In a major victory for banks – JPMorgan Chase & Co. (JPM - Analyst Report), HSBC Holdings plc , UBS AG (UBS) and UniCredit S.p.A. – the lawsuit filed by Madoff Securities trustee, Mr. Irving Picard, has been dismissed. The plaintiff was claiming nearly $30 billion for damages from these banks for their alleged role in the scam embroiling Bernard L. Madoff Investment Securities LLC (BLMIS).
The U.S. Court of Appeals for the Second Circuit in New York upheld the earlier rulings by U.S. District Judges Colleen McMahon and Jed Rakoff in Manhattan.
While dismissing the case, the court stated that a bankruptcy trustee cannot sue a party on behalf of creditors. The trustee can only avow claims held by the bankrupt firm itself. Hence, the Madoff trustee cannot pursue its charges against the banks.
At the time of filing the cases, the Madoff trustee had accused the banks of ignoring the signs of fraud committed by BLMIS. The trustee accused JPMorgan of ignoring various signals of fraudulence and not notifying regulators of suspicious transactions. While seeking damages from HSBC, the trustee had accused it of failing to conduct proper due diligence of Madoff Securities hedge fund – for which it was a custodian and provider of administrative services.
The present decision of the court leaves the Madoff trustee with 2 options – to either recourse to the U.S. Supreme Court or to the appeals court in New York. However, the trustee still has claims worth nearly $4 billion against the banks in the bankruptcy court.
In 2010, the Madoff trustee filed nearly 1,000 lawsuits in the bankruptcy court in order to recover more than $100 billion from various banks and other Madoff investors who profited from the fraud. The trustee, so far, has recovered roughly $10 billion of the total $17.5 billion lost by investors due to the Ponzi schemes run by BLMIS.
The dismissal of the above-mentioned case removes a legal headwind for the banks. The banks have been facing a large number of lawsuits for the way they conduct their operations. However, for the investors, this is a big setback as they lose a chance to recover their hard-earned money.
Currently, JPMorgan carries a Zacks Rank #2 (Buy), while HSBC and UBS has a Zacks Rank #3 (Hold). Other major global banks, performing better than these and worth considering include Mitsubishi UFJ Financial Group, Inc. (MTU - Analyst Report), which has a Zacks Rank #1 (Strong Buy).