In the News Law360

Madoff Feeder Funds Seek Bankruptcy Suit Removal

Two alleged feeder funds of Bernard L. Madoff's Ponzi scheme asked a New York federal judge Monday to remove suits lodged by the trustee overseeing liquidation of Madoff's firm from bankruptcy court, saying the suits raise securities issues that belong in district court.

The Primeo Fund and the Herald Fund, affiliates of HSBC PLC unit HSBC Securities Services Luxembourg SA, argue that claims lodged by Irving H. Picard that they profited from Madoff's scam raise questions that require interpretations of the Securities Investor Protection Act — a nonbankruptcy securities statute — and its interaction with the U.S. Bankruptcy Code.

Ultimately, the funds intend to move to dismiss the suits, claiming they are innocent investors who don't have a retroactive duty to investigate potential fraud carried out by Madoff, as Picard has alleged. According to Herald's removal request, Picard is seeking to recover more than $578 million from the fund, which claims it lost $1.1 billion in Madoff's Ponzi scheme.

Counsel for Picard declined comment Tuesday.

Primeo and Herald had accounts with Bernard L. Madoff Investment Securities LLC through HSBC's Luxembourg unit, which acted as custodian of their accounts. Herald said it invested more than $1.7 billion with Madoff. Primeo invested more than $370 billion with Madoff, according to the suit Picard lodged against HSBC, Primeo, Herald and 10 other feeder funds in New York bankruptcy court in December, seeking to recover $9 billion.

Among Picard's claims is that the SIPA imposes a "retroactive due diligence duty" on investors to investigate potential fraud carried out by their brokers.

"The existence of this so-called duty is contrary to federal securities laws, and is wholly unsupported by SIPA, the very statute upon which the trustee relies," attorneys for the Primeo Fund wrote in their removal request on Monday. "Undoubtedly, the resolution of this issue will involve significant interpretation of SIPA, which requires adjudication by an Article III judge."

Other Madoff-related suits that have been bumped to district court include a racketeering case of potentially $60 billion against Austrian financier Sonja Kohn and UniCredit SpA, and a multibillion-dollar case against HSBC Bank and JPMorgan Chase & Co.

Picard has lodged hundreds of suits in bankruptcy court against investors and other parties associated with the Madoff scheme as part of the recovery effort.

Counsel for the funds could not be immediately reached for comment Tuesday.

The Primeo Fund is represented by Gary S. Lee, Joel C. Haims, LaShann M. DeArcy, Angela T. Rella and Michael Gerard of Morrison & Foerster LLP.

The Herald Fund is represented by Joseph Serino Jr., Jay P. Lefkowitz and David S. Flugman of Kirkland & Ellis LLP.

Picard is represented by Baker Hostetler.

The cases are Irving H. Picard v. Alpha Prime Fund Limited et al., case numbers 1:11-cv-06541 and 1:11-cv-06524, in the U.S. District Court for the Southern District of New York.