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February 10, 2011 9:27 AM

JPMorgan Seeks to Move Madoff Fraud Suit

Posted by David Bario

From The Am Law Litigation Daily

Did Baker & Hostetler partner Irving Picard overreach by demanding billions in fraud and other common law damages from JPMorgan Chase, HSBC, and UBS as the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities?

That's emerging as a central question in the blockbuster bank suits in the Madoff Chapter 11, just a week after Picard's $6.4 billion complaint against JPMorgan was unsealed. On Tuesday, JPMorgan's lawyers at Wachtell, Lipton, Rosen & Katz filed a 39-page brief asking Manhattan federal bankruptcy judge Burton Lifland to remove their client's case to federal district court. The bank accuses Picard of "trying to pursue an enormous backdoor class action to recoup damages incurred by individuals and entities other than the firm to which he is the appointed successor."

Wachtell's brief asserts that by attempting to recover damages for victims of the Madoff Ponzi scheme, rather than for the estate of Madoff's bankrupt investment firm, Picard has overstepped his role as trustee under the Securities Investor Protection Act. Moreover, the JPMorgan filing argues, the trustee's damages claims are likely barred by the Securities Litigation Uniform Standards Act.

JPMorgan contends that Picard's allegations of aiding and abetting fraud, breach of fiduciary duty, and "fraud on the regulator" are "manifestly noncore claims" that fall outside the mandate of the federal bankruptcy courts. The bank's motion asserts that about $5.9 billion of Picard's claims are nonbankruptcy claims, leaving only about $500 million in clawbacks of disputed fees, loan repayments, and redemptions that JPMorgan concedes are appropriate for the bankruptcy court to consider.

"The multibillion-dollar claims that the trustee is asserting on behalf of Madoff's customers have nothing to do with bankruptcy law, and they raise an array of complex issues under federal banking law, federal securities law, and the law of New York," JPMorgan asserts. "More broadly, the trustee's claims raise fundamental questions, of great importance to the banking industry as a whole, as to whether banks such as JPMorgan have liability to private plaintiffs for fraud conducted by their customers."

JPMorgan isn't the first Picard bank defendant to ask Judge Lifland to transfer the trustee's case out of bankruptcy court. On Friday HSBC filed a motion to withdraw the $9 billion suit that Picard filed in December against the bank and several Madoff feeder funds. Like JPMorgan, HSBC argues that Picard's fraud claims overlap with claims in three Manhattan federal district court class actions brought by feeder fund investors. Those cases have been consolidated before Manhattan federal district court judge Richard Berman.

"In what appears to be an unprecedented step for a SIPA trustee and one unthinkable for a bankruptcy trustee under well-established case law, the trustee action asserts claims for aiding and abetting the Madoff fraud against defendants that served as service providers to so-called feeder funds that were Madoff customers," HSBC and its lawyers at Cleary, Gottlieb, Steen & Hamilton contend in their brief. In so doing, HSBC argues,"the trustee action directly competes with investor class actions for recovery of the same loss."

UBS, which faces $2 billion in similar claims by Picard, has yet to file a response to the trustee's allegations. (No UBS counsel has entered an appearance on the docket.) We left messages with lead counsel for JPMorgan and HSBC at Wachtell and Cleary, but we didn't hear back. Representatives for Picard at Baker & Hostetler also didn't respond to a request for comment.

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