In Re: Bernard L. Madoff Investment Securities, No. 11-5044 (2d Cir. 2013)
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Trustee sued on behalf of victims in the Ponzi scheme worked by Bernard Madoff under the Securities Investor Protection Act (SIPA), 15 U.S.C. 78aaa, alleging that, when defendants were confronted with evidence of Madoff's illegitimate scheme, their banking fees gave incentive to look away, or at least caused a failure to perform due diligence that would have revealed the fraud. The court concluded that the doctrine of in pari delicto barred the Trustee from asserting claims directly against defendants on behalf of the estate for wrongdoing in which Madoff participated; SIPA provided no right to contribution; and the Trustee did not have standing to pursue common law claims on behalf of Madoff's customers. Accordingly, the court affirmed the district court's dismissal of the Trustee's claims.
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11-5044; 11-5051; 11-5175; 11-5207 In re: Bernard L. Madoff Investment Securities Picard v. JP Morgan Chase & Co., 11-5044 Picard v. Egger, 11-5051 Picard v. UniCredit Bank Austria AG, 11-5175 Picard v. HSBC Bank PLC, 11-5207 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2012 (Argued: November 21, 2012 Decided: June 20, 2013) Docket Nos. 11-5044 11-5051 11-5175 11-5207 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IRVING H. PICARD, Plaintiff-Appellant, - v.JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN SECURITIES LLC, J.P. MORGAN SECURITIES LTD., Defendants-Appellees, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IRVING H. PICARD, Plaintiff-Appellant, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor, - v.UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPES LIMITED, ACCESS INTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE) SA, ACCESS MANAGEMENT LUXEMBOURG SA, as represented by its Liquidator MAITRE FERDINAND ENTRINGER, FKA ACESS INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, as represented by its Liquidator MAITRE FERDINAND ENTRINGER, PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, in her capacity as Executrix under the WILL OF THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la Villehuchet), individually and as the sole beneficiary under the WILL OF THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la Villehuchet), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICA V, as represented by its Liquidators MAITRE ALAIN RUKAVINA and PAUL LAPLUME, ROGER HARTMANN, RALF SHROETER, RENE EGGER, ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN RUKAVINA, in his capacity as liquidator and representative of LUXALPHA SICA V, PAUL LAPLUME, in his capacity as liquidator and representative of LUXALPHA SICA V, UBS THIRD PARTY MANAGEMENT COMPANY SA, Defendants-Appellees. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IRVING H. PICARD, Plaintiff-Appellant, - v.HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., HSBC BANK BERMUDA LIMITED, HSBC FUND SERVICES (LUXEMBOURG) S.A., HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, UNICREDIT S.p.A., PIONEER ALTERNATIVE INVESTMENT MANAGEMENT LIMITED, UNICREDIT BANK AUSTRIA AG, ALPHA PRIME FUND LIMITED, Defendants-Appellees, and SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IRVING H. PICARD, Plaintiff-Appellant, - v.HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES (LUXEMBOURG) S.A., Defendants-Appellees, SECURITIES INVESTOR PROTECTION CORPORATION, Intervenor. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x Before: JACOBS, Chief Judge, WINTER and CARNEY, Circuit Judges. A trustee appointed pursuant to the Securities Investor 29 Protection Act appeals from the dismissal of his claims 30 brought on behalf of the debtor and the debtor s customers, 31 asserting that various financial institutions and other 32 defendants aided and abetted the debtor s fraud. 33 States District Court for the Southern District of New York 34 (McMahon and Rakoff, JJ.) held that the claims were barred 35 by the doctrine of in pari delicto and that the trustee 36 lacked standing to pursue claims on behalf of customers. 37 affirm. 4 The United We 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 OREN J. WARSHAVSKY (David J. Sheehan, Deborah H. Renner, Lan Hoang, Geoffrey A. North on the brief) Baker & Hostetler LLP, New York, New York for Plaintiff-Appellant. CHRISTOPHER H. LAROSA (Josephine Wang, Kevin H. Bell, on the brief) Securities Investor Protection Corporation, Washington, D.C. for Intervenor Securities Investor Protection Corporation. JOHN F. SAVARESE (Douglas K. Mayer, Stephen R. DiPrima, Emil A. Kleinhaus, Lauren M. Kofke, Jonathon R. La Chapelle on the brief) Wachtell, Lipton, Rosen & Katz, New York, New York for Defendant-Appellee JPMorgan Chase & Co., et al. THOMAS J. MOLONEY (Evan A. Davis, David E. Brodsky, Marla A. Decker, Charles J. Keeley, Jason B. Frasco on the brief) Cleary Gottlieb Steen & Hamilton LLP, New York, New York for Defendant-Appellee HSBC Bank plc, et al. MARCO E. SCHNABL (Susan L. Saltzstein, Jeremy A. Berman on the brief) Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York for DefendantsAppellees UniCredit S.p.A. and Pioneer Alternative Investment Management Ltd. MARSHALL R. KING, Gibson, Dunn & Crutcher LLP, New York, New York for Defendant-Appellee UBS AG, et al. 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 FRANKLIN B. VELIE (Jonathan G. Kortmansky, Mitchell C. Stein on the brief) Sullivan & Worcester LLP, New York, New York for Defendant-Appellee UniCredit Bank Austria AG. Robert W. Gottlieb, Katten Muchin Rosenman LLP, New York, New York for Defendant-Appellee Access International Advisers, LLC, et al. Brett S. & Newman York for Luxalpha Moore, Porzio Bromberg P.C., New York, New Defendant-Appellee Sicav, et al. Robert Knuts, Park & Jensen LLP, New York, New York for Defendant-Appellee Theodore Dumbauld. DENNIS JACOBS, Chief Judge: Irving Picard ( Picard or the Trustee ) sues in his 28 capacity as Trustee under the Securities Investor Protection 29 Act ( SIPA ) on behalf of victims in the multi-billion- 30 dollar Ponzi scheme worked by Bernard Madoff. 31 actions presently before this Court allege that numerous 32 major financial institutions aided and abetted the fraud, 33 collecting steep fees while ignoring blatant warning signs. 34 In summary, the complaints allege that, when the Defendants 35 were confronted with evidence of Madoff s illegitimate 6 The four 1 scheme, their banking fees gave incentive to look away, or 2 at least caused a failure to perform due diligence that 3 would have revealed the fraud. 4 for unjust enrichment, breach of fiduciary duty, aiding and 5 abetting fraud, and negligence, among others. 6 position is supported by the Securities Investor Protection 7 Corporation ( SIPC ), a statutorily created nonprofit 8 corporation consisting of registered broker-dealers and 9 members of national securities exchanges, which intervened 10 to recover some or all of the approximately $800 million it 11 advanced to victims. 12 The Trustee asserts claims The Trustee s As we will explain, the doctrine of in pari delicto 13 bars the Trustee (who stands in Madoff s shoes) from 14 asserting claims directly against the Defendants on behalf 15 of the estate for wrongdoing in which Madoff (to say the 16 least) participated. 17 unfounded, as SIPA provides no such right. 18 issue, then, is whether the Trustee has standing to pursue 19 the common law claims on behalf of Madoff s customers. 20 thorough well-reasoned opinions by the district courts held 21 that he does not. 22 (S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase & 23 Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.). The claim for contribution is likewise The decisive Two See Picard v. HSBC Bank PLC, 454 B.R. 25 7 1 Our holding relies on a rooted principle of standing: A 2 party must assert his own legal rights and interests, and 3 cannot rest his claim to relief on the legal rights or 4 interests of third parties. 5 499 (1975). 6 consistently applied in the bankruptcy context to bar suits 7 brought by trustees on behalf of creditors. 8 Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 9 (1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 10 Warth v. Seldin, 422 U.S. 490, This prudential limitation has been See, e.g., 114, 118 (2d Cir. 1991). 11 Picard offers two theories for why a SIPA liquidation 12 is a different creature entirely, and why therefore a SIPA 13 trustee enjoys third-party standing: (1) He is acting as a 14 bailee of customer property and therefore can pursue actions 15 on customers behalf to recover such property; and (2) he is 16 enforcing SIPC s rights of equitable and statutory 17 subrogation to recoup funds advanced to Madoff s customers. 18 Neither is compelling. 19 traditional bankruptcy, a SIPA trustee is vested with the 20 same powers and title with respect to the debtor and the 21 property of the debtor . . . as a trustee in a case under 22 Title 11. Although a SIPA liquidation is not a 15 U.S.C. § 78fff-1(a). 8 At best, SIPA is silent 1 as to the questions presented here. 2 law of bailment and the law of subrogation are inapt and 3 unconvincing.1 And analogies to the 4 5 6 BACKGROUND In December 2008, federal agents arrested Bernard L. 7 Madoff, who had conducted the largest Ponzi scheme yet 8 uncovered. 9 conversion strategy that involved buying S&P 100 stocks and Madoff purported to employ a split-strike 10 hedging through the use of options. 11 in no securities transactions at all.2 In reality, he engaged 12 1 The Defendants also argue that the Trustee has not met constitutional standing requirements, violates the Securities Litigation Uniform Standards Act, and fails to plead with particularity SIPC s purported subrogation claims. Given our holding, we decline to address these arguments. 2 Although Madoff simply appropriated his clients money without ever purchasing securities on their behalf, we have held that Madoff s victims are nonetheless customers under the Act. See In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011) ( SIPA . . . ensur[es] that claimants who deposited cash with a broker for the purpose of purchasing securities, are treated as customers with claims for securities. This is so because the critical aspect of the customer definition is the entrustment of cash or securities to the broker-dealer for the purposes of trading securities. ) (internal citations and quotation marks omitted), cert. denied, 133 S. Ct. 25 (2012). 9 1 In March 2009, Madoff pleaded guilty to securities 2 fraud and admitted that he had used his brokerage firm, 3 Bernard L. Madoff Investment Securities LLC ( BLMIS ), as a 4 vast Ponzi scheme. 5 recounted many times. 6 Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert. 7 denied, 133 S. Ct. 25 (2012); In re Bernard L. Madoff Inv. 8 Sec. LLC, 424 B.R. 122, 126 32 (Bankr. S.D.N.Y. 2010). 9 The details of Madoff s fraud have been See, e.g., In re Bernard L. Madoff Following Madoff s arrest, SIPC filed an application 10 under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS 11 required protection. 12 the firm s Trustee and referred the case to the bankruptcy 13 court. 14 The district court appointed Picard as SIPA was enacted in 1970 to speed the distribution of 15 customer property back to investors following a firm s 16 collapse.3 17 separately from the general estate of the failed brokerage 18 firm. 19 to protect the securities market as a whole. 20 L. Madoff Inv. Sec. LLC, 654 F.3d at 235. Customer property is cash and securities held SIPA serves dual purposes: to protect investors, and 3 In re Bernard A SIPA For a succinct overview of the statute s history, see Securities Investor Protection Corp. v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 649 (S.D.N.Y. 1999). 10 1 liquidation confers priority on customer claims by an 2 expeditious alternative to a traditional bankruptcy 3 proceeding. 4 fund of customer property according to the customer s net 5 equity. 6 Under SIPA, each customer shares ratably in the If (as is often the case) the assets are not enough to 7 satisfy all net equity claims, SIPC advances money (up to 8 $500,000 per customer) to the SIPA trustee, who is charged 9 with assessing customer claims and making the ratable 10 distributions. 11 advanced approximately $800 million. 12 At the time of this appeal, SIPC had A trustee also has authority to investigate the 13 circumstances surrounding the insolvency and to recover and 14 distribute any remaining funds to creditors. 15 that his investigation has uncovered evidence of wrongdoing 16 by third parties who aided and abetted Madoff, and seeks to 17 replenish the fund of customer property by taking action 18 against various financial institutions that serviced BLMIS. Picard alleges 19 Picard presses claims against JPMorgan Chase & Co., UBS 20 AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated 21 persons and entities. 22 summarized one by one. The allegations against each are We distill the detailed allegations 11 1 from the consolidated complaints, and recount only the 2 background needed to understand our analysis. 3 of the litigation, the allegations are assumed to be true. 4 See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 5 2009). 6 JPMorgan. At this stage Madoff maintained a checking account at 7 JPMorgan Chase & Co. ( JPMorgan )4 for more than twenty 8 years, beginning in 1986. 9 bankruptcy, JPMorgan collected an estimated half billion In the years prior to BLMIS s 10 dollars in fees, interest payments, and revenue from BLMIS. 11 The Trustee alleges that JPMorgan was at the very center 12 of Madoff s fraud and was thoroughly complicit in it. 13 662 ¶ 1.5 14 Account, was where hundreds of billions of dollars of 15 customer money were commingled and ultimately washed. 16 663 ¶ 2. 17 for split-strike securities transactions were instead 18 funneled to other customers to sustain the illusion of large 19 and reliable returns on investment. A Madoff s primary account with JPMorgan, the 703 A The customer funds deposited into the 703 Account 4 Throughout this brief, JPMorgan refers to the four JPMorgan defendants: JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. 5 Record citations refer to the joint appendix filed in the action under discussion. 12 1 The 703 Account was a retail checking account, not a 2 commercial account. 3 investors were deposited without being segregated or 4 transferred to separate sub-accounts. 5 exhibited, on their face, a glaring absence of securities 6 activity. 7 million-dollar checks and wire transfers having no apparent 8 business purpose were exchanged between Madoff and his close 9 friend, Norman Levy (now dead). Billions of dollars from thousands of A 714 ¶ 190. These accounts At the same time, numerous multi- 10 In 2006, due diligence conducted by JPMorgan revealed 11 strong and steady yields by Madoff s feeder funds during a 12 time when the S&P 100 dropped thirty percent. 13 manager later acknowledged, that was too good to be true. 14 In June 2007, JPMorgan s Chief Risk Officer John Hogan 15 learned at a lunch with JPMorgan money manager Matt Zames 16 that there is a well-known cloud over the head of Madoff 17 and that his returns are speculated to be part of a [P]onzi 18 scheme. 19 a Google search on Madoff, and made no further inquiries 20 when the search yielded no hard evidence. 21 22 A 695 ¶ 119. As one money Hogan asked a junior analyst to run Faced with numerous indications of Madoff s fraud, in the fall of 2008 JPMorgan redeemed $276 million of its 13 1 investments in Madoff s feeder funds. 2 710 ¶ 178. 3 other investors. 4 put an end to Madoff s fraud, it quietly continued 5 collecting its large fees. 6 A 705 ¶¶ 156-60; A But the company failed to tip off regulators or Though JPMorgan was uniquely positioned to UBS and Access. Defendants UBS AG6 ( UBS ) and Access 7 International Advisors LLC7 ( Access ) are sued for aiding 8 and abetting Madoff s fraud by creating feeder funds and 9 collecting investments from abroad. UBS acted as sponsor, 10 manager, administrator, custodian, and primary banker of the 11 funds. 12 facilitated investments in BLMIS, despite clear indicia of 13 fraud. 14 legitimize and attract money to Madoff s fraud, but UBS UBS reaped at least $80 million in fees as it The prestigious name of UBS was used to 6 UBS includes UBS AG, UBS (Luxembourg) S.A., UBS Fund Services (Luxembourg) S.A., UBS Third Party Management Company S.A., Roger Hartmann, Ralf Schroter, Rene Egger, Bernd Stiehl, Alain Hondequin, and Hermann Kranz. 7 Access includes Access International Advisors LLC, Access International Advisors Europe Limited, Access International Advisors Ltd., Access Partners (Suisse) S.A., Access Management Luxembourg S.A., Access Partners S.A., Patrick Littaye, Claudine Magnon de la Villehuchet (in her capacities as Executrix and sole beneficiary of the Will of Thierry Magnon de la Villehuchet), Pierre Delandmeter, and Theodore Dumbauld. The Trustee also sues feeder funds created by UBS and Access such as Defendants Luxalpha SICA V and Groupement. 14 1 agreed to look the other way and to pretend that they were 2 truly ensuring the existence of assets and trades when in 3 fact they were not and never did. 4 A 916 ¶ 5. UBS observed but ignored Madoff s lack of transparency 5 and his uncanny ability to generate consistently high 6 returns, except insofar as UBS declined to invest its own 7 money in BLMIS or endorse Madoff s funds to its clients. 8 In 2009, the Luxembourg regulator, the Commission de 9 Surveillance du Secteur Financier, indicated that the 10 failure of UBS to identify Madoff as a possible fraud was a 11 violation of Luxembourg law. 12 Access was also alerted to Madoff s suspicious 13 investment activities. 14 became worried about the volume of options trades being 15 reported by Madoff, and hired an independent consultant to 16 investigate. 17 possibly have executed the volume of options or equities 18 trades he reported, and that his trading revealed either 19 extremely sloppy errors or serious omissions that suggest 20 he doesn t really understand the costs of the option 21 strategy. 22 concealed the consultant s findings and continued active In 2006, internal managers at Access The consultant concluded that Madoff could not A 977 ¶ 218 (emphasis removed). 15 Access 1 recruitment of investors for Madoff s feeder funds in order 2 to keep churning its fees. 3 Unicredit. Madoff s fraud drew billions from abroad. 4 With the help of UniCredit Bank Austria AG ( Bank Austria ) 5 and 20:20 Medici AG ( Bank Medici ), one Sonja Kohn 6 established several Madoff feeder funds (the Medici 7 Funds ). 8 BLMIS. 9 Alternative Investment Management Limited ( Pioneer ) and Together, they funneled nearly $3 billion into UniCredit S.p.A. and its two subsidiaries, Pioneer 10 Bank Austria (collectively, the UniCredit entities ), 11 helped to promote the Medici Funds and thereby facilitated 12 the fraud. 13 The UniCredit entities and their affiliates made a lot 14 of money servicing the Medici funds: Bank Medici took more 15 than $15 million in fees; and BA Worldwide, more than $68 16 million. 17 Madoff s returns were highly suspicious, and that the extent 18 of BLMIS s trading activities was facially impossible. 19 they continued to aggressively market the Madoff feeder 20 funds to new customers while purporting to provide 21 oversight. 22 entities were Madoff s failure to identify counterparties to The UniCredit entities were well aware that Yet Among the signs overlooked by the UniCredit 16 1 BLMIS s options transactions, BLMIS s atypical fee 2 structure, and Madoff s impossibly high volume of 3 transactions. 4 research analyst at Pioneer wrote, [w]e should be the 5 professionals protecting investors from this fraud . . . 6 [but] there is not one [due diligence] report in the files 7 except for one in May 2005. 8 original). 9 HSBC. Shortly after Madoff s arrest, a senior A 136 ¶ 314 (brackets in HSBC Bank plc ( HSBC )8 established Madoff 10 feeder funds (at least eighteen in seven different 11 countries) that injected capital into the Ponzi scheme while 12 ignoring obvious warning signs. 13 administrator of the funds, HSBC was required to hold the 14 fund assets and handle day-to-day operations. 15 created derivative products, such as notes and swaps, to 16 increase the flow of investment. 8 As custodian and HSBC also These funds fed at least The HSBC Defendants include HSBC Bank plc, HSBC Holdings plc, HSBC Securities Services (Luxembourg) S.A., HSBC Institutional Trust Services (Ireland) Limited, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBC Securities Services (Bermuda) Limited, HSBC Bank (Cayman) Limited, HSBC Private Banking Holdings (Suisse) S.A., HSBC Private Bank (Suisse) S.A., HSBC Fund Services (Luxembourg) S.A., and HSBC Bank Bermuda Limited. 17 1 $8.9 billion into Madoff s scheme, a sum representing nearly 2 forty percent of BLMIS s capital under management. 3 HSBC represented to customers that it exercised 4 supervision and control over fund assets, whereas BLMIS 5 itself took the role of custodian. 6 oversight diligently, it would have seen thousands of 7 instances in which Madoff s purported trades exceeded the 8 total market volume of such trades on the given day. 9 Repeatedly, industry analysts and HSBC s own due diligence 10 team openly questioned Madoff s extraordinary success, lack 11 of transparency, and incredible trading volume. 12 Had HSBC performed In September 2005, HSBC commissioned KPMG LLP to detect 13 potential fraud in BLMIS s operations. 14 2006 and 2008 warned that BLMIS s role as custodian of its 15 own funds posed a risk that the trades were a sham in order 16 to divert client cash. 17 continued to enable[] Madoff in order to reap a windfall. 18 A 35 ¶ 1. 19 funds, management companies, and service providers that, to 20 unsuspecting outsiders, seemed to compose a formidable 21 system of checks and balances, yet, in reality, it 22 provided different modes for directing money to Madoff while 23 avoiding scrutiny and maximizing fees. A 89 ¶ 168. Resulting reports in Nonetheless, HSBC In sum, HSBC engineered a labyrinth of hedge 18 A 36 ¶ 4. 1 Procedural History. On July 15, 2009, the Trustee 2 commenced an adversary proceeding in the United States 3 Bankruptcy Court for the Southern District of New York 4 against HSBC and thirty-six others, including UniCredit and 5 Pioneer.9 6 billion in preferential or fraudulent transfers (Counts 1 7 through 19), and asserted four common law causes of action: 8 aiding and abetting fraud, aiding and abetting breach of 9 fiduciary duty, unjust enrichment, and money had and The Amended Complaint sought recovery of $2 10 received (collectively, the common law claims ). 11 common law claims sought $6.6 billion from HSBC and $2 12 billion from the remaining defendants. 13 was asserted under New York law. 14 These A contribution claim On a motion by the UniCredit entities, the district 15 court withdrew the reference to the bankruptcy court, for 16 the limited purpose of deciding two threshold issues: (1) 17 the Trustee s standing to assert the common law claims, and 18 (2) preemption of these claims by the Securities Litigation 19 Uniform Standards Act ( SLUSA ). 20 21 The common law claims and the contribution claim were dismissed by Judge Rakoff in July 2011, on the grounds that 9 This proceeding consolidated two actions, one against HSBC and one against UniCredit and Pioneer. 19 1 the Trustee was in pari delicto with the defendants, lacked 2 standing to assert the common law claims on customers 3 behalf, and could not demonstrate a right to contribution. 4 See Picard v. HSBC Bank PLC, 454 B.R. 25, 37 (S.D.N.Y. 5 2011). 6 bars the Trustee s claims. 7 The court did not reach the question whether SLUSA Id. The Trustee s adversary proceeding against JPMorgan was 8 commenced in December 2010. 9 HSBC and UniCredit, the Trustee asserted common law claims As in the proceedings against 10 seeking $19 billion for, inter alia, aiding and abetting 11 fraud, aiding and abetting breach of fiduciary duty, unjust 12 enrichment, and conversion. 13 The adversary proceeding against UBS followed. Also 14 named were Access, several of its affiliates, and two feeder 15 funds. 16 aiding and abetting fraud, aiding and abetting breach of 17 fiduciary duty, unjust enrichment, and conversion, among 18 others. 19 behalf of the customers of BLMIS (rather than BLMIS itself). 20 All Defendants (except Luxalpha and two individual Again, the Trustee asserted common law claims for Damages of approximately $2 billion were sought on 21 Defendants) moved to dismiss the common law claims and the 22 contribution claim. 23 the motions. In November 2011, Judge McMahon granted See Picard v. JPMorgan Chase & Co., 460 B.R. 20 1 84 (S.D.N.Y. 2011). 2 Rakoff) that the Trustee lacks standing to bring an action 3 on behalf of third parties and has no valid claim for 4 contribution. Judge McMahon concluded (as did Judge Id. at 106. 5 DISCUSSION 6 We review de novo a district court s dismissal of 7 causes of action for failure to state a claim for relief or 8 lack of standing. 9 Cir. 2009). See Fulton v. Goord, 591 F.3d 37, 41 (2d Point I considers the Trustee s claims as 10 asserted by him on behalf of BLMIS itself; Point II 11 considers claims asserted by the Trustee on behalf of 12 BLMIS s customers. 13 14 I We agree with the district courts that the Trustee s 15 common law claims asserted on behalf of BLMIS are barred by 16 the doctrine of in pari delicto. 17 A 18 Under New York law,10 one wrongdoer may not recover 19 against another. See Kirschner v. KPMG LLP, 938 N.E.2d 941, 10 In a bankruptcy proceeding, state law . . . determines whether a right to sue belongs to the debtor or to the individual creditors. Wight v. BankAmerica Corp., 219 F.3d 79, 86 (2d Cir. 2000) (citation and internal quotation marks omitted). New York law governs here. 21 1 950 (N.Y. 2010). 2 profit from his own misconduct is . . . strong in New 3 York. 4 Department, has long applied the doctrine of in pari delicto 5 to bar a debtor from suing third parties for a fraud in 6 which he participated. 7 536, 539 (App. Div. 1st Dep t 1925) ( The bankrupts could 8 not recover against these defendants for bucketing orders 9 because they were responsible for the illegal transaction The principle that a wrongdoer should not Id. at 964. The New York Appellate Division, First See Barnes v. Hirsch, 212 N.Y.S. 10 and parties to the fraud. ), aff d, 152 N.E. 424 (N.Y. 11 1926). 12 A claim against a third party for defrauding a 13 corporation with the cooperation of management accrues to 14 creditors, not to the guilty corporation. 15 Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991) 16 (citing Barnes, 212 N.Y.S. at 537). 17 is imputed to the trustee because, innocent as he may be, he 18 acts as the debtor s representative. 19 BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) 20 ( [B]ecause a trustee stands in the shoes of the 21 corporation, the Wagoner rule bars a trustee from suing to 22 recover for a wrong that he himself essentially took part 22 Shearson Lehman The debtor s misconduct See Wight v. 1 in. ); accord Breeden v. Kirkpatrick & Lockhart LLP (In re 2 Bennett Funding Grp., Inc.), 336 F.3d 94, 99-100 (2d Cir. 3 2003) (applying Wagoner rule in the context of the greatest 4 Ponzi scheme [then] on record and holding that the 5 defrauded investors and not the bankruptcy trustee were 6 entitled to pursue malpractice claims against attorneys and 7 accountants arising from the fraud).11 8 9 Picard alleges that the Defendants were complicit in Madoff s fraud and facilitated his Ponzi scheme by providing 10 (well-paid) financial services while ignoring obvious 11 warning signs. 12 of Wagoner and the ensuing cases: Picard stands in the shoes 13 of BLMIS and may not assert claims against third parties for 14 participating in a fraud that BLMIS orchestrated. These claims fall squarely within the rule 15 11 See also Kirschner v. Grant Thornton LLP, No. 07 Civ. 11604 (GEL), 2009 WL 1286326, at *10 (S.D.N.Y. Apr. 14, 2009) (applying Wagoner rule to dismiss fraud and breach of fiduciary claims where the debtor participated in, and benefitted from, the very wrong for which it seeks to recover ), aff d, 626 F.3d 673 (2d Cir. 2010); Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1094-95 (2d Cir. 1995) (holding that even though there [was] at least a theoretical possibility that some independent financial injury to the Debtors might be established, the Wagoner rule precluded standing because of the Debtors collaboration with the defendants-appellees in promulgating and promoting the Colonial Ponzi schemes ). 23 1 Picard s scattershot responses are resourceful, but 2 they all miss the mark. 3 exempt from the Wagoner rule, but adduces no authority. 4 argues that the rationale of the in pari delicto doctrine is 5 not served here because he himself is not a wrongdoer; but 6 neither were the trustees in the cases cited above.12 7 contends that in pari delicto should not impede the 8 enforcement of securities laws, citing Bateman Eichler, Hill 9 Richards, Inc. v. Berner, 472 U.S. 299 (1985); but Bateman He contends that a SIPA trustee is He He 10 Eichler is inapposite. 11 pari delicto would not prevent defrauded tippee from 12 bringing suit against defrauding tipper, at least absent 13 further inquiry into relative culpabilities of tippee and 14 tipper).13 See id. at 315-16 (holding that in He invokes the adverse interest exception, 12 Relatedly, he argues that in a typical bankruptcy in pari delicto is designed to bar corporate malefactors, including shareholders, from recovering, whereas in a SIPA liquidation the trustee marshals assets for the benefit of the customer property estate. Accordingly, there is no similar concern here that funds collected by the trustee would be distributed to wrongdoers. But, in Kirschner v. KPMG LLP, the New York Court of Appeals declined to make an exception to the in pari delicto doctrine despite the trustee s urging that proceeds would benefit blameless unsecured creditors . . . and shareholders. Kirschner v. KPMG LLP, 938 N.E.2d 941, 958 (N.Y. 2010). 13 Like the Supreme Court in Bateman Eichler, we recently declined to apply in pari delicto to bar suit in a private civil antitrust action, where private actions play 24 1 which directs a court not to impute to a corporation the bad 2 acts of its agent when the fraud was committed for personal 3 benefit. 4 Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997). 5 However, this most narrow of exceptions is reserved for 6 cases of outright theft or looting or embezzlement . . . 7 where the fraud is committed against a corporation rather 8 than on its behalf. 14 Kirschner v. KPMG LLP, 938 N.E.2d 9 941, 952 (N.Y. 2010). It is not possible thus to separate See The Mediators, Inc. v. Manney (In re a significant role in the enforcement scheme. Gatt Commc ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 80 (2d Cir. 2013) (dismissing action on threshold question of antitrust standing). Here, in contrast, barring claims brought by Madoff s successor-in-interest would not preclude his victims from bringing suit individually. See infra p. 58 n.29. In pari delicto does not apply to all wrongdoers; the doctrine targets those who actively participate in the illegal scheme and who are substantially at fault. Gatt Commc ns, 711 F.3d at 84 (Wesley, J., concurring). The pleadings here leave us with no doubt that BLMIS--in whose shoes the Trustee stands--bore at least substantially equal responsibility for the injuries the Trustee now seeks to redress. See Bateman Eichler, 472 U.S. at 310-11. Accordingly, application of the rule in this context is well established. See, e.g., Wagoner, 944 F.2d at 120; Wight, 219 F.3d at 87. 14 When, as here, principal and agent are one and the same . . . the adverse interest exception is itself subject to an exception styled the sole actor rule, which imputes the agent s knowledge to the principal notwithstanding the agent s self-dealing. In re Mediators, Inc., 105 F.3d at 827. 25 1 BLMIS from Madoff himself and his scheme. 2 argues that the district courts should not have applied the 3 in pari delicto doctrine at the pleadings stage; but the New 4 York Court of Appeals has held otherwise. 5 n.3; see also Wagoner, 944 F.2d at 120. 6 appropriate where (as here) the outcome is plain on the face 7 of the pleadings. 8 9 Finally, Picard See id. at 947 Early resolution is B. The Trustee s claim for contribution is the only one 10 that may escape the bar of in pari delicto. 11 United States, 853 F.2d 124, 127 n.3 (2d Cir. 1988) 12 (explaining that parties seeking contribution are 13 necessarily in pari delicto).15 14 contribution for payments made to BLMIS customers under 15 SIPA, on the theory that the Defendants are joint 16 tortfeasors with BLMIS under New York law. See Barrett v. The Trustee seeks 17 15 Some courts have suggested that Wagoner nevertheless bars a contribution claim. See, e.g., Devon Mobile Commc ns Liquidating Trust v. Adelphia Commc ns Corp. (In re Adelphia Commc ns Corp.), 322 B.R. 509, 529 (Bankr. S.D.N.Y. 2005); Silverman v. Meister Seelig & Fein, LLP (In re Agape World, Inc.), 467 B.R. 556, 580-81 (Bankr. E.D.N.Y. 2012). We need not decide whether such a claim would survive a Wagoner challenge because, as explained in text, there is no contribution right under SIPA. 26 1 The New York statute provides that two or more persons 2 who are subject to liability for damages for the same 3 personal injury, injury to property or wrongful death, may 4 claim contribution among them whether or not an action has 5 been brought or a judgment has been rendered against the 6 person from whom contribution is sought. 7 § 1401 (McKinney). 8 compulsion; that is, the party seeking contribution must 9 have been compelled in some way, such as through the entry N.Y. C.P.L.R. Section 1401 requires some form of 10 of a judgment, to make the payment against which 11 contribution is sought. 12 FirstEnergy Corp., No. 3:03-CV-0438 (DEP), 2007 WL 1434901, 13 at *7 (N.D.N.Y. May 11, 2007) (emphasis added). N.Y. State Elec. & Gas Corp. v. 14 However, the SIPA payments for which Picard seeks 15 contribution were not compelled by BLMIS s state law fraud 16 liability to its customers; his obligation to pay customers 17 their ratable share of customer property is an obligation of 18 federal law: SIPA. 19 and it is settled in this Circuit that there is no claim for 20 contribution unless the operative federal statute provides 21 one. 22 Am., AFL-CIO, 451 U.S. 77, 97 n.38, 97-99 (1981); see also SIPA provides no right to contribution, See Nw. Airlines, Inc. v. Transp. Workers Union of 27 1 Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 144 (2d Cir. 2 1999) (affirming dismissal of New York state law 3 contribution claims for liability under the Fair Labor 4 Standards Act); KBL Corp. v. Arnouts, 646 F. Supp. 2d 335, 5 341 (S.D.N.Y. 2009) ( [A] plaintiff cannot use New York 6 State common law as an end-around to make a claim for 7 contribution that it could not make under the federal 8 statutory scheme. ); Lehman Bros., Inc. v. Wu, 294 F. Supp. 9 2d 504, 505 n.1 (S.D.N.Y. 2003) ( [W]hether contribution is 10 available in connection with a federal statutory scheme is a 11 question governed solely by federal law. ) (citation and 12 quotation marks omitted). 13 Picard emphasizes that he is not seeking contribution 14 for violations of SIPA or any other federal statute, but 15 that is beside the point. 16 contribution under state law must be an obligation imposed 17 by state law. 18 Supp. 1333, 1349 (S.D.N.Y. 1996) (emphasis added). 19 issue is therefore whether the payments made by the Trustee, 20 for which he is seeking contribution, are required by state 21 or federal law--an easy question. The source of a right of LNC Invs., Inc. v. First Fid. Bank, 935 F. 22 28 The 1 The $800 million paid out to customers fulfilled an 2 obligation created by SIPA, a federal statute that does not 3 provide a right to contribution either expressly or by 4 clear implication, Texas Industries, Inc. v. Radcliff 5 Materials, Inc., 451 U.S. 630, 638 (1981). 6 Bankruptcy Act, SIPA does not require customers to establish 7 a basis of liability as a prerequisite for the Trustee s 8 disbursement obligation. 9 U.S.C. § 78fff-2(c) (the Trustee shall allocate customer 10 property of the debtor . . . to customers of such debtor, 11 who shall share ratably in such customer property on the 12 basis and to the extent of their respective net equities ); 13 cf. Hill v. Day (In re Today s Destiny, Inc.), 388 B.R. 737, 14 753-56 (Bankr. S.D. Tex. 2008) (holding that Texas law 15 governed contribution claim where debtor sought contribution 16 for obligations set forth in proofs of claim alleging fraud 17 under state law). 18 were imposed by a federal law that does not provide a right 19 to contribution, the district courts properly dismissed 20 these claims. Unlike the The loss itself is enough. See 15 Because the Trustee s payment obligations 21 22 29 1 2 II Having rejected the Trustee s claims asserted on behalf 3 of BLMIS, we consider next whether the Trustee may assert 4 such claims on behalf of BLMIS s customers. 5 these claims, the Trustee must first establish his standing. 6 This he cannot do. 7 To proceed with Standing is a threshold question in every federal 8 case, determining the power of the court to entertain the 9 suit. Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing 10 depends, first, on whether the plaintiff has identified a 11 case or controversy between the plaintiff and the 12 defendants within the meaning of Article III of the 13 Constitution. 14 Camp, 397 U.S. 150, 152 (1970). 15 plaintiff must [1] allege personal injury [2] fairly 16 traceable to the defendant s allegedly unlawful conduct and 17 [3] likely to be redressed by the requested relief. 18 Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir. 19 1995) (alterations in original) (quoting Allen v. Wright, 20 468 U.S. 737, 751 (1984)). 21 comply with prudential limitations on standing, of which 22 the salient one here is that a party must assert his own Ass n of Data Processing Serv. Orgs., Inc. v. To have standing, [a] In addition, the plaintiff must 30 1 legal rights and interests and cannot rest his claim to 2 relief on the legal rights or interests of third parties. 3 Warth, 422 U.S. at 499. 4 We consider below Picard s arguments that: (A) existing 5 Second Circuit precedent allows for third-party standing in 6 a SIPA liquidation; and (B) SIPA itself confers standing, 7 both by creating a bailment relationship between the Trustee 8 and the debtor s customers, and by authorizing SIPC to 9 pursue subrogation claims on customers behalf.16 10 11 A The implied prohibition in Article III against third- 12 party standing applies to actions brought by bankruptcy 13 trustees. 14 N.Y., 406 U.S. 416 (1972), the Supreme Court ruled that 15 federal bankruptcy law does not empower a trustee to collect 16 money owed to creditors. 17 trustee is not empowered to collect money not owed to the 18 estate ; the trustee s proper task is simply to collect and In Caplin v. Marine Midland Grace Trust Co. of That is because a bankruptcy 16 In proceedings before one of the district courts, the Trustee grounded his standing argument in large part on Section 544(a) of the Bankruptcy Code, which gives a trustee the rights of a hypothetical lien creditor. The court considered this argument at length and ultimately rejected it, see Picard v. JPMorgan Chase & Co., 460 B.R. 84, 92-97 (S.D.N.Y. 2011) (McMahon, J.), and the Trustee has abandoned it on appeal. 31 1 reduce to money the property of the estates for which (he is 2 trustee). 3 marks omitted). 4 any suggestion that the trustee in reorganization is to 5 assume the responsibility of suing third parties on behalf 6 of creditors. 7 their own assessment of the respective advantages and 8 disadvantages, not only of litigation, but of various 9 theories of litigation, id. at 431; no consensus is needed 10 as to the amount of damages to seek, or even on the theory 11 on which to sue, id. at 432; and disputes over inconsistent 12 judgments and the scope of settlements can be avoided, id. 13 at 431-32. 14 Id. at 428-29 (citation and internal quotation [N]owhere in the statutory scheme is there Id. at 428. This way, creditors can make Our Court has hewed to this principle. In Wagoner, the 15 misappropriation of funds by the owner and president of the 16 debtor company was facilitated by stock transactions 17 effected through a third-party brokerage firm. 18 Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir. 19 1991). 20 abetted the fraud was dismissed on summary judgment, and we 21 affirmed, observing that [i]t is well settled that a 22 bankruptcy trustee has no standing generally to sue third Shearson The trustee s claim that the brokerage aided and 32 1 parties on behalf of the estate s creditors, but may only 2 assert claims held by the bankrupt corporation itself. 3 at 118 (citing Caplin, 406 U.S. at 434); see also Hirsch v. 4 Arthur Andersen & Co., 72 F.3d 1085, 1094 (2d Cir. 1995) 5 (holding that Chapter 11 trustee had no standing to bring 6 creditor claims against accountants and law firms that had 7 provided services to the debtor, a real estate partnership 8 operated as a Ponzi scheme); The Mediators, Inc. v. Manney 9 (In re Mediators, Inc.), 105 F.3d 822, 826 (2d Cir. 1997) Id. 10 (affirming dismissal of breach of fiduciary duty claim 11 brought by creditors committee functioning as bankruptcy 12 trustee, against bank and law firm for allegedly aiding and 13 abetting debtor s fraud). 14 The Trustee makes little effort to explain why Caplin 15 and its progeny do not control. 16 single Second Circuit case that was overruled by the Supreme 17 Court, and on dicta in another. 18 precedential force, both cases are readily distinguishable. 19 1 20 In Redington v. Touche Ross & Co., 592 F.2d 617 (2d Instead, he relies on a Apart from lacking 21 Cir. 1978), rev d, 442 U.S. 560 (1979), a SIPA trustee sued 22 the accountant of an insolvent brokerage for violations of 33 1 record-keeping provisions of Section 17(a) of the Securities 2 Exchange Act, as well as violations of state common law. 3 The district court dismissed the Section 17(a) claim for 4 lack of an implied private right of action, and concluded 5 that it lacked jurisdiction over the common law claims. 6 Redington v. Touche Ross & Co., 428 F. Supp. 483, 492-93 7 (S.D.N.Y. 1977). 8 9 See In reversing, we held that Section 17(a) did create an implied private right of action. See Redington v. Touche 10 Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev d, 442 U.S. 560 11 (1979). 12 is responsible for marshalling and returning [customer] 13 property; to the extent that he is unable to do so, he 14 argues, he may sue on behalf of the customer/bailors any 15 wrongdoer whom they could sue themselves. 16 Relying on the Federal Rules of Civil Procedure, Redington 17 concluded that the Trustee, as bailee, is an appropriate 18 real party in interest, id., and that SIPC is subrogated 19 to the right of action implied in section 17 in favor of 20 brokers customers against third parties such as 21 accountants. 22 case, except that Redington is no longer good law. We then considered the trustee s claim that [h]e Id. at 624. Id. at 625. Redington would favor Picard s 34 1 The Supreme Court granted certiorari in Redington to 2 decide whether Section 17(a) created an implied right of 3 action and whether a SIPA trustee and SIPC had standing to 4 assert that claim. 5 U.S. 560 (1979). 6 action existed under Section 17(a), id. at 579, and 7 therefore considered it unnecessary to reach the standing 8 issue, id. at 567 n.9. 9 whether an alternative basis for jurisdiction existed, but See Touche Ross & Co. v. Redington, 442 The Court held that no private right of The case was remanded to consider 10 none was found. 11 F.2d 68, 70 (2d Cir. 1979). 12 See Redington v. Touche Ross & Co., 612 Picard argues that the Supreme Court left the standing 13 question untouched because the opinion was limited to a 14 merits-based reversal on the issue of whether a private 15 right of action existed under section 17(a). 16 31 (11-5044). 17 right of action is presented ordinarily only if a right of 18 action has been found to exist. 19 Corp. v. Nat. Assoc. of R.R. Passengers, 414 U.S. 453, 456 20 (1974) ( [T]he threshold question clearly is whether the 21 Amtrak Act . . . creates a [private] cause of action . . . 22 for it is only if such a right of action exists that we need Appellant Br. However, the question of who may assert a 35 See Nat. R.R. Passenger 1 consider whether the respondent had standing to bring the 2 action[.] ).17 3 threshold question drained the Second Circuit Redington 4 opinion of force on other questions. 5 Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010) 6 ( [W]hen the Supreme Court reverses a lower court s decision 7 on a threshold question, the Court effectively holds the 8 lower court erred by reaching [other issues]. ). 9 The Supreme Court s reversal on the See Newdow v. Rio Following the Supreme Court s reversal, this Court 10 vacated its original judgment on the ground that subject 11 matter jurisdiction was lacking. 12 Touche Ross, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979); 13 Appellee Br. Addendum A (11-5207). 14 vacatur dissipates precedential force. 17 See Order, Redington v. As the Trustee concedes, See Appellant Br. 30 The Trustee attempts to distinguish National Railroad on the ground that that case involved a single federal statute without additional claims, so a determination that the Amtrak Act did not create a private right of action ended the case. Because Redington also involved state law claims over which the Court exercised pendent jurisdiction, Picard reasons, a determination on the existence of a private right of action tied to a federal statute does not end the court s inquiry into a trustee s standing to assert state common law claims. Appellant Br. 36 (11-5044). In Redington, however, we did not consider specifically whether the trustee had standing to bring claims under common law. As explained in text, Redington s standing analysis was entirely dependent on the Court s antecedent ruling that the statute created an implied private right of action--a ruling that was later overturned. 36 1 (11-5044). 2 577 n.12 (1975) (observing that vacatur deprives [the] 3 court s opinion of precedential effect ); Brown v. Kelly, 4 609 F.3d 467, 476-77 (2d Cir. 2010). See also O Connor v. Donaldson, 422 U.S. 563, 5 Since Redington, at least six judges in this Circuit 6 have questioned or rejected third-party claims brought by 7 SIPA trustees, beginning with Judge Pollack in Mishkin v. 8 Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 556-58 9 (S.D.N.Y. 1990).18 See also Picard v. JPMorgan Chase & Co., 10 460 B.R. 84, 100-101 (S.D.N.Y. 2011) (McMahon, J.); Picard 11 v. HSBC Bank PLC, 454 B.R. 25, 33-34 (S.D.N.Y. 2011) 12 (Rakoff, J.); Picard v. Taylor (In re Park South Sec., LLC), 13 326 B.R. 505, 516 (Bankr. S.D.N.Y. 2005) (Drain, J.); 14 Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.), 15 280 B.R. 794, 804 (Bankr. S.D.N.Y. 2002) (Beatty, J.); SIPC 16 v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653 (S.D.N.Y. 1999) 17 (Preska, J.), rev d on other grounds, 222 F.3d 63 (2d Cir. 18 2000). 19 18 In a hearing in the Mishkin case, Judge Pollack concluded, as we do, that Redington was reversed in all respects not on other grounds and does not stand as the law of this circuit. SPA 17 (11-5175). 37 1 Yet Redington has enjoyed something of a half-life, 2 with several courts (including this one) assuming without 3 deciding that Redington retains residual force.19 4 should be put to rest; it has no precedential effect. 5 Redington Even if Redington retained some persuasive value, it 6 would not decide this case. 7 chiefly whether the trustee and SIPC had standing to bring a 8 cause of action under Section 17 of the Exchange Act; the 9 opinion said nothing about a SIPA trustee s ability to First, Redington considered 10 orchestrate mass tort actions against third parties. 11 Redington v. Touche Ross & Co., 592 F.2d 617, 618 (2d Cir. 12 1978), rev d, 442 U.S. 560 (1979) ( [W]e are presented with 13 the question whether a private cause of action exists under 14 section 17 of the Securities Exchange Act of 1934 against 19 See Assuming that Redington was still good law, Judges Drain and Beatty instead rejected SIPA trustees standing arguments on the ground that only SIPC, not a SIPA trustee, could enforce its rights of subrogation. See In re Park South Sec., LLC, 326 B.R. at 516; In re A.R. Baron & Co., Inc., 280 B.R. at 804. In BDO Seidman, LLP, Judge Preska held that although Mishkin s interpretation of SIPC s subrogation power was more faithful to the letter and purpose of the Act, she was nonetheless bound by Redington to find that SIPC has standing to bring suit. 49 F. Supp. 2d at 653. On appeal, this Court assume[d], without deciding, that . . . SIPC has standing as the customers subrogee, SIPC v. BDO Seidman, LLP, 222 F.3d 63, 69 (2d Cir. 2000), and ultimately dismissed its claims on substantive grounds, id. at 71-76. 38 1 accountants who prepare misleading statements of a broker s 2 financial affairs, and if so, who may maintain such an 3 action. ). 4 part, on an analysis of Fed. R. Civ. P. 17(a), which sets 5 forth rules concerning real parties in interest, and which 6 has no application here. 7 51 n.25. 8 accounting firm for a few discrete instances of alleged 9 misconduct (the preparation of misleading financial Second, our holding in Redington turned, in See id. at 625; see also infra p. Third, Redington involved claims against a single 10 statements). As a result, the policy concerns we express 11 below (see infra pp. 59-69) would have been considerably 12 diminished--and, indeed, were not even addressed by the 13 Court. 14 was not complicit in the wrongdoing, but rather an entity 15 distinct from its conniving officers [that] was directly 16 damaged by Touche Ross unsatisfactory audit. 17 620. 18 consider whether the doctrine of in pari delicto barred all 19 or part of the suit. 20 and inapposite. Fourth, and finally, in Redington the brokerage firm 592 F.2d at The Redington Court therefore did not have occasion to In sum, Redington is both non-binding 21 22 23 39 1 2 2 The Trustee relies on St. Paul Fire & Marine Insurance 3 Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), for the 4 proposition that a trustee may assert creditors claims if 5 they are generalized in nature, and not particular to any 6 individual creditor. 7 no application here. 8 9 However, the holding of that case has PepsiCo had been guarantor of bonds issued by a subsidiary that later was acquired by a subsidiary of Banner 10 Industries. 11 bonds, PepsiCo sued Banner, alleging diversion of assets and 12 alter ego. 13 sued Banner for misappropriation. 14 trustee--and not PepsiCo--could pursue Banner because Ohio 15 law allowed a subsidiary to assert an alter ego claim 16 against its parent, so that [t]he cause of action therefore 17 becomes property of the estate of a bankrupt subsidiary, and 18 is properly asserted by the trustee in bankruptcy. 19 703-04. 20 When the (later) merged entity defaulted on the The merged entity went bankrupt, and the trustee We ruled that the Id. at Picard directs us to a passage in St. Paul--stating 21 that a trustee may bring a claim if the claim is a general 22 one, with no particularized injury arising from it, and if 40 1 that claim could be brought by any creditor of the debtor, 2 id. at 701--and contends that the third-party claims here 3 are common to all customers because all customers were 4 similarly injured by Madoff s fraud and the Defendants 5 facilitation. 6 ¢ This argument is flawed on many levels: St. Paul decided the specific question whether a 7 creditor may bring an alter ego claim against the debtor s 8 parent when the debtor itself also possesses such a claim. 9 Id. at 699. 10 11 But Picard seeks to assert claims that are property only of the creditors, not of the debtor. ¢ The Trustee s broad reading of St. Paul would 12 bring the Court s holding into conflict with a line of cases 13 that came before and after it. 14 34, it is settled that a trustee may not assert creditors 15 claims against third parties. 16 Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). 17 of course, St. Paul could not alter the Supreme Court s 18 ruling in Caplin. 19 Supreme Court and Second Circuit precedent. 20 In re Stanwich Fin. Servs. Corp., 317 B.R. 224, 228 n.4 21 (Bankr. D. Conn. 2004) (highlighting this tension). As discussed supra pp. 32- See, e.g., Shearson Lehman And, Picard s argument thus conflicts with 22 41 See generally 1 ¢ The language cited by Picard from St. Paul is not 2 a pronouncement about third-party standing; it voices the 3 maxim that only a trustee, not creditors, may assert claims 4 that belong to the bankrupt estate. 5 states: [T]he Trustee in bankruptcy has standing to 6 represent only the interests of the debtor corporation. 7 Our decision today goes no further than to say that causes 8 of action that could be asserted by the debtor are property 9 of the estate and should be asserted by the trustee. 10 Paul, 884 F.2d at 702 n.3 (internal citation omitted) 11 (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 12 754 F.2d 57, 62 n.4 (2d Cir. 1985)). 13 Paul, when a creditor seeks relief against third parties 14 that pushed the debtor into bankruptcy, the creditor is 15 asserting a derivative claim that arises from harm done to 16 the estate. 17 18 19 20 21 22 23 24 25 26 27 28 As St. Paul elsewhere St. As illustrated by St. Judge Posner described this distinction: The point is simply that the trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor. He represents the unsecured creditors of the corporation; and in that sense when he is suing on behalf of the corporation he is really suing on behalf of the creditors of the corporation. But there is a difference between a creditor s interest in the claims of the corporation against a third party, which are enforced by the trustee, and the creditor s own direct--not derivative--claim against the third 42 1 2 3 4 Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994). 5 See generally Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 6 A.2d 772, 792 (Del. Ch. 2004). party, which only the creditor himself can enforce. 7 ¢ The customers claims against the Defendants are 8 not common or general. 9 party is general if it seeks to augment the fund of A debtor s claim against a third 10 customer property and thus affects all creditors in the same 11 way. 12 thousands of customers against third-party financial 13 institutions for their handling of individual investments 14 made on various dates in varying amounts. 15 alleged wrongful acts, then, could not have harmed all 16 customers in the same way.20 Picard, however, seeks to assert claims on behalf of 20 The Defendants A recent case arising out of the BLMIS bankruptcy provides a useful contrast. In Fox v. Picard (In re Madoff), 848 F. Supp. 2d 469 (S.D.N.Y. 2012), the district court relied on St. Paul in holding that certain Madoff customers could not pursue fraudulent transfer claims that were the property of the BLMIS estate. Id. at 478. The customer claims were duplicative and derivative of the Trustee s fraudulent transfer claim. Id. at 479 n.2. Accordingly, the court found the claims to be general in the sense articulated in St. Paul, in that they arose from a single set of actions that harmed BLMIS and all BLMIS customers in the same way. Id. at 480. Here, however, the customers claims are not derivative of claims held by the BLMIS estate. 43 1 2 B The Trustee attempts to blunt the force of Caplin and 3 its progeny by arguing that a SIPA liquidation is unique and 4 is therefore not controlled by precedent under the 5 bankruptcy code. 6 trustee enjoys standing to assert third-party claims. He advances two theories for why a SIPA 7 8 9 1 Picard contends that, for SIPA purposes, the customers of a failed brokerage are bailors, and that he--acting as 10 bailee-- has a sufficient possessory interest to permit him 11 to recover for the wrongful act of a third party resulting 12 in the loss of, or injury to, the subject of the bailment. 13 United States v. Perea, 986 F.2d 633, 640 (2d Cir. 1993) 14 (quoting Rogers v. Atl., Gulf & Pac. Co., 107 N.E. 661, 664 15 (N.Y. 1915)). 16 We disagree. First, the statute is not written or cast in terms of 17 bailment. 18 this chapter, a liquidation proceeding shall be conducted in 19 accordance with, and as though it were being conducted under 20 [the Bankruptcy Code]. 21 rule, SIPA vests trustees with the same powers and title 22 with respect to the debtor and the property of the debtor To the extent consistent with the provisions of 15 U.S.C. § 78fff(b). 44 As a general 1 . . . as a trustee in a case under Title 11. 2 78fff-1(a). 3 conferred on a trustee under Title 11. 4 creates a fund of customer property that is separate from 5 the debtor estate and that has priority over other 6 creditors claims, and authorizes the trustee to ratably 7 distribute those funds based on customers net equity. 8 15 U.S.C. § 78fff 2(c)(1)(B); In re Bernard L. Madoff 9 Investment Secs., 654 F.3d 229, 231 (2d Cir. 2011), cert. 15 U.S.C. § True, a SIPA trustee has some powers not Most notably, SIPA See 10 denied, 133 S. Ct. 25 (2012). 11 confer upon SIPA trustees a power, denied all other 12 bankruptcy trustees, to sue third parties on claims that 13 belong to persons other than the estate. 14 statute reference bailment, or characterize customers as 15 bailors or trustees as bailees, or in any way indicate 16 that the trustee is acting as bailee of customer property. 17 But the statute does not Nowhere does the Picard alternatively invokes the principle of bailment 18 under the common law. 19 to avoid overlaying common law principles onto a statutory 20 framework, even when (unlike here) the statute makes clear 21 reference to common law. 22 189 F.3d 165, 179-80 (2d Cir. 1999) ( That the statute . . . This is dubious: courts are careful See Moore v. PaineWebber, Inc., 45 1 borrow[s] in part from the common law should not mislead us: 2 it remains the statute and its purpose that governs. ). 3 This caution is especially apt here because the statute 4 creates a ramified scheme that makes no mention of common 5 law. 6 In any event, the analogy to the common law of bailment 7 is flawed from start to finish. 8 of personalty for some particular purpose, or on mere 9 deposit, upon a contract express or implied, that after the A bailment is a delivery 10 purpose has been fulfilled it will be redelivered to the 11 person who delivered it, or otherwise dealt with according 12 to that person s directions, or kept until it is reclaimed. 13 9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (West 2013). 14 Even assuming that the customers investments could be 15 deemed bailed property, the only delivery that took place 16 was when customers made their investments, either in BLMIS 17 directly, or through the feeder funds. 18 Hammerstein, 39 N.Y.S. 1039, 1040 (App. Div. 1st Dep t 19 1896); see also United States v. $79,000 in Account No. 20 2168050/6749900 at Bank of N.Y., 96 CIV. 3493 (MBM), 1996 WL 21 648934, at *6 (S.D.N.Y. Nov. 7, 1996) ( Delivery to the 22 bailee is required to create a bailment. ). 46 See Pattison v. So: any 1 supposed bailment pre-dated Picard s appointment; he was not 2 entrusted with any customer property until after it had been 3 impaired; and he never had control over the missing funds 4 that he now seeks to recoup. 5 party to bring such an action. 6 and Chattel Leases § 115 (West 2013) (explaining that bailee 7 may only bring an action to recover for the loss of or 8 injury to the bailed property while in his or her 9 possession ).21 10 He therefore is not the proper See 9 N.Y. Jur. 2d Bailments Moreover, Picard is not seeking to recover specific 11 bailments for return to individual bailors. 12 2d Bailments and Chattel Leases § 82 (West 2013) ( One of 13 the most important rights of the bailor is that, on the 14 termination of the bailment, the bailor will return to him 15 or her the identical thing bailed . . . . ). 16 customer name securities, which are separately held and 17 returned to individual customers outside the normal 18 distribution scheme,22 Picard s claims are intended to See 9 N.Y. Jur. Unlike 21 Judge McMahon likened the Trustee s position to that of a parking garage attendant who is handed the keys to a car that was recently in an accident and decides to sue the culpable party on the owner s behalf. See Picard v. JPMorgan Chase & Co., 460 B.R. 84, 104-05 (S.D.N.Y. 2011). 22 See 15 U.S.C. § 78lll(4) (excluding customer name securities delivered to the customer from definition of 47 1 augment the general fund of customer property so that it can 2 be distributed ratably based on customers net equity. 3 arrangement is not an analog to a bailment, in which the 4 bailee is entrusted with an item that is to be recovered by 5 the bailor at some later time. 6 This SIPC urges that we view the transaction as though 7 BLMIS, not the Trustee, acted as the bailee of customer 8 property, and that the Trustee is simply acting on BLMIS s 9 behalf to recover the bailed property. The short answer is 10 that Madoff (and, by extension, BLMIS) took the investment 11 money from the customers in order to defraud them--and a 12 thief is not a bailee of stolen property. 13 Graduate Sch. of Figurative Art of the N.Y. Acad. of Art, 14 735 N.Y.S. 2d 522, 522 (App. Div. 1st Dep t 2002) (holding 15 that a bailment relationship arises if the bailee takes See Pivar v. customer property); see also In re New Times Sec. Servs., Inc., 371 F.3d 68, 72-73 (2d Cir. 2004). This contrast, and its ramifications, are illuminated by SIPC s own statements to Congress regarding the passage of the 1978 amendments to SIPA. SIPC s then-Chairman, Hugh F. Owens, explained that customer name securities will be treated, in short, as though they are not part of the debtor s estate, but merely held by the debtor as bailee --implying that most other commingled property, such as cash, would simply become part of the debtor s estate. SIPA Amendments: Hearings on H.R. 8331 Before the Subcomm. on Sec., Comm. on Banking, Hous. and Urban Affairs, 95th Cong. 41-42 (1978) (Statement by Hugh F. Owens, Chairman of SIPC). 48 1 lawful possession of property without present intent to 2 appropriate ). 3 Madoff s commingling of customer funds also defeats any 4 analogy to bailment. 5 failed to maintain customers investments in separate named 6 accounts. 7 account (the 703 Account) and distributed those new 8 investments to earlier customers in lieu of actual returns. 9 This arrangement, which enabled the fraud, made a bailment Notwithstanding Madoff s pretense, he He deposited all customer funds into a general 10 impossible. 11 961 F.2d 327, 330 (2d Cir. 1992) (distinguishing special 12 accounts from general accounts); see also United States v. 13 Khan, No. 97-6083, 1997 WL 701366, at *2 (2d Cir. 1997) 14 (holding that a deposit into a general bank account 15 destroys a potential bailment under New York law).23 See Peoples Westchester Sav. Bank v. F.D.I.C., 16 23 With a few exceptions, such as commingled fungible goods in a warehouse, the general rule is that the bailee can only discharge his or her liability to the bailor by returning the identical thing received, in its original or an altered form, according to the terms of the bailment. 9 N.Y. Jur. 2d Bailments and Chattel Leases § 84 (West 2013). Rahilly v. Wilson, a case relied on by SIPC, is not to the contrary. See Rahilly v. Wilson, 20 F. Cas. 179, 182 (Cir. Ct. D. Minn. 1873) (comparing commingled bales of wheat to an ordinary general deposit of money in a bank and holding that no bailment had taken place). 49 1 SIPC attempts to obviate these difficulties by relying 2 on SEC Rule 15c, which establishes bookkeeping segregation 3 requirements for brokers. 4 Rakoff was mystified by this argument, Picard v. HSBC Bank 5 PLC, 454 B.R. 25, 32 (S.D.N.Y. 2011), as are we. 6 17 C.F.R. § 240.15c3-3. Judge Rule 15c requires brokers to maintain a minimum cash 7 balance in a reserve account and segregate all such cash for 8 customers benefit. 9 specifically contemplates the commingling of customer See 17 C.F.R. § 240.15c3-3. It also 10 monies and the lending of customer securities. 11 PaineWebber, Inc., 159 F.3d 698, 706 (2d Cir. 1998). 12 Whatever Rule 15c may do, it does not confer power on a SIPA 13 trustee to sue on behalf of customers. 14 not a part of SIPA. 15 scope of agency rule-making. 16 Sandoval, 532 U.S. 275, 291 (2001) ( Language in a 17 regulation may invoke a private right of action that 18 Congress through statutory text created, but it may not 19 create a right that Congress has not. ). 20 Rule does not suggest that the broker (or the Trustee) 21 serves as a bailee of customer property, or that the Trustee 22 may assert claims on behalf of customers. Levitin v. First, the Rule is Second, such a rule would exceed the See generally Alexander v. 50 In any event, the 1 Finally, SIPC and the Trustee infer a bailment 2 relationship from federal common law and the Federal Rules 3 of Civil Procedure. 4 Federal common law, which does not speak to the powers of a 5 SIPA trustee, offers no useful insight.24 6 Federal Rules of Civil Procedure.25 7 8 9 The inferences are strained at best. Nor do the 2 The Trustee argues that, because SIPC advanced funds to customers at the outset of the liquidation, SIPC is 24 SIPC suggests that it is appropriate to resort to federal common law where a significant conflict exists between state and federal law and where the need for uniformity in the treatment of brokerage customers is paramount. But no legal authority is offered to support the application of federal common law here. And there is no evident conflict between New York bailment law (on the one hand) and (on the other) SIPA, Rule 15c, or some broader federal policy. 25 The Trustee invokes Rule 17, which allows a bailee to sue in [his] own name[] without joining the person for whose benefit the action is brought. Fed. R. Civ. P. 17(a)(1). But, as discussed in text, the trustee is not a bailee. Additionally, Rule 17(a), like all rules prescribed by the Supreme Court, may not abridge, enlarge, or otherwise modify substantive rights. See 28 U.S.C. § 2072(b); Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Int l B.V. v. Schreiber, 407 F.3d 34, 49 (2d Cir. 2005) ( The procedural mechanisms set forth in Rule 17(a) for ameliorating real party in interest problems may not . . . be employed to expand substantive rights. ). It therefore cannot provide an independent basis for standing. See generally Natural Res. Def. Council, Inc. v. EPA, 481 F.2d 116, 121 (10th Cir. 1973). 51 1 subrogated to those customers claims against the 2 Defendants; SIPC therefore may assert those claims as 3 subrogee; and Picard is authorized to enforce that right on 4 SIPC s behalf. 5 neither the plain language of the statute, nor its 6 legislative history, supports the Trustee s position. 7 But SIPC is a creature of statute, and True, a SIPA trustee (unlike a trustee in bankruptcy), 8 advances money to pay claims. 9 into account by subrogating SIPC to customers net equity The statute takes this fact 10 claims to the extent of the advances they received. 11 goes no further. 12 13 But it The Trustee s subrogation theory is premised in § 78fff-3(a): 14 15 16 17 18 19 20 21 22 23 24 25 15 U.S.C. § 78fff-3(a). 26 claims of customers refers (as throughout the statute) to 27 customers net equity claims against the estate. 28 generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d To the extent moneys are advanced by SIPC to the trustee to pay or otherwise satisfy the claims of customers, in addition to all other rights it may have at law or in equity, SIPC shall be subrogated to the claims of such customers with the rights and priorities provided in this chapter, except that SIPC as subrogee may assert no claim against customer property until after the allocation thereof to customers as provided in section 78fff2(c) of this title. It is undisputed that the phrase 52 See 1 229, 233 (2d Cir. 2011), cert. denied, 133 S. Ct. 25 (2012). 2 SIPA thus allows only a narrow right of subrogation--for 3 SIPC to assert claims against the fund of customer property 4 and thereby recoup any funds advanced to customers once the 5 SIPA trustee has satisfied those customers net equity 6 claims. 7 The Trustee urges us to conclude that § 78fff-3(a) does 8 more--much more--by creating a right of subrogation that 9 allows SIPC (and, by extension, the Trustee) to step into 10 customers shoes and to initiate and control litigation on 11 their behalf, against any number of defendants, until SIPC 12 has been repaid in full. 13 grants trustees the same powers and title with respect to 14 the debtor and the property of the debtor as a Title 11 15 trustee, 15 U.S.C. § 78fff-1(a), and the Supreme Court has 16 squarely rejected attempts by Title 11 trustees to capture 17 such litigation, see Caplin v. Marine Midland Grace Trust 18 Co., 406 U.S. 416, 428 (1972). 19 Trustee relies on a catch-all provision included in the 1978 20 amendments to SIPA, which states that the subrogation rights 21 afforded by § 78fff-3(a) should not be read to diminish all 22 other rights [SIPC] may have at law or in equity. As we emphasized earlier, SIPA 53 As a final resort, the 15 1 U.S.C. § 78fff-3(a). 2 implied right of equitable subrogation, the principle by 3 which an insurer, having paid losses of its insured, is 4 placed in the position of its insured so that it may recover 5 from the third party legally responsible for the loss. 6 Winkelmann v. Excelsior Ins. Co., 650 N.E.2d 841, 843 (N.Y. 7 1995). 8 class-action lawsuits and assert any number of tort claims 9 against third parties on customers behalf.26 10 11 From here, the Trustee claims an He thus claims a wide grant of authority to initiate This is a long, long reach. There is no sign that Congress intended an expansive 12 increment of power to SIPA trustees. 13 chairman appointed a Special Task Force to consider possible 14 amendments to the 1970 Act. 15 separately listed its major policy recommendations and its 16 proposed technical refinements. 17 of Directors of SIPC of the Special Task Force to Consider 18 Possible Amendments to SIPA, Letter of Transmittal (July 31, 19 1974). 20 Recommendation, states that claims of SIPC as subrogee 21 (except as otherwise provided), should be allowable only as In 1973, the SIPC The resulting July 1974 report See Report to the Board Recommendation II.A.9, deemed a Major Policy 26 We use the term class-action lawsuits loosely here, without taking a position on the SLUSA question. 54 1 claims against the general estate. 2 added); see also SIPA Amendments of 1975: Hearings on H.R. 3 8064 Before the Subcomm. on Consumer Protection and Fin. of 4 the H. Comm. on Interstate and Foreign Commerce, 94th Cong. 5 64 (1976) (hereinafter Hearings on H.R. 8064 ). 6 Id. at 12 (emphasis Notably, Caplin was decided in 1972, before the Task 7 Force report and six years before Congress amended § 78fff- 8 3(a) to include all other rights [SIPC] may have at law or 9 in equity. If Congress sought to exempt SIPA trustees from 10 Caplin s rule and expand SIPC s subrogation rights to tort 11 actions against third parties, we would expect such intent 12 to be manifested in the statutory wording and in the 13 record.27 14 The wording cited by Picard was proposed by SIPC itself 15 as a Minor Substantive or Technical Amendment[] in order 16 to make clear that SIPC s subrogation rights under the 1970 17 Act are cumulative with whatever rights it may have under 18 other State or Federal laws. Hearings on H.R. 8064, 94th 27 Caplin was undoubtedly on the radar of legislators at the time, as an earlier version of Section 544 of the Bankruptcy Code introduced with the 1978 amendments contained a provision intended to overrule Caplin. See In re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1227 n.9 (8th Cir. 1987). Significantly, this provision was deleted prior to enactment. Id. 55 1 Cong. 197, 199 (1976) (Memorandum of the Securities Investor 2 Protection Corporation in Regard to Certain Comments 3 Concerning H.R. 8064). 4 fundamental details of a regulatory scheme in vague terms or 5 ancillary provisions--it does not . . . hide elephants in 6 mouseholes. 7 U.S. 457, 468 (2001). 8 9 Congress does not alter the Whitman v. Am. Trucking Assocs., Inc., 531 The Trustee adduces rules of insurance law to justify his claim, an analogy with some intuitive appeal: Principles 10 of equity generally permit subrogees wide scope to sue 11 third-party tortfeasors, a claim that arises most commonly 12 with insurance. 13 See, e.g., Winkelmann, 650 N.E.2d at 843. But this argument succumbs to the same critique as 14 Picard s bailment theory: We avoid engrafting common law 15 principles onto a statutory scheme unless Congress s intent 16 is manifest. 17 intent here is that we should treat SIPA as a bankruptcy 18 statute, not as an insurance scheme. 19 independent statutory schemes, enacted to serve the unique 20 needs of the banking and securities industries, 21 respectively. 28 See supra p. 46. The clearest Congressional SIPA and FDIA are SIPC v. Morgan, Kennedy & Co., 533 F.2d 28 Congress rejected some early versions of the SIPA bill which were patterned on FDIA and which extended 56 1 1314, 1318 (2d Cir. 1976). 2 oversimplified comparisons between insurance law and federal 3 statutory law: While this Court has referred to SIPC as 4 providing a form of public insurance, it is clear that the 5 obligations imposed on an insurance provider under state law 6 do not apply to this congressionally-created nonprofit 7 membership corporation. 8 LLC, 654 F.3d 229, 239 (2d Cir. 2011), cert. denied, 133 S. 9 Ct. 25 (2012) (internal citations and quotation marks 10 We have since warned against In re Bernard L. Madoff Inv. Sec. omitted). 11 Relatedly, Picard argues under principles of equity 12 that unless he can spearhead the litigation on behalf of 13 defrauded customers, the victims will not be made whole, 14 SIPC will be unable to recoup its advances, and third-party 15 tortfeasors will reap windfalls.29 No doubt, there are insurance coverage to certain beneficial interests represented by customer accounts. Morgan, Kennedy & Co., 533 F.2d at 1318. 29 Picard and SIPC contend that, absent his exclusive authority to bring these customer claims, the Defendants would in effect be immunized from suit. But it is not obvious why customers cannot bring their own suits against the Defendants. In fact, the Defendants make clear that customers have already filed such actions. See, e.g., MLSMK Inv. Co. v. JP Morgan Chase & Co., 431 F. App x 17 (2d Cir. 2011) (summary order); Shapiro v. JP Morgan Chase & Co., No. 11-CV-8331 (S.D.N.Y.); Hill v. JPMorgan Chase & Co., No. 11CV-7961 (S.D.N.Y.). As in Redington, the customers on whose behalf the Trustee seeks to maintain suit are not only 57 1 advantages to the course Picard wants to follow. 2 has its limits; it may fill certain gaps in a statute, but 3 it should not be used to enlarge substantive rights and 4 powers. 5 while Bankruptcy Code allows a court to apply equitable 6 principles when necessary, [t]hese powers . . . do not 7 include the ability to award equitable relief where the 8 party asserting the cause of action for such relief does not 9 have standing under any other section of the Code ). 10 But equity Cf. In re Ozark, 816 F.2d at 1230 (observing that As the Supreme Court observed, SIPC s theory of 11 subrogation is fraught with unanswered questions. 12 v. SIPC, 503 U.S. 258, 270 (1992) (ultimately declining to 13 decide subrogation issue and instead holding that link 14 between stock manipulation and harm to customers was too 15 remote to support SIPC s RICO claim). 16 has left courts to guess at the nature of the common law 17 rights of subrogation that it claims. 18 Holmes As in Holmes, SIPC Id. at 271. The practical skepticism voiced in Caplin in a 19 traditional bankruptcy context is justified here as well. 20 Would such suits prevent customers from mak[ing] their own entitled to bring, but have already initiated their own action. Redington v. Touche Ross & Co., 592 F.2d 617, 635 (2d Cir. 1978) (Mulligan, J., dissenting). 58 1 assessment of the respective advantages and disadvantages, 2 not only of litigation, but of various theories of 3 litigation ? 4 control customers claims against third parties if SIPC has 5 not fully satisfied the customers claims against the 6 estate? 7 that independent actions are still likely because it is 8 extremely doubtful that [the parties] would agree on the 9 amount of damages to seek, or even on the theory on which to Caplin, 406 U.S. at 431. Can a SIPA trustee How would inconsistent judgments be avoided, given 10 sue ? 11 entered into by either the Trustee or by each customer who 12 brings suit? 13 only amplify these concerns. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Id. at 432. Id. Who would be bound by a settlement The size and scope of the litigation here As Caplin advises, it is better to leave these intractable policy judgments to Congress: Congress might well decide that reorganizations have not fared badly in the 34 years since Chapter X was enacted and that the status quo is preferable to inviting new problems by making changes in the system. Or, Congress could determine that the trustee . . . was so well situated for bringing suits . . . that he should be permitted to do so. In this event, Congress might also determine that the trustee s action was exclusive, or that it should be brought as a class action on behalf of all [creditors], or perhaps even that the [creditors] should have the option of suing on their own or having the trustee sue on their behalf. Any number of alternatives are 59 1 2 3 4 5 6 7 8 available. Congress would also be able to answer questions regarding subrogation or timing of law suits before these questions arise in the context of litigation. Whatever the decision, it is one that only Congress can make. Caplin, 406 U.S. at 434-35. * * * For the foregoing reasons, the judgments are affirmed. 60
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