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.
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 show 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. Although the trustee is appealing, the odds of his 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 delicto 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. Indeed, 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.