 17, which allows a bailee
to sue “in [his] own name[] without joining the person for
whose benefit the action is brought.” Fed. R. Civ. P.
17(a)(1). But, as discussed in text, the trustee is not a
bailee. Additionally, Rule 17(a), like all rules prescribed
by the Supreme Court, may not abridge, enlarge, or otherwise
modify substantive rights. See 28 U.S.C. § 2072(b);
Stichting Ter Behartiging Van de Belangen Van
Oudaandeelhouders In Het Kapitaal Van Saybolt Int’l B.V. v.
Schreiber, 407 F.3d 34, 49 (2d Cir. 2005) (“The procedural
mechanisms set forth in Rule 17(a) for ameliorating real
party in interest problems may not . . . be employed to
expand substantive rights.”). It therefore cannot provide
an independent basis for standing. See generally Natural
Res. Def. Council, Inc. v. EPA, 481 F.2d 116, 121 (10th Cir.
1973).
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1
subrogated to those customers’ claims against the
2
Defendants; SIPC therefore may assert those claims as
3
subrogee; and Picard is authorized to enforce that right on
4
SIPC’s behalf.
5
neither the plain language of the statute, nor its
6
legislative history, supports the Trustee’s position.
7
But SIPC is a creature of statute, and
True, a SIPA trustee (unlike a trustee in bankruptcy),
8
advances money to pay claims.
9
into account by subrogating SIPC to customers’ net equity
The statute takes this fact
10
claims to the extent of the advances they received.
11
goes no further.
12
13
But it
The Trustee’s subrogation theory is premised in
§ 78fff-3(a):
14
15
16
17
18
19
20
21
22
23
24
25
15 U.S.C. § 78fff-3(a).
26
“claims of customers” refers (as throughout the statute) to
27
customers’ net equity claims against the estate.
28
generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d
To the extent moneys are advanced by SIPC to the
trustee to pay or otherwise satisfy the claims of
customers, in addition to all other rights it may
have at law or in equity, SIPC shall be subrogated
to the claims of such customers with the rights
and priorities provided in this chapter, except
that SIPC as subrogee may assert no claim against
customer property until after the allocation
thereof to customers as provided in section 78fff2(c) of this title.
It is undisputed that the phrase
52
See
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229, 233 (2d Cir. 2011), cert. denied, 133 S. Ct. 25 (2012).
2
SIPA thus allows only a narrow right of subrogation--for
3
SIPC to assert claims against the fund of customer property
4
and thereby recoup any funds advanced to customers once the
5
SIPA trustee has satisfied those customers’ net equity
6
claims.
7
The Trustee urges us to conclude that § 78fff-3(a) does
8
more--much more--by creating a right of subrogation that
9
allows SIPC (and, by extension, the Trustee) to step into
10
customers’ shoes and to initiate and control litigation on
11
their behalf, against any number of defendants, until SIPC
12
has been repaid in full.
13
grants trustees the “same powers and title with respect to
14
the debtor and the property of the debtor” as a Title 11
15
trustee, 15 U.S.C. § 78fff-1(a), and the Supreme Court has
16
squarely rejected attempts by Title 11 trustees to capture
17
such litigation, see Caplin v. Marine Midland Grace Trust
18
Co., 406 U.S. 416, 428 (1972).
19
Trustee relies on a catch-all provision included in the 1978
20
amendments to SIPA, which states that the subrogation rights
21
afforded by § 78fff-3(a) should not be read to diminish “all
22
other rights [SIPC] may have at law or in equity.”
As we emphasized earlier, SIPA
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As a final resort, the
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1
U.S.C. § 78fff-3(a).
2
implied right of equitable subrogation, “the principle by
3
which an insurer, having paid losses of its insured, is
4
placed in the position of its insured so that it may recover
5
from the third party legally responsible for the loss.”
6
Winkelmann v. Excelsior Ins. Co., 650 N.E.2d 841, 843 (N.Y.
7
1995).
8
class-action lawsuits and assert any number of tort claims
9
against third parties on customers’ behalf.26
10
11
From here, the Trustee claims an
He thus claims a wide grant of authority to initiate
This is a
long, long reach.
There is no sign that Congress intended an expansive
12
increment of power to SIPA trustees.
13
chairman appointed a Special Task Force to consider possible
14
amendments to the 1970 Act.
15
separately listed its “major policy recommendations” and its
16
proposed “technical refinements.”
17
of Directors of SIPC of the Special Task Force to Consider
18
Possible Amendments to SIPA, Letter of Transmittal (July 31,
19
1974).
20
Recommendation,” states that “claims of SIPC as subrogee
21
(except as otherwise provided), should be allowable only as
In 1973, the SIPC
The resulting July 1974 report
See Report to the Board
Recommendation II.A.9, deemed a “Major Policy
26
We use the term “class-action lawsuits” loosely
here, without taking a position on the SLUSA question.
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claims against the general estate.”
2
added); see also SIPA Amendments of 1975: Hearings on H.R.
3
8064 Before the Subcomm. on Consumer Protection and Fin. of
4
the H. Comm. on Interstate and Foreign Commerce, 94th Cong.
5
64 (1976) (hereinafter “Hearings on H.R. 8064”).
6
Id. at 12 (emphasis
Notably, Caplin was decided in 1972, before the Task
7
Force report and six years before Congress amended § 78fff-
8
3(a) to include “all other rights [SIPC] may have at law or
9
in equity.”
If Congress sought to exempt SIPA trustees from
10
Caplin’s rule and expand SIPC’s subrogation rights to tort
11
actions against third parties, we would expect such intent
12
to be manifested in the statutory wording and in the
13
record.27
14
The wording cited by Picard was proposed by SIPC itself
15
as a “Minor Substantive or Technical Amendment[]” in order
16
to “make clear that SIPC’s subrogation rights under the 1970
17
Act are cumulative with whatever rights it may have under
18
other State or Federal laws.”
Hearings on H.R. 8064, 94th
27
Caplin was undoubtedly on the radar of legislators
at the time, as an earlier version of Section 544 of the
Bankruptcy Code introduced with the 1978 amendments
contained a provision intended to overrule Caplin. See In
re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1227 n.9
(8th Cir. 1987). Significantly, this provision was deleted
prior to enactment. Id.
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Cong. 197, 199 (1976) (Memorandum of the Securities Investor
2
Protection Corporation in Regard to Certain Comments
3
Concerning H.R. 8064).
4
fundamental details of a regulatory scheme in vague terms or
5
ancillary provisions--it does not . . . hide elephants in
6
mouseholes.”
7
U.S. 457, 468 (2001).
8
9
Congress “does not alter the
Whitman v. Am. Trucking Assocs., Inc., 531
The Trustee adduces rules of insurance law to justify
his claim, an analogy with some intuitive appeal: Principles
10
of equity generally permit subrogees wide scope to sue
11
third-party tortfeasors, a claim that arises most commonly
12
with insurance.
13
See, e.g., Winkelmann, 650 N.E.2d at 843.
But this argument succumbs to the same critique as
14
Picard’s bailment theory: We avoid engrafting common law
15
principles onto a statutory scheme unless Congress’s intent
16
is manifest.
17
intent here is that we should treat SIPA as a bankruptcy
18
statute, not as an insurance scheme.
19
independent statutory schemes, enacted to serve the unique
20
needs of the banking and securities industries,
21
respectively.”28
See supra p. 46.
The clearest Congressional
“SIPA and FDIA are
SIPC v. Morgan, Kennedy & Co., 533 F.2d
28
Congress rejected some early versions of the SIPA
bill “which were patterned on FDIA and which extended
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1314, 1318 (2d Cir. 1976).
2
oversimplified comparisons between insurance law and federal
3
statutory law: “While this Court has referred to SIPC as
4
providing a form of public insurance, it is clear that the
5
obligations imposed on an insurance provider under state law
6
do not apply to this congressionally-created nonprofit
7
membership corporation.”
8
LLC, 654 F.3d 229, 239 (2d Cir. 2011), cert. denied, 133 S.
9
Ct. 25 (2012) (internal citations and quotation marks
10
We have since warned against
In re Bernard L. Madoff Inv. Sec.
omitted).
11
Relatedly, Picard argues under principles of equity
12
that unless he can spearhead the litigation on behalf of
13
defrauded customers, the victims will not be made whole,
14
SIPC will be unable to recoup its advances, and third-party
15
tortfeasors will reap windfalls.29
No doubt, there are
insurance coverage to certain beneficial interests
represented by customer accounts.” Morgan, Kennedy & Co.,
533 F.2d at 1318.
29
Picard and SIPC contend that, absent his exclusive
authority to bring these customer claims, the Defendants
would in effect be immunized from suit. But it is not
obvious why customers cannot bring their own suits against
the Defendants. In fact, the Defendants make clear that
customers have already filed such actions. See, e.g., MLSMK
Inv. Co. v. JP Morgan Chase & Co., 431 F. App’x 17 (2d Cir.
2011) (summary order); Shapiro v. JP Morgan Chase & Co., No.
11-CV-8331 (S.D.N.Y.); Hill v. JPMorgan Chase & Co., No. 11CV-7961 (S.D.N.Y.). As in Redington, “the customers on
whose behalf the Trustee seeks to maintain suit are not only
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advantages to the course Picard wants to follow.
2
has its limits; it may fill certain gaps in a statute, but
3
it should not be used to enlarge substantive rights and
4
powers.
5
while Bankruptcy Code allows a court to apply equitable
6
principles when necessary, “[t]hese powers . . . do not
7
include the ability to award equitable relief where the
8
party asserting the cause of action for such relief does not
9
have standing under any other section of the Code”).
10
But equity
Cf. In re Ozark, 816 F.2d at 1230 (observing that
As the Supreme Court observed, “SIPC’s theory of
11
subrogation is fraught with unanswered questions.”
12
v. SIPC, 503 U.S. 258, 270 (1992) (ultimately declining to
13
decide subrogation issue and instead holding that link
14
between stock manipulation and harm to customers was too
15
remote to support SIPC’s RICO claim).
16
has left courts “to guess at the nature of the ‘common law
17
rights of subrogation’ that it claims.”
18
Holmes
As in Holmes, SIPC
Id. at 271.
The practical skepticism voiced in Caplin in a
19
traditional bankruptcy context is justified here as well.
20
Would such suits prevent customers from “mak[ing] their own
entitled to bring, but have already initiated their own
action.” Redington v. Touche Ross & Co., 592 F.2d 617, 635
(2d Cir. 1978) (Mulligan, J., dissenting).
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assessment of the respective advantages and disadvantages,
2
not only of litigation, but of various theories of
3
litigation”?
4
control customers’ claims against third parties if SIPC has
5
not fully satisfied the customers’ claims against the
6
estate?
7
that “independent actions are still likely because it is
8
extremely doubtful that [the parties] would agree on the
9
amount of damages to seek, or even on the theory on which to
Caplin, 406 U.S. at 431.
Can a SIPA trustee
How would inconsistent judgments be avoided, given
10
sue”?
11
entered into by either the Trustee or by each customer who
12
brings suit?
13
only amplify these concerns.
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Id. at 432.
Id.
Who would be bound by a settlement
The size and scope of the litigation here
As Caplin advises, it is better to leave these
intractable policy judgments to Congress:
Congress might well decide that reorganizations
have not fared badly in the 34 years since Chapter
X was enacted and that the status quo is
preferable to inviting new problems by making
changes in the system. Or, Congress could
determine that the trustee . . . was so well
situated for bringing suits . . . that he should
be permitted to do so. In this event, Congress
might also determine that the trustee’s action was
exclusive, or that it should be brought as a class
action on behalf of all [creditors], or perhaps
even that the [creditors] should have the option
of suing on their own or having the trustee sue on
their behalf. Any number of alternatives are
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available. Congress would also be able to answer
questions regarding subrogation or timing of law
suits before these questions arise in the context
of litigation. Whatever the decision, it is one
that only Congress can make.
Caplin, 406 U.S. at 434-35.
*
*
*
For the foregoing reasons, the judgments are affirmed.
60
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