A federal judge ruled that the trustee charged with recovering assets lost in Bernard Madoff’s Ponzi scheme does not have standing to sue banks and other institutions on behalf of victims for failing to detect the fraud.
In a ruling issued Thursday, United States District Judge Jed Rakoff said that the bankruptcy trustee, Irving Picard, cannot make claims against third parties for money that was not received from Madoff.
In addition to trying to recoup funds from Madoff investors who had received payouts in excess of their deposits, Picard has sued banks and other entities that helped to funnel money to Madoff’s operations. Picard has argued that such banks violated their duties to investors by ignoring evidence that Madoff was engaged in a fraud.
Rakoff blocked $8.6 billion in claims from a lawsuit that Picard had initiated against the London-based bank, HSBC, and a pair of other defendants. The ruling could affect Picard’s other lawsuits against banks as well.
Rakoff ruled that the trustee could not represent the interests of Madoff’s victims in suits against third parties that did not involve money paid out by Madoff. He ruled that the bankruptcy trustee’s proper role was to recover assets on behalf of the debtor, in this case Madoff’s firm.
The judge’s ruling, however, does not prevent investors themselves from pursuing legal action against such third parties.
Hours before the judge’s ruling, Picower had announced a settlement of $1 billion with Tremont Partners, a Madoff feeder fund.
So far Picower has recovered almost half of the $17 billion in claims on principal invested with Madoff.