Picard v. Egger, 11-5051 Picard v. UniCredit Bank Austria AG, 11-5175 Picard v. HSBC Bank PLC, 11-5207

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
UNITED STATES COURT OF APPEALS 1
2
FOR THE SECOND CIRCUIT 3
4
August Term, 2012 5
6
7
(Argued: November 21, 2012 Decided: June 20, 2013) 8
9
Docket Nos. 11-5044 10
11-5051 11
11-5175 12
11-5207 13
14
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 15
16
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC. 17
18
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 19
20
IRVING H. PICARD, 21
22
Plaintiff-Appellant, 23
24
- v.- 25
26
JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN 27
SECURITIES LLC, J.P. MORGAN SECURITIES LTD., 28
29
Defendants-Appellees, 30
31
and 32
33
SECURITIES INVESTOR PROTECTION CORPORATION, 34
35
Intervenor. 36
37
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 38
39

-- 1 of 60 --

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 1
2
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, 3
4
Debtor. 5
6
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 7
8
IRVING H. PICARD, 9
10
Plaintiff-Appellant, 11
12
and 13
14
SECURITIES INVESTOR PROTECTION CORPORATION, 15
16
Intervenor, 17
18
- v.- 19
20
UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL 21
ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPES LIMITED, 22
ACCESS INTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE) 23
SA, ACCESS MANAGEMENT LUXEMBOURG SA, as represented by its 24
Liquidator MAITRE FERDINAND ENTRINGER, FKA ACESS 25
INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, as 26
represented by its Liquidator MAITRE FERDINAND ENTRINGER, 27
PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, in her 28
capacity as Executrix under the WILL OF THIERRY MAGON DE LA 29
VILLEHUCHET (AKA Rene Thierry de la Villehuchet), 30
individually and as the sole beneficiary under the WILL OF 31
THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la 32
Villehuchet), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE 33
DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICA V, as 34
represented by its Liquidators MAITRE ALAIN RUKAVINA and 35
PAUL LAPLUME, ROGER HARTMANN, RALF SHROETER, RENE EGGER, 36
ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT 37
FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN 38
RUKAVINA, in his capacity as liquidator and representative 39
of LUXALPHA SICA V, PAUL LAPLUME, in his capacity as 40
liquidator and representative of LUXALPHA SICA V, UBS THIRD 41
PARTY MANAGEMENT COMPANY SA, 42
43
Defendants-Appellees. 44
2

-- 2 of 60 --

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 1
2
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, 3
4
Debtor. 5
6
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 7
8
IRVING H. PICARD, 9
10
Plaintiff-Appellant, 11
12
- v.- 13
14
HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., 15
HSBC BANK BERMUDA LIMITED, HSBC FUND SERVICES (LUXEMBOURG) 16
S.A., HSBC PRIVATE BANK (SUISSE) S.A., HSBC PRIVATE BANKING 17
HOLDINGS (SUISSE) S.A., HSBC BANK (CAYMAN) LIMITED, HSBC 18
SECURITIES SERVICES (BERMUDA) LIMITED, HSBC BANK USA, N.A., 19
HSBC INSTITUTIONAL TRUST SERVICES (BERMUDA) LIMITED, HSBC 20
SECURITIES SERVICES (IRELAND) LIMITED, HSBC INSTITUTIONAL 21
TRUST SERVICES (IRELAND) LIMITED, HSBC HOLDINGS PLC, 22
UNICREDIT S.p.A., PIONEER ALTERNATIVE INVESTMENT MANAGEMENT 23
LIMITED, UNICREDIT BANK AUSTRIA AG, ALPHA PRIME FUND 24
LIMITED, 25
26
Defendants-Appellees, 27
28
and 29
30
SECURITIES INVESTOR PROTECTION CORPORATION, 31
32
Intervenor. 33
34
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 35
36
IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC, 37
38
Debtor. 39
40
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 41
42
43
44
3

-- 3 of 60 --

IRVING H. PICARD, 1
2
Plaintiff-Appellant, 3
4
- v.- 5
6
HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A., 7
HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A., 8
HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK 9
(CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA) 10
LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST 11
SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES 12
(IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES 13
(IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES 14
(LUXEMBOURG) S.A., 15
16
Defendants-Appellees, 17
18
SECURITIES INVESTOR PROTECTION CORPORATION, 19
20
Intervenor. 21
22
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - x 23
24
Before: JACOBS, Chief Judge, WINTER and CARNEY, 25
Circuit Judges. 26
27 A trustee appointed pursuant to the Securities Investor 28
Protection Act appeals from the dismissal of his claims 29
brought on behalf of the debtor and the debtor’s customers, 30
asserting that various financial institutions and other 31
defendants aided and abetted the debtor’s fraud. The United 32
States District Court for the Southern District of New York 33
(McMahon and Rakoff, JJ.) held that the claims were barred 34
by the doctrine of in pari delicto and that the trustee 35
lacked standing to pursue claims on behalf of customers. We 36
affirm. 37
4

-- 4 of 60 --

OREN J. WARSHAVSKY (David J. 1
Sheehan, Deborah H. Renner, Lan 2
Hoang, Geoffrey A. North on the 3
brief) Baker & Hostetler LLP, 4
New York, New York for 5
Plaintiff-Appellant. 6
7 CHRISTOPHER H. LAROSA (Josephine 8
Wang, Kevin H. Bell, on the 9
brief) Securities Investor 10
Protection Corporation, 11
Washington, D.C. for Intervenor 12
Securities Investor Protection 13
Corporation. 14
15 JOHN F. SAVARESE (Douglas K. 16
Mayer, Stephen R. DiPrima, Emil 17
A. Kleinhaus, Lauren M. Kofke, 18
Jonathon R. La Chapelle on the 19
brief) Wachtell, Lipton, Rosen & 20
Katz, New York, New York for 21
Defendant-Appellee JPMorgan 22
Chase & Co., et al. 23
24
THOMAS J. MOLONEY (Evan A. 25
Davis, David E. Brodsky, Marla 26
A. Decker, Charles J. Keeley, 27
Jason B. Frasco on the brief) 28
Cleary Gottlieb Steen & Hamilton 29
LLP, New York, New York for 30
Defendant-Appellee HSBC Bank 31
plc, et al. 32
33
MARCO E. SCHNABL (Susan L. 34
Saltzstein, Jeremy A. Berman on 35
the brief) Skadden, Arps, Slate, 36
Meagher & Flom LLP, New York, 37
New York for Defendants- 38
Appellees UniCredit S.p.A. and 39
Pioneer Alternative Investment 40
Management Ltd. 41
42
MARSHALL R. KING, Gibson, Dunn & 43
Crutcher LLP, New York, New York 44
for Defendant-Appellee UBS AG, 45
et al. 46
5

-- 5 of 60 --

1
FRANKLIN B. VELIE (Jonathan G. 2
Kortmansky, Mitchell C. Stein on 3
the brief) Sullivan & Worcester 4
LLP, New York, New York for 5
Defendant-Appellee UniCredit 6
Bank Austria AG. 7
8
Robert W. Gottlieb, Katten 9
Muchin Rosenman LLP, New York, 10
New York for Defendant-Appellee 11
Access International Advisers, 12
LLC, et al. 13
14 Brett S. Moore, Porzio Bromberg 15
& Newman P.C., New York, New 16
York for Defendant-Appellee 17
Luxalpha Sicav, et al. 18
19
Robert Knuts, Park & Jensen LLP, 20
New York, New York for 21
Defendant-Appellee Theodore 22
Dumbauld. 23
24
25
DENNIS JACOBS, Chief Judge: 26
Irving Picard (“Picard” or the “Trustee”) sues in his 27
capacity as Trustee under the Securities Investor Protection 28
Act (“SIPA”) on behalf of victims in the multi-billion- 29
dollar Ponzi scheme worked by Bernard Madoff. The four 30
actions presently before this Court allege that numerous 31
major financial institutions aided and abetted the fraud, 32
collecting steep fees while ignoring blatant warning signs. 33
In summary, the complaints allege that, when the Defendants 34
were confronted with evidence of Madoff’s illegitimate 35
6

-- 6 of 60 --

scheme, their banking fees gave incentive to look away, or 1
at least caused a failure to perform due diligence that 2
would have revealed the fraud. The Trustee asserts claims 3
for unjust enrichment, breach of fiduciary duty, aiding and 4
abetting fraud, and negligence, among others. The Trustee’s 5
position is supported by the Securities Investor Protection 6
Corporation (“SIPC”), a statutorily created nonprofit 7
corporation consisting of registered broker-dealers and 8
members of national securities exchanges, which intervened 9
to recover some or all of the approximately $800 million it 10
advanced to victims. 11
As we will explain, the doctrine of in pari delicto 12
bars the Trustee (who stands in Madoff’s shoes) from 13
asserting claims directly against the Defendants on behalf 14
of the estate for wrongdoing in which Madoff (to say the 15
least) participated. The claim for contribution is likewise 16
unfounded, as SIPA provides no such right. The decisive 17
issue, then, is whether the Trustee has standing to pursue 18
the common law claims on behalf of Madoff’s customers. Two 19
thorough well-reasoned opinions by the district courts held 20
that he does not. See Picard v. HSBC Bank PLC, 454 B.R. 25 21
(S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase & 22
Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.). 23
7

-- 7 of 60 --

Our holding relies on a rooted principle of standing: A 1
party must “assert his own legal rights and interests, and 2
cannot rest his claim to relief on the legal rights or 3
interests of third parties.” Warth v. Seldin, 422 U.S. 490, 4
499 (1975). This prudential limitation has been 5
consistently applied in the bankruptcy context to bar suits 6
brought by trustees on behalf of creditors. See, e.g., 7
Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 8
(1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 9
114, 118 (2d Cir. 1991). 10
Picard offers two theories for why a SIPA liquidation 11
is a different creature entirely, and why therefore a SIPA 12
trustee enjoys third-party standing: (1) He is acting as a 13
bailee of customer property and therefore can pursue actions 14
on customers’ behalf to recover such property; and (2) he is 15
enforcing SIPC’s rights of equitable and statutory 16
subrogation to recoup funds advanced to Madoff’s customers. 17
Neither is compelling. Although a SIPA liquidation is not a 18
traditional bankruptcy, a SIPA trustee is vested with the 19
“same powers and title with respect to the debtor and the 20
property of the debtor . . . as a trustee in a case under 21
Title 11.” 15 U.S.C. § 78fff-1(a). At best, SIPA is silent 22
8

-- 8 of 60 --

as to the questions presented here. And analogies to the 1
law of bailment and the law of subrogation are inapt and 2
unconvincing. 1
3
4
BACKGROUND 5
In December 2008, federal agents arrested Bernard L. 6
Madoff, who had conducted the largest Ponzi scheme yet 7
uncovered. Madoff purported to employ a “split-strike 8
conversion strategy” that involved buying S&P 100 stocks and 9
hedging through the use of options. In reality, he engaged 10
in no securities transactions at all. 2
11
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

-- 9 of 60 --

In March 2009, Madoff pleaded guilty to securities 1
fraud and admitted that he had used his brokerage firm, 2
Bernard L. Madoff Investment Securities LLC (“BLMIS”), as a 3
vast Ponzi scheme. The details of Madoff’s fraud have been 4
recounted many times. See, e.g., In re Bernard L. Madoff 5
Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert. 6
denied, 133 S. Ct. 25 (2012); In re Bernard L. Madoff Inv. 7
Sec. LLC, 424 B.R. 122, 126–32 (Bankr. S.D.N.Y. 2010). 8
Following Madoff’s arrest, SIPC filed an application 9
under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS 10
required protection. The district court appointed Picard as 11
the firm’s Trustee and referred the case to the bankruptcy 12
court. 13
SIPA was enacted in 1970 to speed the distribution of 14
“customer property” back to investors following a firm’s 15
collapse. 3 Customer property is cash and securities held 16
separately from the general estate of the failed brokerage 17
firm. “SIPA serves dual purposes: to protect investors, and 18
to protect the securities market as a whole.” In re Bernard 19
L. Madoff Inv. Sec. LLC, 654 F.3d at 235. A SIPA 20
3 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

-- 10 of 60 --

liquidation confers priority on customer claims by an 1
expeditious alternative to a traditional bankruptcy 2
proceeding. Under SIPA, each customer shares ratably in the 3
fund of customer property according to the customer’s “net 4
equity.” 5
If (as is often the case) the assets are not enough to 6
satisfy all net equity claims, SIPC advances money (up to 7
$500,000 per customer) to the SIPA trustee, who is charged 8
with assessing customer claims and making the ratable 9
distributions. At the time of this appeal, SIPC had 10
advanced approximately $800 million. 11
A trustee also has authority to investigate the 12
circumstances surrounding the insolvency and to recover and 13
distribute any remaining funds to creditors. Picard alleges 14
that his investigation has uncovered evidence of wrongdoing 15
by third parties who aided and abetted Madoff, and seeks to 16
replenish the fund of customer property by taking action 17
against various financial institutions that serviced BLMIS. 18
Picard presses claims against JPMorgan Chase & Co., UBS 19
AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated 20
persons and entities. The allegations against each are 21
summarized one by one. We distill the detailed allegations 22
11

-- 11 of 60 --

from the consolidated complaints, and recount only the 1
background needed to understand our analysis. At this stage 2
of the litigation, the allegations are assumed to be true. 3
See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 4
2009). 5
JPMorgan. Madoff maintained a checking account at 6
JPMorgan Chase & Co. (“JPMorgan”) 4 for more than twenty 7
years, beginning in 1986. In the years prior to BLMIS’s 8
bankruptcy, JPMorgan collected an estimated half billion 9
dollars in fees, interest payments, and revenue from BLMIS. 10
The Trustee alleges that JPMorgan was “at the very center” 11
of Madoff’s fraud and was “thoroughly complicit” in it. A 12
662 ¶ 1. 5 Madoff’s primary account with JPMorgan, the “703 13
Account,” was where hundreds of billions of dollars of 14
customer money were “commingled and ultimately washed.” A 15
663 ¶ 2. The customer funds deposited into the 703 Account 16
for “split-strike” securities transactions were instead 17
funneled to other customers to sustain the illusion of large 18
and reliable returns on investment. 19
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

-- 12 of 60 --

The 703 Account was a retail checking account, not a 1
commercial account. Billions of dollars from thousands of 2
investors were deposited without being segregated or 3
transferred to separate sub-accounts. These accounts 4
exhibited, on their face, a “glaring absence of securities 5
activity.” A 714 ¶ 190. At the same time, numerous multi- 6
million-dollar checks and wire transfers having no apparent 7
business purpose were exchanged between Madoff and his close 8
friend, Norman Levy (now dead). 9
In 2006, due diligence conducted by JPMorgan revealed 10
strong and steady yields by Madoff’s feeder funds during a 11
time when the S&P 100 dropped thirty percent. As one money 12
manager later acknowledged, that was too good to be true. 13
In June 2007, JPMorgan’s Chief Risk Officer John Hogan 14
learned at a lunch with JPMorgan money manager Matt Zames 15
that “there is a well-known cloud over the head of Madoff 16
and that his returns are speculated to be part of a [P]onzi 17
scheme.” A 695 ¶ 119. Hogan asked a junior analyst to run 18
a Google search on Madoff, and made no further inquiries 19
when the search yielded no hard evidence. 20
Faced with “numerous indications of Madoff’s fraud,” in 21
the fall of 2008 JPMorgan redeemed $276 million of its 22
13

-- 13 of 60 --

investments in Madoff’s feeder funds. A 705 ¶¶ 156-60; A 1
710 ¶ 178. But the company failed to tip off regulators or 2
other investors. Though JPMorgan was uniquely positioned to 3
put an end to Madoff’s fraud, it quietly continued 4
collecting its large fees. 5
UBS and Access. Defendants UBS AG 6 (“UBS”) and Access 6
International Advisors LLC 7 (“Access”) are sued for aiding 7
and abetting Madoff’s fraud by creating feeder funds and 8
collecting investments from abroad. UBS acted as sponsor, 9
manager, administrator, custodian, and primary banker of the 10
funds. UBS reaped at least $80 million in fees as it 11
facilitated investments in BLMIS, despite clear indicia of 12
fraud. The “prestigious name” of UBS was used “to 13
legitimize and attract money to Madoff’s fraud,” but UBS 14
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

-- 14 of 60 --

agreed to “look the other way and to pretend that they were 1
truly ensuring the existence of assets and trades when in 2
fact they were not and never did.” A 916 ¶ 5. 3
UBS observed but ignored Madoff’s lack of transparency 4
and his uncanny ability to generate consistently high 5
returns, except insofar as UBS declined to invest its own 6
money in BLMIS or endorse Madoff’s funds to its clients. 7
In 2009, the Luxembourg regulator, the Commission de 8
Surveillance du Secteur Financier, indicated that the 9
failure of UBS to identify Madoff as a possible fraud was a 10
violation of Luxembourg law. 11
Access was also alerted to Madoff’s suspicious 12
investment activities. In 2006, internal managers at Access 13
became worried about the volume of options trades being 14
reported by Madoff, and hired an independent consultant to 15
investigate. The consultant concluded that Madoff could not 16
possibly have executed the volume of options or equities 17
trades he reported, and that his trading revealed “either 18
extremely sloppy errors or serious omissions” that suggest 19
he “doesn’t really understand the costs of the option 20
strategy.” A 977 ¶ 218 (emphasis removed). Access 21
concealed the consultant’s findings and continued active 22
15

-- 15 of 60 --

recruitment of investors for Madoff’s feeder funds in order 1
to keep churning its fees. 2
Unicredit. Madoff’s fraud drew billions from abroad. 3
With the help of UniCredit Bank Austria AG (“Bank Austria”) 4
and 20:20 Medici AG (“Bank Medici”), one Sonja Kohn 5
established several Madoff feeder funds (the “Medici 6
Funds”). Together, they funneled nearly $3 billion into 7
BLMIS. UniCredit S.p.A. and its two subsidiaries, Pioneer 8
Alternative Investment Management Limited (“Pioneer”) and 9
Bank Austria (collectively, the “UniCredit entities”), 10
helped to promote the Medici Funds and thereby facilitated 11
the fraud. 12
The UniCredit entities and their affiliates made a lot 13
of money servicing the Medici funds: Bank Medici took more 14
than $15 million in fees; and BA Worldwide, more than $68 15
million. The UniCredit entities were well aware that 16
Madoff’s returns were highly suspicious, and that the extent 17
of BLMIS’s trading activities was facially impossible. Yet 18
they continued to aggressively market the Madoff feeder 19
funds to new customers while purporting to provide 20
oversight. Among the signs overlooked by the UniCredit 21
entities were Madoff’s failure to identify counterparties to 22
16

-- 16 of 60 --

BLMIS’s options transactions, BLMIS’s atypical fee 1
structure, and Madoff’s impossibly high volume of 2
transactions. Shortly after Madoff’s arrest, a senior 3
research analyst at Pioneer wrote, “[w]e should be the 4
professionals protecting investors from this fraud . . . 5
[but] there is not one [due diligence] report in the files 6
except for one in May 2005.” A 136 ¶ 314 (brackets in 7
original). 8
HSBC. HSBC Bank plc (“HSBC”) 8 established Madoff 9
feeder funds (at least eighteen in seven different 10
countries) that injected capital into the Ponzi scheme while 11
ignoring obvious warning signs. As custodian and 12
administrator of the funds, HSBC was required to hold the 13
fund assets and handle day-to-day operations. HSBC also 14
created derivative products, such as notes and swaps, to 15
increase the flow of investment. These funds fed at least 16
8 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

-- 17 of 60 --

$8.9 billion into Madoff’s scheme, a sum representing nearly 1
forty percent of BLMIS’s capital under management. 2
HSBC represented to customers that it exercised 3
supervision and control over fund assets, whereas BLMIS 4
itself took the role of custodian. Had HSBC performed 5
oversight diligently, it would have seen thousands of 6
instances in which Madoff’s purported trades exceeded the 7
total market volume of such trades on the given day. 8
Repeatedly, industry analysts and HSBC’s own due diligence 9
team openly questioned Madoff’s extraordinary success, lack 10
of transparency, and incredible trading volume. 11
In September 2005, HSBC commissioned KPMG LLP to detect 12
potential fraud in BLMIS’s operations. Resulting reports in 13
2006 and 2008 warned that BLMIS’s role as custodian of its 14
own funds posed a risk that the trades were “a sham in order 15
to divert client cash.” A 89 ¶ 168. Nonetheless, HSBC 16
continued to “enable[]” Madoff in order to reap a windfall. 17
A 35 ¶ 1. In sum, HSBC “engineered a labyrinth of hedge 18
funds, management companies, and service providers that, to 19
unsuspecting outsiders, seemed to compose a formidable 20
system of checks and balances,” yet, in reality, “it 21
provided different modes for directing money to Madoff while 22
avoiding scrutiny and maximizing fees.” A 36 ¶ 4. 23
18

-- 18 of 60 --

Procedural History. On July 15, 2009, the Trustee 1
commenced an adversary proceeding in the United States 2
Bankruptcy Court for the Southern District of New York 3
against HSBC and thirty-six others, including UniCredit and 4
Pioneer. 9 The Amended Complaint sought recovery of $2 5
billion in preferential or fraudulent transfers (Counts 1 6
through 19), and asserted four common law causes of action: 7
aiding and abetting fraud, aiding and abetting breach of 8
fiduciary duty, unjust enrichment, and money had and 9
received (collectively, the “common law claims”). These 10
common law claims sought $6.6 billion from HSBC and $2 11
billion from the remaining defendants. A contribution claim 12
was asserted under New York law. 13
On a motion by the UniCredit entities, the district 14
court withdrew the reference to the bankruptcy court, for 15
the limited purpose of deciding two threshold issues: (1) 16
the Trustee’s standing to assert the common law claims, and 17
(2) preemption of these claims by the Securities Litigation 18
Uniform Standards Act (“SLUSA”). 19
The common law claims and the contribution claim were 20
dismissed by Judge Rakoff in July 2011, on the grounds that 21
9 This proceeding consolidated two actions, one against
HSBC and one against UniCredit and Pioneer.
19

-- 19 of 60 --

the Trustee was in pari delicto with the defendants, lacked 1
standing to assert the common law claims on customers’ 2
behalf, and could not demonstrate a right to contribution. 3
See Picard v. HSBC Bank PLC, 454 B.R. 25, 37 (S.D.N.Y. 4
2011). The court did not reach the question whether SLUSA 5
bars the Trustee’s claims. Id. 6
The Trustee’s adversary proceeding against JPMorgan was 7
commenced in December 2010. As in the proceedings against 8
HSBC and UniCredit, the Trustee asserted common law claims 9
seeking $19 billion for, inter alia, aiding and abetting 10
fraud, aiding and abetting breach of fiduciary duty, unjust 11
enrichment, and conversion. 12
The adversary proceeding against UBS followed. Also 13
named were Access, several of its affiliates, and two feeder 14
funds. Again, the Trustee asserted common law claims for 15
aiding and abetting fraud, aiding and abetting breach of 16
fiduciary duty, unjust enrichment, and conversion, among 17
others. Damages of approximately $2 billion were sought on 18
behalf of the customers of BLMIS (rather than BLMIS itself). 19
All Defendants (except Luxalpha and two individual 20
Defendants) moved to dismiss the common law claims and the 21
contribution claim. In November 2011, Judge McMahon granted 22
the motions. See Picard v. JPMorgan Chase & Co., 460 B.R. 23
20

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84 (S.D.N.Y. 2011). Judge McMahon concluded (as did Judge 1
Rakoff) that the Trustee lacks standing to bring an action 2
on behalf of third parties and has no valid claim for 3
contribution. Id. at 106. 4
DISCUSSION 5
We review de novo a district court’s dismissal of 6
causes of action for failure to state a claim for relief or 7
lack of standing. See Fulton v. Goord, 591 F.3d 37, 41 (2d 8
Cir. 2009). Point I considers the Trustee’s claims as 9
asserted by him on behalf of BLMIS itself; Point II 10
considers claims asserted by the Trustee on behalf of 11
BLMIS’s customers. 12
I 13
We agree with the district courts that the Trustee’s 14
common law claims asserted on behalf of BLMIS are barred by 15
the doctrine of in pari delicto. 16
A 17
Under New York law, 10 one wrongdoer may not recover 18
against another. See Kirschner v. KPMG LLP, 938 N.E.2d 941, 19
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

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950 (N.Y. 2010). The principle that a wrongdoer should not 1
profit from his own misconduct “is . . . strong in New 2
York.” Id. at 964. The New York Appellate Division, First 3
Department, has long applied the doctrine of in pari delicto 4
to bar a debtor from suing third parties for a fraud in 5
which he participated. See Barnes v. Hirsch, 212 N.Y.S. 6
536, 539 (App. Div. 1st Dep’t 1925) (“The bankrupts could 7
not recover against these defendants for bucketing orders 8
because they were responsible for the illegal transaction 9
and parties to the fraud.”), aff’d, 152 N.E. 424 (N.Y. 10
1926). 11
A “claim against a third party for defrauding a 12
corporation with the cooperation of management accrues to 13
creditors, not to the guilty corporation.” Shearson Lehman 14
Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991) 15
(citing Barnes, 212 N.Y.S. at 537). The debtor’s misconduct 16
is imputed to the trustee because, innocent as he may be, he 17
acts as the debtor’s representative. See Wight v. 18
BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000) 19
(“[B]ecause a trustee stands in the shoes of the 20
corporation, the Wagoner rule bars a trustee from suing to 21
recover for a wrong that he himself essentially took part 22
22

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in.”); accord Breeden v. Kirkpatrick & Lockhart LLP (In re 1
Bennett Funding Grp., Inc.), 336 F.3d 94, 99-100 (2d Cir. 2
2003) (applying Wagoner rule in the context of “the greatest 3
Ponzi scheme [then] on record” and holding that “the 4
defrauded investors and not the bankruptcy trustee” were 5
entitled to pursue malpractice claims against attorneys and 6
accountants arising from the fraud). 11
7
Picard alleges that the Defendants were complicit in 8
Madoff’s fraud and facilitated his Ponzi scheme by providing 9
(well-paid) financial services while ignoring obvious 10
warning signs. These claims fall squarely within the rule 11
of Wagoner and the ensuing cases: Picard stands in the shoes 12
of BLMIS and may not assert claims against third parties for 13
participating in a fraud that BLMIS orchestrated. 14
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

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Picard’s scattershot responses are resourceful, but 1
they all miss the mark. He contends that a SIPA trustee is 2
exempt from the Wagoner rule, but adduces no authority. He 3
argues that the rationale of the in pari delicto doctrine is 4
not served here because he himself is not a wrongdoer; but 5
neither were the trustees in the cases cited above. 12 He 6
contends that in pari delicto should not impede the 7
enforcement of securities laws, citing Bateman Eichler, Hill 8
Richards, Inc. v. Berner, 472 U.S. 299 (1985); but Bateman 9
Eichler is inapposite. See id. at 315-16 (holding that in 10
pari delicto would not prevent defrauded tippee from 11
bringing suit against defrauding tipper, at least absent 12
further inquiry into “relative culpabilities” of tippee and 13
tipper). 13 He invokes the “adverse interest” exception, 14
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

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which directs a court not to impute to a corporation the bad 1
acts of its agent when the fraud was committed for personal 2
benefit. See The Mediators, Inc. v. Manney (In re 3
Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997). 4
However, “this most narrow of exceptions” is reserved for 5
cases of “outright theft or looting or embezzlement . . . 6
where the fraud is committed against a corporation rather 7
than on its behalf.” 14 Kirschner v. KPMG LLP, 938 N.E.2d 8
941, 952 (N.Y. 2010). It is not possible thus to separate 9
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

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BLMIS from Madoff himself and his scheme. Finally, Picard 1
argues that the district courts should not have applied the 2
in pari delicto doctrine at the pleadings stage; but the New 3
York Court of Appeals has held otherwise. See id. at 947 4
n.3; see also Wagoner, 944 F.2d at 120. Early resolution is 5
appropriate where (as here) the outcome is plain on the face 6
of the pleadings. 7
B. 8
The Trustee’s claim for contribution is the only one 9
that may escape the bar of in pari delicto. See Barrett v. 10
United States, 853 F.2d 124, 127 n.3 (2d Cir. 1988) 11
(explaining that parties seeking contribution are 12
necessarily in pari delicto). 15 The Trustee seeks 13
contribution for payments made to BLMIS customers under 14
SIPA, on the theory that the Defendants are joint 15
tortfeasors with BLMIS under New York law . 16
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

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The New York statute provides that “two or more persons 1
who are subject to liability for damages for the same 2
personal injury, injury to property or wrongful death, may 3
claim contribution among them whether or not an action has 4
been brought or a judgment has been rendered against the 5
person from whom contribution is sought.” N.Y. C.P.L.R. 6
§ 1401 (McKinney). Section 1401 “requires some form of 7
compulsion; that is, the party seeking contribution must 8
have been compelled in some way, such as through the entry 9
of a judgment, to make the payment against which 10
contribution is sought.” N.Y. State Elec. & Gas Corp. v. 11
FirstEnergy Corp., No. 3:03-CV-0438 (DEP), 2007 WL 1434901, 12
at *7 (N.D.N.Y. May 11, 2007) (emphasis added). 13
However, the SIPA payments for which Picard seeks 14
contribution were not compelled by BLMIS’s state law fraud 15
liability to its customers; his obligation to pay customers 16
their ratable share of customer property is an obligation of 17
federal law: SIPA. SIPA provides no right to contribution, 18
and it is settled in this Circuit that there is no claim for 19
contribution unless the operative federal statute provides 20
one. See Nw. Airlines, Inc. v. Transp. Workers Union of 21
Am., AFL-CIO, 451 U.S. 77, 97 n.38, 97-99 (1981); see also 22
27

-- 27 of 60 --

Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 144 (2d Cir. 1
1999) (affirming dismissal of New York state law 2
contribution claims for liability under the Fair Labor 3
Standards Act); KBL Corp. v. Arnouts, 646 F. Supp. 2d 335, 4
341 (S.D.N.Y. 2009) (“[A] plaintiff cannot use New York 5
State common law as an end-around to make a claim for 6
contribution that it could not make under the federal 7
statutory scheme.”); Lehman Bros., Inc. v. Wu, 294 F. Supp. 8
2d 504, 505 n.1 (S.D.N.Y. 2003) (“[W]hether contribution is 9
available in connection with a federal statutory scheme is a 10
question governed solely by federal law.”) (citation and 11
quotation marks omitted). 12
Picard emphasizes that he is not seeking contribution 13
for violations of SIPA or any other federal statute, but 14
that is beside the point. “The source of a right of 15
contribution under state law must be an obligation imposed 16
by state law.” LNC Invs., Inc. v. First Fid. Bank, 935 F. 17
Supp. 1333, 1349 (S.D.N.Y. 1996) (emphasis added). The 18
issue is therefore whether the payments made by the Trustee, 19
for which he is seeking contribution, are required by state 20
or federal law--an easy question. 21
22
28

-- 28 of 60 --

The $800 million paid out to customers fulfilled an 1
obligation created by SIPA, a federal statute that does not 2
provide a right to contribution “either expressly or by 3
clear implication,” Texas Industries, Inc. v. Radcliff 4
Materials, Inc., 451 U.S. 630, 638 (1981). Unlike the 5
Bankruptcy Act, SIPA does not require customers to establish 6
a basis of liability as a prerequisite for the Trustee’s 7
disbursement obligation. The loss itself is enough. See 15 8
U.S.C. § 78fff-2(c) (the Trustee “shall allocate customer 9
property of the debtor . . . to customers of such debtor, 10
who shall share ratably in such customer property on the 11
basis and to the extent of their respective net equities”); 12
cf. Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737, 13
753-56 (Bankr. S.D. Tex. 2008) (holding that Texas law 14
governed contribution claim where debtor sought contribution 15
for obligations set forth in proofs of claim alleging fraud 16
under state law). Because the Trustee’s payment obligations 17
were imposed by a federal law that does not provide a right 18
to contribution, the district courts properly dismissed 19
these claims. 20
21
22
29

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II 1
Having rejected the Trustee’s claims asserted on behalf 2
of BLMIS, we consider next whether the Trustee may assert 3
such claims on behalf of BLMIS’s customers. To proceed with 4
these claims, the Trustee must first establish his standing. 5
This he cannot do. 6
Standing is a “threshold question in every federal 7
case, determining the power of the court to entertain the 8
suit.” Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing 9
depends, first, on whether the plaintiff has identified a 10
“case or controversy” between the plaintiff and the 11
defendants within the meaning of Article III of the 12
Constitution. Ass’n of Data Processing Serv. Orgs., Inc. v. 13
Camp, 397 U.S. 150, 152 (1970). “To have standing, ‘[a] 14
plaintiff must [1] allege personal injury [2] fairly 15
traceable to the defendant’s allegedly unlawful conduct and 16
[3] likely to be redressed by the requested relief.’” 17
Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir. 18
1995) (alterations in original) (quoting Allen v. Wright, 19
468 U.S. 737, 751 (1984)). In addition, the plaintiff must 20
comply with “prudential” limitations on standing, of which 21
the salient one here is that a party must “assert his own 22
30

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legal rights and interests and cannot rest his claim to 1
relief on the legal rights or interests of third parties.” 2
Warth, 422 U.S. at 499. 3
We consider below Picard’s arguments that: (A) existing 4
Second Circuit precedent allows for third-party standing in 5
a SIPA liquidation; and (B) SIPA itself confers standing, 6
both by creating a bailment relationship between the Trustee 7
and the debtor’s customers, and by authorizing SIPC to 8
pursue subrogation claims on customers’ behalf. 16
9
A 10
The implied prohibition in Article III against third- 11
party standing applies to actions brought by bankruptcy 12
trustees. In Caplin v. Marine Midland Grace Trust Co. of 13
N.Y., 406 U.S. 416 (1972), the Supreme Court ruled that 14
federal bankruptcy law does not empower a trustee to collect 15
money owed to creditors. That is because a bankruptcy 16
trustee is not empowered “to collect money not owed to the 17
estate”; the trustee’s proper task “is simply to collect and 18
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

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reduce to money the property of the estates for which (he is 1
trustee).” Id. at 428-29 (citation and internal quotation 2
marks omitted). “[N]owhere in the statutory scheme is there 3
any suggestion that the trustee in reorganization is to 4
assume the responsibility of suing third parties” on behalf 5
of creditors. Id. at 428. This way, creditors can “make 6
their own assessment of the respective advantages and 7
disadvantages, not only of litigation, but of various 8
theories of litigation,” id. at 431; no consensus is needed 9
as to “the amount of damages to seek, or even on the theory 10
on which to sue,” id. at 432; and disputes over inconsistent 11
judgments and the scope of settlements can be avoided, id. 12
at 431-32. 13
Our Court has hewed to this principle. In Wagoner, the 14
misappropriation of funds by the owner and president of the 15
debtor company was facilitated by stock transactions 16
effected through a third-party brokerage firm. Shearson 17
Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir. 18
1991). The trustee’s claim that the brokerage aided and 19
abetted the fraud was dismissed on summary judgment, and we 20
affirmed, observing that “[i]t is well settled that a 21
bankruptcy trustee has no standing generally to sue third 22
32

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parties on behalf of the estate’s creditors, but may only 1
assert claims held by the bankrupt corporation itself.” Id. 2
at 118 (citing Caplin, 406 U.S. at 434); see also Hirsch v. 3
Arthur Andersen & Co., 72 F.3d 1085, 1094 (2d Cir. 1995) 4
(holding that Chapter 11 trustee had no standing to bring 5
creditor claims against accountants and law firms that had 6
provided services to the debtor, a real estate partnership 7
operated as a Ponzi scheme); The Mediators, Inc. v. Manney 8
(In re Mediators, Inc.), 105 F.3d 822, 826 (2d Cir. 1997) 9
(affirming dismissal of breach of fiduciary duty claim 10
brought by creditors’ committee functioning as bankruptcy 11
trustee, against bank and law firm for allegedly aiding and 12
abetting debtor’s fraud). 13
The Trustee makes little effort to explain why Caplin 14
and its progeny do not control. Instead, he relies on a 15
single Second Circuit case that was overruled by the Supreme 16
Court, and on dicta in another. Apart from lacking 17
precedential force, both cases are readily distinguishable. 18
1 19
In Redington v. Touche Ross & Co., 592 F.2d 617 (2d 20
Cir. 1978), rev’d, 442 U.S. 560 (1979), a SIPA trustee sued 21
the accountant of an insolvent brokerage for violations of 22
33

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record-keeping provisions of Section 17(a) of the Securities 1
Exchange Act, as well as violations of state common law. 2
The district court dismissed the Section 17(a) claim for 3
lack of an implied private right of action, and concluded 4
that it lacked jurisdiction over the common law claims. See 5
Redington v. Touche Ross & Co., 428 F. Supp. 483, 492-93 6
(S.D.N.Y. 1977). 7
In reversing, we held that Section 17(a) did create an 8
implied private right of action. See Redington v. Touche 9
Ross & Co., 592 F.2d 617 (2d Cir. 1978), rev’d, 442 U.S. 560 10
(1979). We then considered the trustee’s claim that “[h]e 11
is responsible for marshalling and returning [customer] 12
property; to the extent that he is unable to do so, he 13
argues, he may sue on behalf of the customer/bailors any 14
wrongdoer whom they could sue themselves.” Id. at 625. 15
Relying on the Federal Rules of Civil Procedure, Redington 16
concluded that “the Trustee, as bailee, is an appropriate 17
real party in interest,” id., and that “SIPC is subrogated 18
to the right of action implied in section 17 in favor of 19
brokers’ customers against third parties such as 20
accountants.” Id. at 624. Redington would favor Picard’s 21
case, except that Redington is no longer good law. 22
34

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The Supreme Court granted certiorari in Redington to 1
decide whether Section 17(a) created an implied right of 2
action and whether a SIPA trustee and SIPC had standing to 3
assert that claim. See Touche Ross & Co. v. Redington, 442 4
U.S. 560 (1979). The Court held that no private right of 5
action existed under Section 17(a), id. at 579, and 6
therefore considered it “unnecessary to reach” the standing 7
issue, id. at 567 n.9. The case was remanded to consider 8
whether an alternative basis for jurisdiction existed, but 9
none was found. See Redington v. Touche Ross & Co., 612 10
F.2d 68, 70 (2d Cir. 1979). 11
Picard argues that the Supreme Court left the standing 12
question “untouched” because the opinion was “limited to a 13
merits-based reversal on the issue of whether a private 14
right of action existed under section 17(a).” Appellant Br. 15
31 (11-5044). However, the question of who may assert a 16
right of action is presented ordinarily only if a right of 17
action has been found to exist. See Nat. R.R. Passenger 18
Corp. v. Nat. Assoc. of R.R. Passengers, 414 U.S. 453, 456 19
(1974) (“[T]he threshold question clearly is whether the 20
Amtrak Act . . . creates a [private] cause of action . . . 21
for it is only if such a right of action exists that we need 22
35

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consider whether the respondent had standing to bring the 1
action[.]”). 17 The Supreme Court’s reversal on the 2
threshold question drained the Second Circuit Redington 3
opinion of force on other questions. See Newdow v. Rio 4
Linda Union Sch. Dist., 597 F.3d 1007, 1041 (9th Cir. 2010) 5
(“[W]hen the Supreme Court reverses a lower court’s decision 6
on a threshold question,” the Court “effectively holds the 7
lower court erred by reaching [other issues].”). 8
Following the Supreme Court’s reversal, this Court 9
vacated its original judgment on the ground that subject 10
matter jurisdiction was lacking. See Order, Redington v. 11
Touche Ross, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979); 12
Appellee Br. Addendum A (11-5207). As the Trustee concedes, 13
vacatur dissipates precedential force. See Appellant Br. 30 14
17 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

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(11-5044). See also O’Connor v. Donaldson, 422 U.S. 563, 1
577 n.12 (1975) (observing that vacatur “deprives [the] 2
court’s opinion of precedential effect”); Brown v. Kelly, 3
609 F.3d 467, 476-77 (2d Cir. 2010). 4
Since Redington, at least six judges in this Circuit 5
have questioned or rejected third-party claims brought by 6
SIPA trustees, beginning with Judge Pollack in Mishkin v. 7
Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 556-58 8
(S.D.N.Y. 1990). 18 See also Picard v. JPMorgan Chase & Co., 9
460 B.R. 84, 100-101 (S.D.N.Y. 2011) (McMahon, J.); Picard 10
v. HSBC Bank PLC, 454 B.R. 25, 33-34 (S.D.N.Y. 2011) 11
(Rakoff, J.); Picard v. Taylor (In re Park South Sec., LLC), 12
326 B.R. 505, 516 (Bankr. S.D.N.Y. 2005) (Drain, J.); 13
Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.), 14
280 B.R. 794, 804 (Bankr. S.D.N.Y. 2002) (Beatty, J.); SIPC 15
v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653 (S.D.N.Y. 1999) 16
(Preska, J.), rev’d on other grounds, 222 F.3d 63 (2d Cir. 17
2000). 18
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

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Yet Redington has enjoyed something of a half-life, 1
with several courts (including this one) assuming without 2
deciding that Redington retains residual force. 19 Redington 3
should be put to rest; it has no precedential effect. 4
Even if Redington retained some persuasive value, it 5
would not decide this case. First, Redington considered 6
chiefly whether the trustee and SIPC had standing to bring a 7
cause of action under Section 17 of the Exchange Act; the 8
opinion said nothing about a SIPA trustee’s ability to 9
orchestrate mass tort actions against third parties. See 10
Redington v. Touche Ross & Co., 592 F.2d 617, 618 (2d Cir. 11
1978), rev’d, 442 U.S. 560 (1979) (“[W]e are presented with 12
the question whether a private cause of action exists under 13
section 17 of the Securities Exchange Act of 1934 against 14
19 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

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accountants who prepare misleading statements of a broker’s 1
financial affairs, and if so, who may maintain such an 2
action.”). Second, our holding in Redington turned, in 3
part, on an analysis of Fed. R. Civ. P. 17(a), which sets 4
forth rules concerning real parties in interest, and which 5
has no application here. See id. at 625; see also infra p. 6
51 n.25. Third, Redington involved claims against a single 7
accounting firm for a few discrete instances of alleged 8
misconduct (the preparation of misleading financial 9
statements). As a result, the policy concerns we express 10
below (see infra pp. 59-69) would have been considerably 11
diminished--and, indeed, were not even addressed by the 12
Court. Fourth, and finally, in Redington the brokerage firm 13
was not complicit in the wrongdoing, but rather “an entity 14
distinct from its conniving officers [that] was directly 15
damaged by Touche Ross’ unsatisfactory audit.” 592 F.2d at 16
620. The Redington Court therefore did not have occasion to 17
consider whether the doctrine of in pari delicto barred all 18
or part of the suit. In sum, Redington is both non-binding 19
and inapposite. 20
21
22
23
39

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2 1
The Trustee relies on St. Paul Fire & Marine Insurance 2
Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), for the 3
proposition that a trustee may assert creditors’ claims if 4
they are generalized in nature, and not particular to any 5
individual creditor. However, the holding of that case has 6
no application here. 7
PepsiCo had been guarantor of bonds issued by a 8
subsidiary that later was acquired by a subsidiary of Banner 9
Industries. When the (later) merged entity defaulted on the 10
bonds, PepsiCo sued Banner, alleging diversion of assets and 11
alter ego. The merged entity went bankrupt, and the trustee 12
sued Banner for misappropriation. We ruled that the 13
trustee--and not PepsiCo--could pursue Banner because Ohio 14
law allowed a subsidiary to assert an alter ego claim 15
against its parent, so that “[t]he cause of action therefore 16
becomes property of the estate of a bankrupt subsidiary, and 17
is properly asserted by the trustee in bankruptcy.” Id. at 18
703-04. 19
Picard directs us to a passage in St. Paul--stating 20
that a trustee may bring a claim if the “claim is a general 21
one, with no particularized injury arising from it, and if 22
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that claim could be brought by any creditor of the debtor,” 1
id. at 701--and contends that the third-party claims here 2
are common to all customers because all customers were 3
similarly injured by Madoff’s fraud and the Defendants’ 4
facilitation. This argument is flawed on many levels: 5
• St. Paul decided the “specific question” whether a 6
creditor may bring an alter ego claim against the debtor’s 7
parent when the debtor itself also possesses such a claim. 8
Id. at 699. But Picard seeks to assert claims that are 9
property only of the creditors, not of the debtor. 10
• The Trustee’s broad reading of St. Paul would 11
bring the Court’s holding into conflict with a line of cases 12
that came before and after it. As discussed supra pp. 32- 13
34, it is settled that a trustee may not assert creditors’ 14
claims against third parties. See, e.g., Shearson Lehman 15
Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). And, 16
of course, St. Paul could not alter the Supreme Court’s 17
ruling in Caplin. Picard’s argument thus conflicts with 18
Supreme Court and Second Circuit precedent. See generally 19
In re Stanwich Fin. Servs. Corp., 317 B.R. 224, 228 n.4 20
(Bankr. D. Conn. 2004) (highlighting this tension). 21
22
41

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• The language cited by Picard from St. Paul is not 1
a pronouncement about third-party standing; it voices the 2
maxim that only a trustee, not creditors, may assert claims 3
that belong to the bankrupt estate. As St. Paul elsewhere 4
states: “‘[T]he Trustee in bankruptcy has standing to 5
represent only the interests of the debtor corporation.’ 6
Our decision today goes no further than to say that causes 7
of action that could be asserted by the debtor are property 8
of the estate and should be asserted by the trustee.” St. 9
Paul, 884 F.2d at 702 n.3 (internal citation omitted) 10
(quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 11
754 F.2d 57, 62 n.4 (2d Cir. 1985)). As illustrated by St. 12
Paul, when a creditor seeks relief against third parties 13
that pushed the debtor into bankruptcy, the creditor is 14
asserting a derivative claim that arises from harm done to 15
the estate. Judge Posner described this distinction: 16
The point is simply that the trustee is confined 17
to enforcing entitlements of the corporation. He 18
has no right to enforce entitlements of a 19
creditor. He represents the unsecured creditors 20
of the corporation; and in that sense when he is 21
suing on behalf of the corporation he is really 22
suing on behalf of the creditors of the 23
corporation. But there is a difference between a 24
creditor’s interest in the claims of the 25
corporation against a third party, which are 26
enforced by the trustee, and the creditor’s own 27
direct--not derivative--claim against the third 28
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party, which only the creditor himself can 1
enforce. 2
3
Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994). 4
See generally Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 5
A.2d 772, 792 (Del. Ch. 2004). 6
• The customers’ claims against the Defendants are 7
not “common” or “general.” A debtor’s claim against a third 8
party is “general” if it seeks to augment the fund of 9
customer property and thus affects all creditors in the same 10
way. Picard, however, seeks to assert claims on behalf of 11
thousands of customers against third-party financial 12
institutions for their handling of individual investments 13
made on various dates in varying amounts. The Defendants’ 14
alleged wrongful acts, then, could not have harmed all 15
customers in the same way. 20
16
20 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.
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B 1
The Trustee attempts to blunt the force of Caplin and 2
its progeny by arguing that a SIPA liquidation is unique and 3
is therefore not controlled by precedent under the 4
bankruptcy code. He advances two theories for why a SIPA 5
trustee enjoys standing to assert third-party claims. 6
1 7
Picard contends that, for SIPA purposes, the customers 8
of a failed brokerage are bailors, and that he--acting as 9
bailee--“has a sufficient possessory interest to permit him 10
to ‘recover for the wrongful act of a third party resulting 11
in the loss of, or injury to, the subject of the bailment.’” 12
United States v. Perea, 986 F.2d 633, 640 (2d Cir. 1993) 13
(quoting Rogers v. Atl., Gulf & Pac. Co., 107 N.E. 661, 664 14
(N.Y. 1915)). We disagree. 15
First, the statute is not written or cast in terms of 16
bailment. “To the extent consistent with the provisions of 17
this chapter, a liquidation proceeding shall be conducted in 18
accordance with, and as though it were being conducted under 19
[the Bankruptcy Code].” 15 U.S.C. § 78fff(b). As a general 20
rule, SIPA vests trustees with “the same powers and title 21
with respect to the debtor and the property of the debtor 22
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. . . as a trustee in a case under Title 11.” 15 U.S.C. § 1
78fff-1(a). True, a SIPA trustee has some powers not 2
conferred on a trustee under Title 11. Most notably, SIPA 3
creates a fund of customer property that is separate from 4
the debtor estate and that has priority over other 5
creditors’ claims, and authorizes the trustee to ratably 6
distribute those funds based on customers’ net equity. See 7
15 U.S.C. § 78fff–2(c)(1)(B); In re Bernard L. Madoff 8
Investment Secs., 654 F.3d 229, 231 (2d Cir. 2011), cert. 9
denied, 133 S. Ct. 25 (2012). But the statute does not 10
confer upon SIPA trustees a power, denied all other 11
bankruptcy trustees, to sue third parties on claims that 12
belong to persons other than the estate. Nowhere does the 13
statute reference bailment, or characterize customers as 14
“bailors” or trustees as “bailees,” or in any way indicate 15
that the trustee is acting as bailee of customer property. 16
Picard alternatively invokes the principle of bailment 17
under the common law. This is dubious: courts are careful 18
to avoid overlaying common law principles onto a statutory 19
framework, even when (unlike here) the statute makes clear 20
reference to common law. See Moore v. PaineWebber, Inc., 21
189 F.3d 165, 179-80 (2d Cir. 1999) (“That the statute . . . 22
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borrow[s] in part from the common law should not mislead us: 1
it remains the statute and its purpose that governs.”). 2
This caution is especially apt here because the statute 3
creates a ramified scheme that makes no mention of common 4
law. 5
In any event, the analogy to the common law of bailment 6
is flawed from start to finish. A bailment is “a delivery 7
of personalty for some particular purpose, or on mere 8
deposit, upon a contract express or implied, that after the 9
purpose has been fulfilled it will be redelivered to the 10
person who delivered it, or otherwise dealt with according 11
to that person’s directions, or kept until it is reclaimed.” 12
9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (West 2013). 13
Even assuming that the customers’ investments could be 14
deemed bailed property, the only delivery that took place 15
was when customers made their investments, either in BLMIS 16
directly, or through the feeder funds. See Pattison v. 17
Hammerstein, 39 N.Y.S. 1039, 1040 (App. Div. 1st Dep’t 18
1896); see also United States v. $79,000 in Account No. 19
2168050/6749900 at Bank of N.Y., 96 CIV. 3493 (MBM), 1996 WL 20
648934, at *6 (S.D.N.Y. Nov. 7, 1996) (“Delivery to the 21
bailee is required to create a bailment.”). So: any 22
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supposed bailment pre-dated Picard’s appointment; he was not 1
entrusted with any customer property until after it had been 2
impaired; and he never had control over the missing funds 3
that he now seeks to recoup. He therefore is not the proper 4
party to bring such an action. See 9 N.Y. Jur. 2d Bailments 5
and Chattel Leases § 115 (West 2013) (explaining that bailee 6
may only “bring an action to recover for the loss of or 7
injury to the bailed property while in his or her 8
possession”). 21
9
Moreover, Picard is not seeking to recover specific 10
bailments for return to individual bailors. See 9 N.Y. Jur. 11
2d Bailments and Chattel Leases § 82 (West 2013) (“One of 12
the most important rights of the bailor is that, on the 13
termination of the bailment, the bailor will return to him 14
or her the identical thing bailed . . . .”). Unlike 15
“customer name securities,” which are separately held and 16
returned to individual customers outside the normal 17
distribution scheme, 22 Picard’s claims are intended to 18
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
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augment the general fund of customer property so that it can 1
be distributed ratably based on customers’ net equity. This 2
arrangement is not an analog to a bailment, in which the 3
bailee is entrusted with an item that is to be recovered by 4
the bailor at some later time. 5
SIPC urges that we view the transaction as though 6
BLMIS, not the Trustee, acted as the bailee of customer 7
property, and that the Trustee is simply acting on BLMIS’s 8
behalf to recover the bailed property. The short answer is 9
that Madoff (and, by extension, BLMIS) took the investment 10
money from the customers in order to defraud them--and a 11
thief is not a bailee of stolen property. See Pivar v. 12
Graduate Sch. of Figurative Art of the N.Y. Acad. of Art, 13
735 N.Y.S. 2d 522, 522 (App. Div. 1st Dep’t 2002) (holding 14
that a bailment relationship arises if the bailee takes 15
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

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“lawful possession” of property “without present intent to 1
appropriate”). 2
Madoff’s commingling of customer funds also defeats any 3
analogy to bailment. Notwithstanding Madoff’s pretense, he 4
failed to maintain customers’ investments in separate named 5
accounts. He deposited all customer funds into a general 6
account (the 703 Account) and distributed those new 7
investments to earlier customers in lieu of actual returns. 8
This arrangement, which enabled the fraud, made a bailment 9
impossible. See Peoples Westchester Sav. Bank v. F.D.I.C., 10
961 F.2d 327, 330 (2d Cir. 1992) (distinguishing special 11
accounts from general accounts); see also United States v. 12
Khan, No. 97-6083, 1997 WL 701366, at *2 (2d Cir. 1997) 13
(holding that a deposit into a general bank account 14
“destroys a potential bailment” under New York law). 23
15
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).
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SIPC attempts to obviate these difficulties by relying 1
on SEC Rule 15c, which establishes bookkeeping segregation 2
requirements for brokers. 17 C.F.R. § 240.15c3-3. Judge 3
Rakoff was “mystified” by this argument, Picard v. HSBC Bank 4
PLC, 454 B.R. 25, 32 (S.D.N.Y. 2011), as are we. 5
Rule 15c requires brokers to maintain a minimum cash 6
balance in a reserve account and segregate all such cash for 7
customers’ benefit. See 17 C.F.R. § 240.15c3-3. It also 8
“specifically contemplates the commingling of customer 9
monies and the lending of customer securities.” Levitin v. 10
PaineWebber, Inc., 159 F.3d 698, 706 (2d Cir. 1998). 11
Whatever Rule 15c may do, it does not confer power on a SIPA 12
trustee to sue on behalf of customers. First, the Rule is 13
not a part of SIPA. Second, such a rule would exceed the 14
scope of agency rule-making. See generally Alexander v. 15
Sandoval, 532 U.S. 275, 291 (2001) (“Language in a 16
regulation may invoke a private right of action that 17
Congress through statutory text created, but it may not 18
create a right that Congress has not.”). In any event, the 19
Rule does not suggest that the broker (or the Trustee) 20
serves as a bailee of customer property, or that the Trustee 21
may assert claims on behalf of customers. 22
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Finally, SIPC and the Trustee infer a bailment 1
relationship from federal common law and the Federal Rules 2
of Civil Procedure. The inferences are strained at best. 3
Federal common law, which does not speak to the powers of a 4
SIPA trustee, offers no useful insight. 24 Nor do the 5
Federal Rules of Civil Procedure. 25
6
2 7
The Trustee argues that, because SIPC advanced funds to 8
customers at the outset of the liquidation, SIPC is 9
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).
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subrogated to those customers’ claims against the 1
Defendants; SIPC therefore may assert those claims as 2
subrogee; and Picard is authorized to enforce that right on 3
SIPC’s behalf. But SIPC is a creature of statute, and 4
neither the plain language of the statute, nor its 5
legislative history, supports the Trustee’s position. 6
True, a SIPA trustee (unlike a trustee in bankruptcy), 7
advances money to pay claims. The statute takes this fact 8
into account by subrogating SIPC to customers’ net equity 9
claims to the extent of the advances they received. But it 10
goes no further. 11
The Trustee’s subrogation theory is premised in 12
§ 78fff-3(a): 13
To the extent moneys are advanced by SIPC to the 14
trustee to pay or otherwise satisfy the claims of 15
customers, in addition to all other rights it may 16
have at law or in equity, SIPC shall be subrogated 17
to the claims of such customers with the rights 18
and priorities provided in this chapter, except 19
that SIPC as subrogee may assert no claim against 20
customer property until after the allocation 21
thereof to customers as provided in section 78fff- 22
2(c) of this title. 23
24
15 U.S.C. § 78fff-3(a). It is undisputed that the phrase 25
“claims of customers” refers (as throughout the statute) to 26
customers’ net equity claims against the estate. See 27
generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 28
52

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229, 233 (2d Cir. 2011), cert. denied, 133 S. Ct. 25 (2012). 1
SIPA thus allows only a narrow right of subrogation--for 2
SIPC to assert claims against the fund of customer property 3
and thereby recoup any funds advanced to customers once the 4
SIPA trustee has satisfied those customers’ net equity 5
claims. 6
The Trustee urges us to conclude that § 78fff-3(a) does 7
more--much more--by creating a right of subrogation that 8
allows SIPC (and, by extension, the Trustee) to step into 9
customers’ shoes and to initiate and control litigation on 10
their behalf, against any number of defendants, until SIPC 11
has been repaid in full. As we emphasized earlier, SIPA 12
grants trustees the “same powers and title with respect to 13
the debtor and the property of the debtor” as a Title 11 14
trustee, 15 U.S.C. § 78fff-1(a), and the Supreme Court has 15
squarely rejected attempts by Title 11 trustees to capture 16
such litigation, see Caplin v. Marine Midland Grace Trust 17
Co., 406 U.S. 416, 428 (1972). As a final resort, the 18
Trustee relies on a catch-all provision included in the 1978 19
amendments to SIPA, which states that the subrogation rights 20
afforded by § 78fff-3(a) should not be read to diminish “all 21
other rights [SIPC] may have at law or in equity.” 15 22
53

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U.S.C. § 78fff-3(a). From here, the Trustee claims an 1
implied right of equitable subrogation, “the principle by 2
which an insurer, having paid losses of its insured, is 3
placed in the position of its insured so that it may recover 4
from the third party legally responsible for the loss.” 5
Winkelmann v. Excelsior Ins. Co., 650 N.E.2d 841, 843 (N.Y. 6
1995). He thus claims a wide grant of authority to initiate 7
class-action lawsuits and assert any number of tort claims 8
against third parties on customers’ behalf. 26 This is a 9
long, long reach. 10
There is no sign that Congress intended an expansive 11
increment of power to SIPA trustees. In 1973, the SIPC 12
chairman appointed a Special Task Force to consider possible 13
amendments to the 1970 Act. The resulting July 1974 report 14
separately listed its “major policy recommendations” and its 15
proposed “technical refinements.” See Report to the Board 16
of Directors of SIPC of the Special Task Force to Consider 17
Possible Amendments to SIPA, Letter of Transmittal (July 31, 18
1974). Recommendation II.A.9, deemed a “Major Policy 19
Recommendation,” states that “claims of SIPC as subrogee 20
(except as otherwise provided), should be allowable only as 21
26 We use the term “class-action lawsuits” loosely
here, without taking a position on the SLUSA question.
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claims against the general estate.” Id. at 12 (emphasis 1
added); see also SIPA Amendments of 1975: Hearings on H.R. 2
8064 Before the Subcomm. on Consumer Protection and Fin. of 3
the H. Comm. on Interstate and Foreign Commerce, 94th Cong. 4
64 (1976) (hereinafter “Hearings on H.R. 8064”). 5
Notably, Caplin was decided in 1972, before the Task 6
Force report and six years before Congress amended § 78fff- 7
3(a) to include “all other rights [SIPC] may have at law or 8
in equity.” If Congress sought to exempt SIPA trustees from 9
Caplin’s rule and expand SIPC’s subrogation rights to tort 10
actions against third parties, we would expect such intent 11
to be manifested in the statutory wording and in the 12
record. 27
13
The wording cited by Picard was proposed by SIPC itself 14
as a “Minor Substantive or Technical Amendment[]” in order 15
to “make clear that SIPC’s subrogation rights under the 1970 16
Act are cumulative with whatever rights it may have under 17
other State or Federal laws.” Hearings on H.R. 8064, 94th 18
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

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Cong. 197, 199 (1976) (Memorandum of the Securities Investor 1
Protection Corporation in Regard to Certain Comments 2
Concerning H.R. 8064). Congress “does not alter the 3
fundamental details of a regulatory scheme in vague terms or 4
ancillary provisions--it does not . . . hide elephants in 5
mouseholes.” Whitman v. Am. Trucking Assocs., Inc., 531 6
U.S. 457, 468 (2001). 7
The Trustee adduces rules of insurance law to justify 8
his claim, an analogy with some intuitive appeal: Principles 9
of equity generally permit subrogees wide scope to sue 10
third-party tortfeasors, a claim that arises most commonly 11
with insurance. See, e.g., Winkelmann, 650 N.E.2d at 843. 12
But this argument succumbs to the same critique as 13
Picard’s bailment theory: We avoid engrafting common law 14
principles onto a statutory scheme unless Congress’s intent 15
is manifest. See supra p. 46. The clearest Congressional 16
intent here is that we should treat SIPA as a bankruptcy 17
statute, not as an insurance scheme. “SIPA and FDIA are 18
independent statutory schemes, enacted to serve the unique 19
needs of the banking and securities industries, 20
respectively.” 28 SIPC v. Morgan, Kennedy & Co., 533 F.2d 21
28 Congress rejected some early versions of the SIPA
bill “which were patterned on FDIA and which extended
56

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1314, 1318 (2d Cir. 1976). We have since warned against 1
oversimplified comparisons between insurance law and federal 2
statutory law: “While this Court has referred to SIPC as 3
providing a form of public insurance, it is clear that the 4
obligations imposed on an insurance provider under state law 5
do not apply to this congressionally-created nonprofit 6
membership corporation.” In re Bernard L. Madoff Inv. Sec. 7
LLC, 654 F.3d 229, 239 (2d Cir. 2011), cert. denied, 133 S. 8
Ct. 25 (2012) (internal citations and quotation marks 9
omitted). 10
Relatedly, Picard argues under principles of equity 11
that unless he can spearhead the litigation on behalf of 12
defrauded customers, the victims will not be made whole, 13
SIPC will be unable to recoup its advances, and third-party 14
tortfeasors will reap windfalls. 29 No doubt, there are 15
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. 11-
CV-7961 (S.D.N.Y.). As in Redington, “the customers on
whose behalf the Trustee seeks to maintain suit are not only
57

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advantages to the course Picard wants to follow. But equity 1
has its limits; it may fill certain gaps in a statute, but 2
it should not be used to enlarge substantive rights and 3
powers. Cf. In re Ozark, 816 F.2d at 1230 (observing that 4
while Bankruptcy Code allows a court to apply equitable 5
principles when necessary, “[t]hese powers . . . do not 6
include the ability to award equitable relief where the 7
party asserting the cause of action for such relief does not 8
have standing under any other section of the Code”). 9
As the Supreme Court observed, “SIPC’s theory of 10
subrogation is fraught with unanswered questions.” Holmes 11
v. SIPC, 503 U.S. 258, 270 (1992) (ultimately declining to 12
decide subrogation issue and instead holding that link 13
between stock manipulation and harm to customers was too 14
remote to support SIPC’s RICO claim). As in Holmes, SIPC 15
has left courts “to guess at the nature of the ‘common law 16
rights of subrogation’ that it claims.” Id. at 271. 17
The practical skepticism voiced in Caplin in a 18
traditional bankruptcy context is justified here as well. 19
Would such suits prevent customers from “mak[ing] their own 20
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

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assessment of the respective advantages and disadvantages, 1
not only of litigation, but of various theories of 2
litigation”? Caplin, 406 U.S. at 431. Can a SIPA trustee 3
control customers’ claims against third parties if SIPC has 4
not fully satisfied the customers’ claims against the 5
estate? How would inconsistent judgments be avoided, given 6
that “independent actions are still likely because it is 7
extremely doubtful that [the parties] would agree on the 8
amount of damages to seek, or even on the theory on which to 9
sue”? Id. at 432. Who would be bound by a settlement 10
entered into by either the Trustee or by each customer who 11
brings suit? Id. The size and scope of the litigation here 12
only amplify these concerns. 13
As Caplin advises, it is better to leave these 14
intractable policy judgments to Congress: 15
Congress might well decide that reorganizations 16
have not fared badly in the 34 years since Chapter 17
X was enacted and that the status quo is 18
preferable to inviting new problems by making 19
changes in the system. Or, Congress could 20
determine that the trustee . . . was so well 21
situated for bringing suits . . . that he should 22
be permitted to do so. In this event, Congress 23
might also determine that the trustee’s action was 24
exclusive, or that it should be brought as a class 25
action on behalf of all [creditors], or perhaps 26
even that the [creditors] should have the option 27
of suing on their own or having the trustee sue on 28
their behalf. Any number of alternatives are 29
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available. Congress would also be able to answer 1
questions regarding subrogation or timing of law 2
suits before these questions arise in the context 3
of litigation. Whatever the decision, it is one 4
that only Congress can make. 5
Caplin, 406 U.S. at 434-35. 6
* * * 7
For the foregoing reasons, the judgments are affirmed. 8
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