UNITED STATES COURT OF APPEALS MANDATE SECOND

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 7Filed07/11/201307/11/13 Page98676810 of 63 601scheme, their banking fees gave incentive to look away, or2at least caused a failure to perform due diligence that3would have revealed the fraud.4for unjust enrichment, breach of fiduciary duty, aiding and5abetting fraud, and negligence, among others.6position is supported by the Securities Investor Protection7Corporation (“SIPC”), a statutorily created nonprofit8corporation consisting of registered broker-dealers and9members of national securities exchanges, which intervenedThe Trustee asserts claimsThe Trustee’s10to recover some or all of the approximately 800 million it11advanced to victims.12As we will explain, the doctrine of in pari delicto13bars the Trustee (who stands in Madoff’s shoes) from14asserting claims directly against the Defendants on behalf15of the estate for wrongdoing in which Madoff (to say the16least) participated.17unfounded, as SIPA provides no such right.18issue, then, is whether the Trustee has standing to pursue19the common law claims on behalf of Madoff’s customers.20thorough well-reasoned opinions by the district courts held21that he does not.22(S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase &23Co., 460 B.R. 84 (S.D.N.Y. 2011) (McMahon, J.).The claim for contribution is likewiseThe decisiveTwoSee Picard v. HSBC Bank PLC, 454 B.R. 25710 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 8Filed07/11/201307/11/13 Page98676811 of 63 601Our holding relies on a rooted principle of standing: A2party must “assert his own legal rights and interests, and3cannot rest his claim to relief on the legal rights or4interests of third parties.”5499 (1975).6consistently applied in the bankruptcy context to bar suits7brought by trustees on behalf of creditors.8Caplin v. Marine Midland Grace Trust Co., 406 U.S. 4169(1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d10Warth v. Seldin, 422 U.S. 490,This prudential limitation has beenSee, e.g.,114, 118 (2d Cir. 1991).11Picard offers two theories for why a SIPA liquidation12is a different creature entirely, and why therefore a SIPA13trustee enjoys third-party standing: (1) He is acting as a14bailee of customer property and therefore can pursue actions15on customers’ behalf to recover such property; and (2) he is16enforcing SIPC’s rights of equitable and statutory17subrogation to recoup funds advanced to Madoff’s customers.18Neither is compelling.19traditional bankruptcy, a SIPA trustee is vested with the20“same powers and title with respect to the debtor and the21property of the debtor . . . as a trustee in a case under22Title 11.”Although a SIPA liquidation is not a15 U.S.C. § 78fff-1(a).At best, SIPA is silent811 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 9Filed07/11/201307/11/13 Page98676812 of 63 601as to the questions presented here.2law of bailment and the law of subrogation are inapt and3unconvincing.1And analogies to the456BACKGROUNDIn December 2008, federal agents arrested Bernard L.7Madoff, who had conducted the largest Ponzi scheme yet8uncovered.9conversion strategy” that involved buying S&P 100 stocks andMadoff purported to employ a “split-strike10hedging through the use of options.11in no securities transactions at all.2In reality, he engaged121The Defendants also argue that the Trustee has notmet constitutional standing requirements, violates theSecurities Litigation Uniform Standards Act, and fails toplead with particularity SIPC’s purported subrogationclaims. Given our holding, we decline to address thesearguments.2Although Madoff simply appropriated his clients’money without ever purchasing securities on their behalf, wehave 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] thatclaimants who deposited cash with a broker for the purposeof purchasing securities, are treated as customers withclaims for securities. This is so because the criticalaspect of the ‘customer’ definition is the entrustment ofcash or securities to the broker-dealer for the purposes oftrading securities.”) (internal citations and quotationmarks omitted), cert. denied, 133 S. Ct. 25 (2012).912 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 10Filed 07/11/201307/11/13 Page98676813 of 63 601In March 2009, Madoff pleaded guilty to securities2fraud and admitted that he had used his brokerage firm,3Bernard L. Madoff Investment Securities LLC (“BLMIS”), as a4vast Ponzi scheme.5recounted many times.6Inv. Sec. LLC, 654 F.3d 229, 231-32 (2d Cir. 2011), cert.7denied, 133 S. Ct. 25 (2012); In re Bernard L. Madoff Inv.8Sec. LLC, 424 B.R. 122, 126–32 (Bankr. S.D.N.Y. 2010).9The details of Madoff’s fraud have beenSee, e.g., In re Bernard L. MadoffFollowing Madoff’s arrest, SIPC filed an application10under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS11required protection.12the firm’s Trustee and referred the case to the bankruptcy13court.14The district court appointed Picard asSIPA was enacted in 1970 to speed the distribution of15“customer property” back to investors following a firm’s16collapse.317separately from the general estate of the failed brokerage18firm.19to protect the securities market as a whole.”20L. Madoff Inv. Sec. LLC, 654 F.3d at 235.Customer property is cash and securities held“SIPA serves dual purposes: to protect investors, andIn re BernardA SIPA3For a succinct overview of the statute’s history, seeSecurities Investor Protection Corp. v. BDO Seidman, LLP, 49F. Supp. 2d 644, 649 (S.D.N.Y. 1999).1013 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 11Filed 07/11/201307/11/13 Page98676814 of 63 601liquidation confers priority on customer claims by an2expeditious alternative to a traditional bankruptcy3proceeding.4fund of customer property according to the customer’s “net5equity.”6Under SIPA, each customer shares ratably in theIf (as is often the case) the assets are not enough to7satisfy all net equity claims, SIPC advances money (up to8 500,000 per customer) to the SIPA trustee, who is charged9with assessing customer claims and making the ratable10distributions.11advanced approximately 800 million.12At the time of this appeal, SIPC hadA trustee also has authority to investigate the13circumstances surrounding the insolvency and to recover and14distribute any remaining funds to creditors.15that his investigation has uncovered evidence of wrongdoing16by third parties who aided and abetted Madoff, and seeks to17replenish the fund of customer property by taking action18against various financial institutions that serviced BLMIS.Picard alleges19Picard presses claims against JPMorgan Chase & Co., UBS20AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated21persons and entities.22summarized one by one.The allegations against each areWe distill the detailed allegations1114 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 12Filed 07/11/201307/11/13 Page98676815 of 63 601from the consolidated complaints, and recount only the2background needed to understand our analysis.3of the litigation, the allegations are assumed to be true.4See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir.52009).6JPMorgan.At this stageMadoff maintained a checking account at7JPMorgan Chase & Co. (“JPMorgan”)4 for more than twenty8years, beginning in 1986.9bankruptcy, JPMorgan collected an estimated half billionIn the years prior to BLMIS’s10dollars in fees, interest payments, and revenue from BLMIS.11The Trustee alleges that JPMorgan was “at the very center”12of Madoff’s fraud and was “thoroughly complicit” in it.13662 ¶ 1.514Account,” was where hundreds of billions of dollars of15customer money were “commingled and ultimately washed.”16663 ¶ 2.17for “split-strike” securities transactions were instead18funneled to other customers to sustain the illusion of large19and reliable returns on investment.AMadoff’s primary account with JPMorgan, the “703AThe customer funds deposited into the 703 Account4Throughout this brief, “JPMorgan” refers to the fourJPMorgan defendants: JPMorgan Chase & Co., JPMorgan ChaseBank, N.A., J.P. Morgan Securities LLC, and J.P. MorganSecurities Ltd.5Record citations refer to the joint appendix filed inthe action under discussion.1215 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 13Filed 07/11/201307/11/13 Page98676816 of 63 601The 703 Account was a retail checking account, not a2commercial account.3investors were deposited without being segregated or4transferred to separate sub-accounts.5exhibited, on their face, a “glaring absence of securities6activity.”7million-dollar checks and wire transfers having no apparent8business purpose were exchanged between Madoff and his close9friend, Norman Levy (now dead).Billions of dollars from thousands ofA 714 ¶ 190.These accountsAt the same time, numerous multi-10In 2006, due diligence conducted by JPMorgan revealed11strong and steady yields by Madoff’s feeder funds during a12time when the S&P 100 dropped thirty percent.13manager later acknowledged, that was too good to be true.14In June 2007, JPMorgan’s Chief Risk Officer John Hogan15learned at a lunch with JPMorgan money manager Matt Zames16that “there is a well-known cloud over the head of Madoff17and that his returns are speculated to be part of a [P]onzi18scheme.”19a Google search on Madoff, and made no further inquiries20when the search yielded no hard evidence.2122A 695 ¶ 119.As one moneyHogan asked a junior analyst to runFaced with “numerous indications of Madoff’s fraud,” inthe fall of 2008 JPMorgan redeemed 276 million of its1316 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 14Filed 07/11/201307/11/13 Page98676817 of 63 601investments in Madoff’s feeder funds.2710 ¶ 178.3other investors.4put an end to Madoff’s fraud, it quietly continued5collecting its large fees.6A 705 ¶¶ 156-60; ABut the company failed to tip off regulators orThough JPMorgan was uniquely positioned toUBS and Access.Defendants UBS AG6 (“UBS”) and Access7International Advisors LLC7 (“Access”) are sued for aiding8and abetting Madoff’s fraud by creating feeder funds and9collecting investments from abroad.UBS acted as sponsor,10manager, administrator, custodian, and primary banker of the11funds.12facilitated investments in BLMIS, despite clear indicia of13fraud.14legitimize and attract money to Madoff’s fraud,” but UBSUBS reaped at least 80 million in fees as itThe “prestigious name” of UBS was used “to6“UBS” includes UBS AG, UBS (Luxembourg) S.A., UBSFund Services (Luxembourg) S.A., UBS Third Party ManagementCompany 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, AccessInternational Advisors Ltd., Access Partners (Suisse) S.A.,Access Management Luxembourg S.A., Access Partners S.A.,Patrick Littaye, Claudine Magnon de la Villehuchet (in hercapacities as Executrix and sole beneficiary of the Will ofThierry Magnon de la Villehuchet), Pierre Delandmeter, andTheodore Dumbauld. The Trustee also sues feeder fundscreated by UBS and Access such as Defendants Luxalpha SICA Vand Groupement.1417 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 15Filed 07/11/201307/11/13 Page98676818 of 63 601agreed to “look the other way and to pretend that they were2truly ensuring the existence of assets and trades when in3fact they were not and never did.”4A 916 ¶ 5.UBS observed but ignored Madoff’s lack of transparency5and his uncanny ability to generate consistently high6returns, except insofar as UBS declined to invest its own7money in BLMIS or endorse Madoff’s funds to its clients.8In 2009, the Luxembourg regulator, the Commission de9Surveillance du Secteur Financier, indicated that the10failure of UBS to identify Madoff as a possible fraud was a11violation of Luxembourg law.12Access was also alerted to Madoff’s suspicious13investment activities.14became worried about the volume of options trades being15reported by Madoff, and hired an independent consultant to16investigate.17possibly have executed the volume of options or equities18trades he reported, and that his trading revealed “either19extremely sloppy errors or serious omissions” that suggest20he “doesn’t really understand the costs of the option21strategy.”22concealed the consultant’s findings and continued activeIn 2006, internal managers at AccessThe consultant concluded that Madoff could notA 977 ¶ 218 (emphasis removed).Access1518 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 16Filed 07/11/201307/11/13 Page98676819 of 63 601recruitment of investors for Madoff’s feeder funds in order2to keep churning its fees.3Unicredit.Madoff’s fraud drew billions from abroad.4With the help of UniCredit Bank Austria AG (“Bank Austria”)5and 20:20 Medici AG (“Bank Medici”), one Sonja Kohn6established several Madoff feeder funds (the “Medici7Funds”).8BLMIS.9Alternative Investment Management Limited (“Pioneer”) andTogether, they funneled nearly 3 billion intoUniCredit S.p.A. and its two subsidiaries, Pioneer10Bank Austria (collectively, the “UniCredit entities”),11helped to promote the Medici Funds and thereby facilitated12the fraud.13The UniCredit entities and their affiliates made a lot14of money servicing the Medici funds: Bank Medici took more15than 15 million in fees; and BA Worldwide, more than 6816million.17Madoff’s returns were highly suspicious, and that the extent18of BLMIS’s trading activities was facially impossible.19they continued to aggressively market the Madoff feeder20funds to new customers while purporting to provide21oversight.22entities were Madoff’s failure to identify counterparties toThe UniCredit entities were well aware thatYetAmong the signs overlooked by the UniCredit1619 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 17Filed 07/11/201307/11/13 Page98676820 of 63 601BLMIS’s options transactions, BLMIS’s atypical fee2structure, and Madoff’s impossibly high volume of3transactions.4research analyst at Pioneer wrote, “[w]e should be the5professionals protecting investors from this fraud . . .6[but] there is not one [due diligence] report in the files7except for one in May 2005.”8original).9HSBC.Shortly after Madoff’s arrest, a seniorA 136 ¶ 314 (brackets inHSBC Bank plc (“HSBC”)8 established Madoff10feeder funds (at least eighteen in seven different11countries) that injected capital into the Ponzi scheme while12ignoring obvious warning signs.13administrator of the funds, HSBC was required to hold the14fund assets and handle day-to-day operations.15created derivative products, such as notes and swaps, to16increase the flow of investment.As custodian andHSBC alsoThese funds fed at least8The HSBC Defendants include HSBC Bank plc, HSBCHoldings plc, HSBC Securities Services (Luxembourg) S.A.,HSBC Institutional Trust Services (Ireland) Limited, HSBCSecurities Services (Ireland) Limited, HSBC InstitutionalTrust Services (Bermuda) Limited, HSBC Bank USA, N.A., HSBCSecurities Services (Bermuda) Limited, HSBC Bank (Cayman)Limited, HSBC Private Banking Holdings (Suisse) S.A., HSBCPrivate Bank (Suisse) S.A., HSBC Fund Services (Luxembourg)S.A., and HSBC Bank Bermuda Limited.1720 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 18Filed 07/11/201307/11/13 Page98676821 of 63 601 8.9 billion into Madoff’s scheme, a sum representing nearly2forty percent of BLMIS’s capital under management.3HSBC represented to customers that it exercised4supervision and control over fund assets, whereas BLMIS5itself took the role of custodian.6oversight diligently, it would have seen thousands of7instances in which Madoff’s purported trades exceeded the8total market volume of such trades on the given day.9Repeatedly, industry analysts and HSBC’s own due diligenceHad HSBC performed10team openly questioned Madoff’s extraordinary success, lack11of transparency, and incredible trading volume.12In September 2005, HSBC commissioned KPMG LLP to detect13potential fraud in BLMIS’s operations.142006 and 2008 warned that BLMIS’s role as custodian of its15own funds posed a risk that the trades were “a sham in order16to divert client cash.”17continued to “enable[]” Madoff in order to reap a windfall.18A 35 ¶ 1.19funds, management companies, and service providers that, to20unsuspecting outsiders, seemed to compose a formidable21system of checks and balances,” yet, in reality, “it22provided different modes for directing money to Madoff while23avoiding scrutiny and maximizing fees.”A 89 ¶ 168.Resulting reports inNonetheless, HSBCIn sum, HSBC “engineered a labyrinth of hedgeA 36 ¶ 4.1821 of 63

Case:Case11-50441:11-cv-00913-CMDocument: 173-2DocumentPage:77 19Filed 07/11/201307/11/13 Page98676822 of 63 601Procedural History.On July 15, 2009, the Trustee2commenced an adversary proceeding in the United States3Bankruptcy Court for the Southern District of New York4against HSBC and thirty-six others, including UniCredit and5Pioneer.96billion in preferential or fraudulent transfers (Counts 17through 19), and asserted four common law

21 ubs fund services (luxembourg) sa, access international . 38 financier ltd., ubs ag, ubs (luxembourg) sa, maitre alain 39 rukavina, in his capacity as liquidator and representative . (cayman) limited, hsbc securities services (bermuda) 11 limited, hsbc bank usa, n.a., hsbc institutional trust .