JPMorgan Deal is Bittersweet Victory for Picard
Summary Judgment is American Lawyer senior writer Susan Beck's regular opinion column for the Litigation Daily.
I'd say JPMorgan Chase & Co. owes Irving Picard an apology. Back in December 2010, when the court-appointed trustee sued JPMorgan for $19 billion for allegedly facilitating Bernard Madoff's Ponzi scheme, the bank struck back with righteous indignation. "Any suggestion that JPMorgan supported Madoff's fraud is utterly baseless and demonstrably false," said a bank spokesman at the time. In a brief penned a few months later by the bank's lawyers at Wachtell, Lipton, Rosen & Katz, JPMorgan accused Picard of spinning an "utterly implausible theory" that it had turned a blind eye to Madoff's scam so that it could earn banking fees from his operation.
In essence, JPMorgan painted Picard as an irresponsible, wild eyed, tin-foil-hat-wearing kook.
Well, look who's standing tall now. More than three years later, Picard is looking savvy while JPMorgan is wiping a carton of eggs off its face. On Tuesday the bank—represented by Wachtell Lipton and Sullivan & Cromwell—agreed to pay $1.7 billion to settle criminal charges by the U.S. Department of Justice that it had helped facilitate Madoff's fraud, plus an additional $350 million to resolve civil charges. And, it will pay $543 million to settle Picard's claims, according to a press release from the trustee.
A JPMorgan spokesman admitted in the DOJ deal that the bank "could have done a better job pulling together various pieces of information and concerns about Madoff."
The documents filed in the government's case echo many of the claims made by Picard, whose 2010 lawsuit against JPMorgan was packed with incriminating emails and internal communications. Picard, for example, was the first to reveal a now-infamous June 2007 email that the government cites from John Hogan, JPMorgan Chase Investment Bank's chief risk officer, to his colleagues. Hogan wrote: "For whatever it's worth I am sitting at lunch with Matt Zames who just told me there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme."
The unfortunate part of this story is that Baker & Hostetler's Picard—who was way ahead of the DOJ—found himself blocked by a series of overreaching court rulings from recovering much of what he sought for Madoff's investors. First, Manhattan U.S. District Court Judge Jed Rakoff wrested a similar Picard case against HSBC Bank away from the bankruptcy judge overseeing the liquidation of Madoff's business, asserting that it raised significant non-bankruptcy issues. That set a precedent for other judges to do the same, including U.S. District Judge Colleen McMahon, who snatched Picard's suit against JPMorgan out of bankruptcy court. I criticized Rakoff's move at the time, saying that a judge can't take a case from another judge just because it intrigues him.
Second, and most damaging, Rakoff in 2011 decided that Picard's claims against HSBC were barred under a defense called in pari delicto. Applying a rationale that's bizarre, although not unprecedented, he held that because Picard was the trustee for Bernard L. Madoff Investment Securities, he stood in the shoes of BLMIS, and was imputed with Madoff's wrongdoing under New York state law. That meant Picard couldn't recover against HSBC or other banks because he had unclean hands. McMahon soon after ruled the same way in the JPMorgan case. I criticized this nonsensical ruling then, and I'm still convinced this is the wrong application of the law.
Picard lost an appeal to the U.S. Court of Appeals for the Second Circuit last June. He's asked the U.S. Supreme Court to review the dismissal of his litigation against the banks, although he's not seeking review of the in pari delicto defense. (He's instead challenging aspects of the court's ruling that denied him standing under federal law.) It's important to remember that none of these judges addressed the merits of Picard's allegations.
Even though Picard's case against JPMorgan stumbled in the courts, it should be viewed as a smashing success. It was Picard who first had the nerve to sue JPMorgan and other big banks over their roles in the Madoff affair, and he gave the government a roadmap. Attorney General Eric Holder and Manhattan U.S. Attorney Preet Bharara are enjoying a victory lap thanks to the latest settlement. But they had a lot of help getting to the finish line.