Second Circuit Restricts Ability of SIPA Trustee to Bring Common Law Claims Against Third Parties

By Christian Sheehan

In its latest decision arising out of the Bernard Madoff Ponzi scheme, the Second Circuit recently held in In re Bernard L. Madoff Investment Securities LLC that the trustee responsible for liquidating Madoff’s investment firm (BLMIS) under the Securities Investor Protection Act was barred from asserting tort claims against financial institutions that allegedly aided and abetted Madoff’s scheme.  Affirming the decisions of two district court judges, the Second Circuit explained that the trustee could not bring claims on behalf of BLMIS itself, nor could he sue on behalf of the firm’s former customers.

The Court held that the claims asserted on behalf of BLMIS were barred by the doctrine of in pari delicto because the trustee stood in the shoes of the firm and therefore could not bring suit against third parties for participating in a fraud that BLMIS orchestrated.  The Court further held that the trustee lacked standing to assert claims on behalf of BLMIS’s customers, reasoning that like a bankruptcy trustee, a SIPA trustee may not sue on behalf of the estate’s creditors.

The Second Circuit’s decision will have a significant impact on future SIPA liquidations as it clarifies the scope of a SIPA trustee’s rights to bring tort claims against third parties, and makes clear that a SIPA trustee is governed by the same standing rules that have long-applied to bankruptcy trustees.

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