By Jonathan Stempel
NEW YORK, Dec 9 (Reuters) - The trustee seeking money forBernard Madoff's victims may be unable to pursue some claimsagainst investment firms that fed client funds into theswindler's Ponzi scheme, a Manhattan federal judge said.
In a decision released on Monday, U.S. District Judge JedRakoff also said the trustee Irving Picard could not pursue"unjust enrichment" claims against spouses of Madoff's sonsAndrew and Mark, saying the women did not qualify as "insiders"who could be held liable for fraud.
Amanda Remus, a spokeswoman for Picard, said the trustee isreviewing the decision. Lawyers for Deborah Madoff, who marriedAndrew Madoff in 1992, and Stephanie Mack, who married MarkMadoff in 2004, were not immediately available for comment. MarkMadoff committed suicide in December 2010.
The decision dated Dec. 5 is a setback for the recoveryefforts of Picard, who is liquidating at Bernard L. MadoffInvestment Securities LLC and has said Madoff's fraud causedinvestors to lose $17.3 billion of principal.
Picard has recovered $9.5 billion, of which he has paid outa little over half. Madoff was arrested nearly five years ago,on Dec. 11, 2008, and is serving a 150-year prison term.
FEEDER FUNDS
Rakoff's decision covered more than a dozen lawsuits againstprincipals and affiliates of "feeder funds" that sent customermoney to Madoff's firm, court records show.
Picard alleged that these feeder funds had been aware of redflags signaling fraud, but ignored them because they werereceiving substantial payments through dealings with Madoff.
But the judge said a June 20 decision by a federal appealscourt in New York dismissing $30 billion of claims against suchbanks as JPMorgan Chase & Co and HSBC Holdings Plc "disposes of many of the trustee's arguments."
Citing the doctrine of "in pari delicto," meaning "in equalfault," the appeals court concluded that Picard could not assertclaims on behalf of Madoff's firm to recover for fraud that thefirm itself caused.
But Rakoff said the court was not asked to decide if Picardcould seek some recoveries as an assignee of customer claims.
The judge concluded that Picard had standing to pursue someof these claims, but that doing so against feeder funds may bebarred under the Securities Litigation Uniform Standards Act(SLUSA).
That 1998 law limits a private party's ability to bring a"covered class action," or single lawsuit seeking damages onbehalf of more than 50 people.
"Here," Rakoff wrote, "the trustee is not attempting topursue claims belonging to the debtor, a single entity, for thebenefit of many; rather, he seeks to assert claims belonging tomany creditors as a single entity."
Rakoff directed a federal bankruptcy judge to decide whetherSLUSA barred Picard's claims in given lawsuits.
MADOFF WIVES
As to the spouses, Picard alleged that Deborah Madoff andStephanie Mack were unjustly enriched by $54.5 million throughtheir marriages to Andrew and Mark Madoff.
But Rakoff said the trustee could not prevail by invoking anexception to "in pari delicto" by claiming that the women werecorporate insiders who breached their fiduciary duties.
Rakoff noted that neither spouse was involved in fraud, thatboth face other claims by the trustee, and that Picard can stillpursue money from Andrew Madoff and Mark Madoff's estate.
"Effectively, the trustee seeks to extend the definition ofinsiders to include spouses solely by virtue of their marriageto, and their receiving of joint transfers with, corporateinsiders," the judge wrote. "This novel proposition isunsupported by any legal authority and extends the limitedinsider exception beyond its proper bounds."
The case is Securities Investor Protection Corp v. BernardL. Madoff Investment Securities LLC, U.S. District Court,Southern District of New York, No. 12-mc-00115.
HSBC Holdings (HSBA)