Madoff Feeder Fund Investors Lose Second Circuit Case
In a group of cases stemming from Bernard Madoff's Ponzi scheme, the U.S. Court of Court of Appeals for the Second Circuit ruled Monday that investors in foreign feeder funds can't sue the banks that allegedly facilitated the fraud in U.S. courts. In a 17-page opinion, the Second Circuit held that the investors' claims against JPMorgan Chase & Co. and the Bank of New York Mellon Corporation were precluded under the Securities Litigation Uniform Standards Act of 1998. That law, known as SLUSA, was enacted to prevent plaintiffs from bypassing stringent federal securities laws by bringing state law claims.
Allen & Overy represents JPMorgan and Cleary Gottlieb Steen & Hamilton represents Bank of New York Mellon.
The plaintiff investors had purchased securities from foreign funds, such as the Thema International Fund in Ireland, which in turn handed their money over to Madoff. After Madoff's fraud was exposed, the investors sued JPMorgan, Bank of New York Mellon, and other banks that provided banking services for Madoff Securities, asserting claims under New York state law that the banks had aided and abetted fraud. The defendants moved to dismiss under SLUSA, which prohibits state law claims alleging misrepresentations in connection with the purchase or sale of certain "covered securities," which are defined in the statute. The plaintiffs argued that SLUSA didn't apply because Madoff never purchased any securities and the foreign securities they had purchased from the feeder funds weren't covered securities.
In November 2011 Manhattan U.S. District Judge Richard Berman dismissed the case under SLUSA.
On appeal, Manhattan U.S. District Judge Jed Rakoff, sitting by designation on the Second Circuit and writing for a unanimous panel, upheld the dismissal. He found that Madoff's phony, phantom trades in securities counted as securities transactions under SLUSA--even if they weren't real. "[O]n the very face of the plaintiffs' complaint, the liability of JPMorgan and BNY is predicated not on these banks' relationship with plaintiffs or their investments in the feeder funs but on the banks' relationship with, and alleged assistance to, Madoff Securities' Ponzi scheme, which indisputably engaged in purported investments in covered securities on U.S. exchanges," Rakoff wrote.
Allen & Overy's Patricia Hynes, who represents JPMorgan and handled oral arguments at the Second Circuit for both banks, said the opinion clarified SLUSA's application to a Ponzi scheme. "I think it's a good, crisp, straight-forward decision that is clear and provides good guidance going forward on SLUSA," she said. Cleary Gottlieb's Lewis Liman, who represents BNY, didn't immediately return our call.
In a separate summary order on Monday, the Second Circuit panel upheld the dismissal of the plaintiffs' claims against another group of foreign banks and funds on forum non conveniens grounds, noting that they are facing legal actions abroad. Marco Schnabl of Skadden, Arps, Slate, Meagher & Flom, who represents UniCredit S.p.A. in the litigation, said he and his client are pleased. He noted that the court found "that whatever litigation may be pursued in this case should be pursued in forums other than the United States."
The plaintiffs were represented by Stull, Stull & Brody; Chapin Fitzgerald Sullivan & Bottini; and Robbins Geller Rudman & Dowd. We contacted Stull, Stull & Brody's Timothy Burke and Chapin Fitzgerald's Francis Bottini Jr. and they didn't immediately get back to us.