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Madoff victims Common Law Fraud Recovery from Banks is Barred

Madoff victims Common Law Fraud Recovery from Banks is Barred

The bankruptcy trustee recovering funds for victims of Bernard Madoff has been hit with a significantly adverse ruling. (Case 1:11-cv-00763-JSR Document 40, Filed 07/28/11)

The ruling by U.S. District Judge Rakoff bars Picard from pursuing $8.6 billion in common law fraud claims against several banks, while allowing about $2 billion in claims under bankruptcy law.  It appears the Judge found that Picard didn’t have standing to assert the common law claims on behalf of Madoff’s investors, only on Madoff’s now defunct company.   Thus, Picard can’t sue on behalf of Madoff’s former company; because of the Company’s own wrongdoing and the doctrine of in pari delicto.

I would expect that the ruling will significantly hamper efforts of the liquidators acting on behalf of companies to recover funds, but may not hamper the claims of individual victims assembled outside the boundaries of the company.  Expect other banks fighting fraud claims to cite this ruling from memory.

While I understand the reasoning — it still does not excuse the blind eye many banks cast on the activities of Madoff and many, many others.  When either incompetence or willful ignorance can be demonstrated, banks should be expected to account for their actions which aiding and abet fraud.

I am curious to get our learned readers feedback on this decision.

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