Suspense Is Over in Madoff Case
By JOE NOCERA
Published: June 25, 2012 91 Comments
On Monday morning, as the Supreme Court was issuing its big ruling on the Arizona immigration law
— and prolonging the suspense on its Affordable Care Act decision — it
also quietly decided to end the suspense for the victims of the Bernard
Madoff Ponzi scheme. Without comment, the court declined to hear a case about which Madoff victims should be compensated and which should not.
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Practically from the moment that Irving Picard became the Madoff
trustee, he took the position that his job was to get money back for the
“net losers” — that is, those who put more into the Madoff fraud than
they took out. He planned to do so, in part, by “clawing back” money
from the net winners, who took out more than they put in.
Not surprisingly, lawyers for the net winners sued. But, in the lower
courts, Picard’s argument held sway, and the Supreme Court saw no reason
to wade into the matter.
I have argued
that Picard’s method is the fairest way to treat the Madoff victims.
After all, the net winners’ gains came from the pockets of the net
losers. That’s how a Ponzi scheme works. If you buy a stolen watch, and
its real owner wants it back, don’t you have an obligation to return it?
Yet it is hard not to feel sympathy for the net winners. For many of
them, their Madoff accounts represented their life savings. To discover
that it was all an illusion was crushing. It seems doubly cruel that
they should now have to give some of it back. They feel punished for
someone else’s crime.
Still, in all the fighting between net winners and net losers, what
tends to get overlooked is that the big boys — the “deep pockets” who
could actually afford to compensate the Madoff victims — are being
allowed to walk away from the fraud.
Early on, the trustee made an enormous effort
to investigate the roles of HSBC, JPMorgan Chase and other financial
institutions that were in one way or another linked to the Madoff fraud.
(JPMorgan was Madoff’s banker,
for instance.) It found various HSBC due diligence reports, to cite one
example, that clearly showed bank executives declining to look too
deeply into Madoff — even though internally they had acknowledged that
his returns were too good to be true.
At one point, the trustee had up to $100 billion worth of lawsuits, most
of them against some of the biggest financial firms in the world. But
those cases are starting to be tossed out of court. Though the trustee
is appealing, the odds of him gaining a reversal — and thus being able
to claw back from Madoff’s enablers — are not high.
The crux of the problem is a longstanding legal doctrine called in pari
delicto. What it essentially means is that “thieves can’t sue thieves,”
says Peter Henning, a law professor at Wayne State University who writes about white-collar crime for DealBook in The Times.
That’s all well and good, I suppose, except that in the view of the law,
Irving Picard is a thief. Even though he is trying to get money back
for victims, the fact that he is representing the Madoff estate in
bankruptcy court means that, in the eyes of the law, he is standing in
the shoes of a very bad man. So when he alleges that the big banks
played a role in the fraud, he has no legal standing to do so, the
courts have ruled. A thief can’t sue a thief.
Nor is Madoff the only time in pari dilecto has been trotted out in
recent years. According to Frederick Feldkamp, a retired lawyer who has
dug into its implications, it has become a common tactic to shield
lawyers, accountants, banks and other enablers of fraud that winds up in
bankruptcy court. “It’s being used everywhere,” he told me. Bankruptcy
trustees can’t overcome the hurdle it poses, and thus are stuck with
clawing back money from victims.
If Picard can’t sue the big banks for wrongdoing in the Madoff case,
then who can? You might think the answer would be the Madoff victims
themselves. When Colleen McMahon, a federal judge, threw out Picard’s
lawsuit against JPMorgan last year, she suggested that, indeed, only the victims had the standing to sue.
Sure enough, a group of Madoff victims decided to file a class-action lawsuit against the bank. Guess what. It’s probably not going anywhere either — thanks to a law, passed in the mid-1990s, that drastically limits the ability to sue companies for securities fraud.
You can’t blame the judges for making these rulings. They are doing what
the law plainly tells them to do. But it does make you wonder who the
law is supposed to serve: huge institutions that can hide behind legal
niceties, or victims of fraud.
Sadly, these days, the answer seems obvious.
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