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

 1                    UNITED STATES COURT OF APPEALS
 2
 3                        FOR THE SECOND CIRCUIT
 4
 5                          August Term, 2012
 6
 7
 8     (Argued: November 21, 2012          Decided: June 20, 2013)
 9
10                         Docket Nos. 11-5044
11                                     11-5051
12                                     11-5175
13                                     11-5207
14
15   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
16
17   IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC.
18
19   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
20
21   IRVING H. PICARD,
22
23                  Plaintiff-Appellant,
24
25            - v.-
26
27   JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A., J.P. MORGAN
28   SECURITIES LLC, J.P. MORGAN SECURITIES LTD.,
29
30                  Defendants-Appellees,
31
32            and
33
34   SECURITIES INVESTOR PROTECTION CORPORATION,
35
36                  Intervenor.
37
38   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
39
 1   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
 2
 3   IN RE: BERNARD L. MADOFF INVESTMENT SECURITIES LLC,
 4
 5                  Debtor.
 6
 7   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
 8
 9   IRVING H. PICARD,
10
11                  Plaintiff-Appellant,
12
13            and
14
15   SECURITIES INVESTOR PROTECTION CORPORATION,
16
17                  Intervenor,
18
19            - v.-
20
21   UBS FUND SERVICES (LUXEMBOURG) SA, ACCESS INTERNATIONAL
22   ADVISORS LLC, ACCESS INTERNATIONAL ADVISORS EUROPES LIMITED,
23   ACCESS INTERNATIONAL ADVISORS LTD., ACCESS PARTNERS (SUISSE)
24   SA, ACCESS MANAGEMENT LUXEMBOURG SA, as represented by its
25   Liquidator MAITRE FERDINAND ENTRINGER, FKA ACESS
26   INTERNATIONAL ADVISORS LUXEMBOURG SA, ACCESS PARTNERS SA, as
27   represented by its Liquidator MAITRE FERDINAND ENTRINGER,
28   PATRICK LITTAYE, CLAUDINE MAGON DE LA VILLEHUCHET, in her
29   capacity as Executrix under the WILL OF THIERRY MAGON DE LA
30   VILLEHUCHET (AKA Rene Thierry de la Villehuchet),
31   individually and as the sole beneficiary under the WILL OF
32   THIERRY MAGON DE LA VILLEHUCHET (AKA Rene Thierry de la
33   Villehuchet), AKA CLAUDINE DE LA VILLEHUCHET, PIERRE
34   DELANDMETER, THEODORE DUMBAULD, LUXALPHA SICA V, as
35   represented by its Liquidators MAITRE ALAIN RUKAVINA and
36   PAUL LAPLUME, ROGER HARTMANN, RALF SHROETER, RENE EGGER,
37   ALAIN HONDEQUIN, HERMANN KRANZ, BERNARD STIEHL, GROUPEMENT
38   FINANCIER LTD., UBS AG, UBS (LUXEMBOURG) SA, MAITRE ALAIN
39   RUKAVINA, in his capacity as liquidator and representative
40   of LUXALPHA SICA V, PAUL LAPLUME, in his capacity as
41   liquidator and representative of LUXALPHA SICA V, UBS THIRD
42   PARTY MANAGEMENT COMPANY SA,
43
44                  Defendants-Appellees.

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

                                   3
 1   IRVING H. PICARD,
 2
 3                 Plaintiff-Appellant,
 4
 5             - v.-
 6
 7   HSBC BANK PLC, HSBC SECURITIES SERVICES (LUXEMBOURG) S.A.,
 8   HSBC BANK BERMUDA LIMITED, HSBC PRIVATE BANK (SUISSE) S.A.,
 9   HSBC PRIVATE BANKING HOLDINGS (SUISSE) S.A., HSBC BANK
10   (CAYMAN) LIMITED, HSBC SECURITIES SERVICES (BERMUDA)
11   LIMITED, HSBC BANK USA, N.A., HSBC INSTITUTIONAL TRUST
12   SERVICES (BERMUDA) LIMITED, HSBC SECURITIES SERVICES
13   (IRELAND) LIMITED, HSBC INSTITUTIONAL TRUST SERVICES
14   (IRELAND) LIMITED, HSBC HOLDINGS PLC, HSBC FUND SERVICES
15   (LUXEMBOURG) S.A.,
16
17                 Defendants-Appellees,
18
19   SECURITIES INVESTOR PROTECTION CORPORATION,
20
21                 Intervenor.
22
23   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
24
25       Before:         JACOBS, Chief Judge, WINTER and CARNEY,
26                       Circuit Judges.
27
28       A trustee appointed pursuant to the Securities Investor

29   Protection Act appeals from the dismissal of his claims

30   brought on behalf of the debtor and the debtor’s customers,

31   asserting that various financial institutions and other

32   defendants aided and abetted the debtor’s fraud.   The United

33   States District Court for the Southern District of New York

34   (McMahon and Rakoff, JJ.) held that the claims were barred

35   by the doctrine of in pari delicto and that the trustee

36   lacked standing to pursue claims on behalf of customers.      We

37   affirm.

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

27       Irving Picard (“Picard” or the “Trustee”) sues in his

28   capacity as Trustee under the Securities Investor Protection

29   Act (“SIPA”) on behalf of victims in the multi-billion-

30   dollar Ponzi scheme worked by Bernard Madoff.      The four

31   actions presently before this Court allege that numerous

32   major financial institutions aided and abetted the fraud,

33   collecting steep fees while ignoring blatant warning signs.

34   In summary, the complaints allege that, when the Defendants

35   were confronted with evidence of Madoff’s illegitimate


                                    6
1    scheme, their banking fees gave incentive to look away, or

2    at least caused a failure to perform due diligence that

3    would have revealed the fraud.    The Trustee asserts claims

4    for unjust enrichment, breach of fiduciary duty, aiding and

5    abetting fraud, and negligence, among others.    The Trustee’s

6    position is supported by the Securities Investor Protection

7    Corporation (“SIPC”), a statutorily created nonprofit

8    corporation consisting of registered broker-dealers and

9    members of national securities exchanges, which intervened

10   to recover some or all of the approximately $800 million it

11   advanced to victims.

12       As we will explain, the doctrine of in pari delicto

13   bars the Trustee (who stands in Madoff’s shoes) from

14   asserting claims directly against the Defendants on behalf

15   of the estate for wrongdoing in which Madoff (to say the

16   least) participated.   The claim for contribution is likewise

17   unfounded, as SIPA provides no such right.    The decisive

18   issue, then, is whether the Trustee has standing to pursue

19   the common law claims on behalf of Madoff’s customers.       Two

20   thorough well-reasoned opinions by the district courts held

21   that he does not.   See Picard v. HSBC Bank PLC, 

22   (S.D.N.Y. 2011) (Rakoff, J.); Picard v. JPMorgan Chase &

23   Co., 

 (S.D.N.Y. 2011) (McMahon, J.).

                                   7
1        Our holding relies on a rooted principle of standing: A

2    party must “assert his own legal rights and interests, and

3    cannot rest his claim to relief on the legal rights or

4    interests of third parties.”     Warth v. Seldin, 

,

5    499 (1975).    This prudential limitation has been

6    consistently applied in the bankruptcy context to bar suits

7    brought by trustees on behalf of creditors.     See, e.g.,

8    Caplin v. Marine Midland Grace Trust Co., 

9    (1972); Shearson Lehman Hutton, Inc. v. Wagoner, 

   114, 118 (2d Cir. 1991).

11       Picard offers two theories for why a SIPA liquidation

12   is a different creature entirely, and why therefore a SIPA

13   trustee enjoys third-party standing: (1) He is acting as a

14   bailee of customer property and therefore can pursue actions

15   on customers’ behalf to recover such property; and (2) he is

16   enforcing SIPC’s rights of equitable and statutory

17   subrogation to recoup funds advanced to Madoff’s customers.

18   Neither is compelling.     Although a SIPA liquidation is not a

19   traditional bankruptcy, a SIPA trustee is vested with the

20   “same powers and title with respect to the debtor and the

21   property of the debtor . . . as a trustee in a case under

22   Title 11.”    15 U.S.C. § 78fff-1(a).   At best, SIPA is silent



                                     8
1    as to the questions presented here.    And analogies to the

2    law of bailment and the law of subrogation are inapt and

3    unconvincing.1

4

5                              BACKGROUND

6        In December 2008, federal agents arrested Bernard L.

7    Madoff, who had conducted the largest Ponzi scheme yet

8    uncovered.   Madoff purported to employ a “split-strike

9    conversion strategy” that involved buying S&P 100 stocks and

10   hedging through the use of options.    In reality, he engaged

11   in no securities transactions at all.2

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,
     

, 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, 

 (2012).
                                   9
1        In March 2009, Madoff pleaded guilty to securities

2    fraud and admitted that he had used his brokerage firm,

3    Bernard L. Madoff Investment Securities LLC (“BLMIS”), as a

4    vast Ponzi scheme.       The details of Madoff’s fraud have been

5    recounted many times.       See, e.g., In re Bernard L. Madoff

6    Inv. Sec. LLC, 

, 231-32 (2d Cir. 2011), cert.

7    denied, 

 (2012); In re Bernard L. Madoff Inv.

8    Sec. LLC, 

, 126–32 (Bankr. S.D.N.Y. 2010).

9        Following Madoff’s arrest, SIPC filed an application

10   under SIPA, 15 U.S.C. § 78eee(a)(4)(B), asserting that BLMIS

11   required protection.       The district court appointed Picard as

12   the firm’s Trustee and referred the case to the bankruptcy

13   court.

14       SIPA was enacted in 1970 to speed the distribution of

15   “customer property” back to investors following a firm’s

16   collapse.3      Customer property is cash and securities held

17   separately from the general estate of the failed brokerage

18   firm.       “SIPA serves dual purposes: to protect investors, and

19   to protect the securities market as a whole.”       In re Bernard

20   L. Madoff Inv. Sec. LLC, 654 F.3d at 235.       A SIPA


             3
            For a succinct overview of the statute’s history, see
     Securities Investor Protection Corp. v. BDO Seidman, LLP, 

, 649 (S.D.N.Y. 1999).
                                       10
1    liquidation confers priority on customer claims by an

2    expeditious alternative to a traditional bankruptcy

3    proceeding.   Under SIPA, each customer shares ratably in the

4    fund of customer property according to the customer’s “net

5    equity.”

6        If (as is often the case) the assets are not enough to

7    satisfy all net equity claims, SIPC advances money (up to

8    $500,000 per customer) to the SIPA trustee, who is charged

9    with assessing customer claims and making the ratable

10   distributions.   At the time of this appeal, SIPC had

11   advanced approximately $800 million.

12       A trustee also has authority to investigate the

13   circumstances surrounding the insolvency and to recover and

14   distribute any remaining funds to creditors.    Picard alleges

15   that his investigation has uncovered evidence of wrongdoing

16   by third parties who aided and abetted Madoff, and seeks to

17   replenish the fund of customer property by taking action

18   against various financial institutions that serviced BLMIS.

19       Picard presses claims against JPMorgan Chase & Co., UBS

20   AG, UniCredit Bank Austria AG, HSBC Bank plc, and affiliated

21   persons and entities.    The allegations against each are

22   summarized one by one.    We distill the detailed allegations



                                    11
1    from the consolidated complaints, and recount only the

2    background needed to understand our analysis.    At this stage

3    of the litigation, the allegations are assumed to be true.

4    See Selevan v. N.Y. Thruway Auth., 

, 88 (2d Cir.

5    2009).

6        JPMorgan.    Madoff maintained a checking account at

7    JPMorgan Chase & Co. (“JPMorgan”)4 for more than twenty

8    years, beginning in 1986.    In the years prior to BLMIS’s

9    bankruptcy, JPMorgan collected an estimated half billion

10   dollars in fees, interest payments, and revenue from BLMIS.

11   The Trustee alleges that JPMorgan was “at the very center”

12   of Madoff’s fraud and was “thoroughly complicit” in it.      A

13   662 ¶ 1.5   Madoff’s primary account with JPMorgan, the “703

14   Account,” was where hundreds of billions of dollars of

15   customer money were “commingled and ultimately washed.”      A

16   663 ¶ 2.    The customer funds deposited into the 703 Account

17   for “split-strike” securities transactions were instead

18   funneled to other customers to sustain the illusion of large

19   and reliable returns on investment.

          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
1        The 703 Account was a retail checking account, not a

2    commercial account.     Billions of dollars from thousands of

3    investors were deposited without being segregated or

4    transferred to separate sub-accounts.        These accounts

5    exhibited, on their face, a “glaring absence of securities

6    activity.”     A 714 ¶ 190.     At the same time, numerous multi-

7    million-dollar checks and wire transfers having no apparent

8    business purpose were exchanged between Madoff and his close

9    friend, Norman Levy (now dead).

10       In 2006, due diligence conducted by JPMorgan revealed

11   strong and steady yields by Madoff’s feeder funds during a

12   time when the S&P 100 dropped thirty percent.        As one money

13   manager later acknowledged, that was too good to be true.

14   In June 2007, JPMorgan’s Chief Risk Officer John Hogan

15   learned at a lunch with JPMorgan money manager Matt Zames

16   that “there is a well-known cloud over the head of Madoff

17   and that his returns are speculated to be part of a [P]onzi

18   scheme.”     A 695 ¶ 119.     Hogan asked a junior analyst to run

19   a Google search on Madoff, and made no further inquiries

20   when the search yielded no hard evidence.

21       Faced with “numerous indications of Madoff’s fraud,” in

22   the fall of 2008 JPMorgan redeemed $276 million of its



                                        13
1    investments in Madoff’s feeder funds.     A 705 ¶¶ 156-60; A

2    710 ¶ 178.   But the company failed to tip off regulators or

3    other investors.   Though JPMorgan was uniquely positioned to

4    put an end to Madoff’s fraud, it quietly continued

5    collecting its large fees.

6        UBS and Access.   Defendants UBS AG6 (“UBS”) and Access

7    International Advisors LLC7 (“Access”) are sued for aiding

8    and abetting Madoff’s fraud by creating feeder funds and

9    collecting investments from abroad.     UBS acted as sponsor,

10   manager, administrator, custodian, and primary banker of the

11   funds.   UBS reaped at least $80 million in fees as it

12   facilitated investments in BLMIS, despite clear indicia of

13   fraud.   The “prestigious name” of UBS was used “to

14   legitimize and attract money to Madoff’s fraud,” but UBS

          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
1    agreed to “look the other way and to pretend that they were

2    truly ensuring the existence of assets and trades when in

3    fact they were not and never did.”     A 916 ¶ 5.

4        UBS observed but ignored Madoff’s lack of transparency

5    and his uncanny ability to generate consistently high

6    returns, except insofar as UBS declined to invest its own

7    money in BLMIS or endorse Madoff’s funds to its clients.

8    In 2009, the Luxembourg regulator, the Commission de

9    Surveillance du Secteur Financier, indicated that the

10   failure of UBS to identify Madoff as a possible fraud was a

11   violation of Luxembourg law.

12       Access was also alerted to Madoff’s suspicious

13   investment activities.     In 2006, internal managers at Access

14   became worried about the volume of options trades being

15   reported by Madoff, and hired an independent consultant to

16   investigate.     The consultant concluded that Madoff could not

17   possibly have executed the volume of options or equities

18   trades he reported, and that his trading revealed “either

19   extremely sloppy errors or serious omissions” that suggest

20   he “doesn’t really understand the costs of the option

21   strategy.”     A 977 ¶ 218 (emphasis removed).   Access

22   concealed the consultant’s findings and continued active


                                     15
1    recruitment of investors for Madoff’s feeder funds in order

2    to keep churning its fees.

3        Unicredit.     Madoff’s fraud drew billions from abroad.

4    With the help of UniCredit Bank Austria AG (“Bank Austria”)

5    and 20:20 Medici AG (“Bank Medici”), one Sonja Kohn

6    established several Madoff feeder funds (the “Medici

7    Funds”).     Together, they funneled nearly $3 billion into

8    BLMIS.     UniCredit S.p.A. and its two subsidiaries, Pioneer

9    Alternative Investment Management Limited (“Pioneer”) and

10   Bank Austria (collectively, the “UniCredit entities”),

11   helped to promote the Medici Funds and thereby facilitated

12   the fraud.

13       The UniCredit entities and their affiliates made a lot

14   of money servicing the Medici funds: Bank Medici took more

15   than $15 million in fees; and BA Worldwide, more than $68

16   million.     The UniCredit entities were well aware that

17   Madoff’s returns were highly suspicious, and that the extent

18   of BLMIS’s trading activities was facially impossible.        Yet

19   they continued to aggressively market the Madoff feeder

20   funds to new customers while purporting to provide

21   oversight.     Among the signs overlooked by the UniCredit

22   entities were Madoff’s failure to identify counterparties to


                                     16
1    BLMIS’s options transactions, BLMIS’s atypical fee

2    structure, and Madoff’s impossibly high volume of

3    transactions.   Shortly after Madoff’s arrest, a senior

4    research analyst at Pioneer wrote, “[w]e should be the

5    professionals protecting investors from this fraud . . .

6    [but] there is not one [due diligence] report in the files

7    except for one in May 2005.”   A 136 ¶ 314 (brackets in

8    original).

9        HSBC.    HSBC Bank plc (“HSBC”)8 established Madoff

10   feeder funds (at least eighteen in seven different

11   countries) that injected capital into the Ponzi scheme while

12   ignoring obvious warning signs.     As custodian and

13   administrator of the funds, HSBC was required to hold the

14   fund assets and handle day-to-day operations.     HSBC also

15   created derivative products, such as notes and swaps, to

16   increase the flow of investment.     These funds fed at least



          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
1    $8.9 billion into Madoff’s scheme, a sum representing nearly

2    forty percent of BLMIS’s capital under management.

3        HSBC represented to customers that it exercised

4    supervision and control over fund assets, whereas BLMIS

5    itself took the role of custodian.      Had HSBC performed

6    oversight diligently, it would have seen thousands of

7    instances in which Madoff’s purported trades exceeded the

8    total market volume of such trades on the given day.

9    Repeatedly, industry analysts and HSBC’s own due diligence

10   team openly questioned Madoff’s extraordinary success, lack

11   of transparency, and incredible trading volume.

12       In September 2005, HSBC commissioned KPMG LLP to detect

13   potential fraud in BLMIS’s operations.      Resulting reports in

14   2006 and 2008 warned that BLMIS’s role as custodian of its

15   own funds posed a risk that the trades were “a sham in order

16   to divert client cash.”   A 89 ¶ 168.     Nonetheless, HSBC

17   continued to “enable[]” Madoff in order to reap a windfall.

18   A 35 ¶ 1.   In sum, HSBC “engineered a labyrinth of hedge

19   funds, management companies, and service providers that, to

20   unsuspecting outsiders, seemed to compose a formidable

21   system of checks and balances,” yet, in reality, “it

22   provided different modes for directing money to Madoff while

23   avoiding scrutiny and maximizing fees.”      A 36 ¶ 4.

                                   18
1        Procedural History.    On July 15, 2009, the Trustee

2    commenced an adversary proceeding in the United States

3    Bankruptcy Court for the Southern District of New York

4    against HSBC and thirty-six others, including UniCredit and

5    Pioneer.9   The Amended Complaint sought recovery of $2

6    billion in preferential or fraudulent transfers (Counts 1

7    through 19), and asserted four common law causes of action:

8    aiding and abetting fraud, aiding and abetting breach of

9    fiduciary duty, unjust enrichment, and money had and

10   received (collectively, the “common law claims”).   These

11   common law claims sought $6.6 billion from HSBC and $2

12   billion from the remaining defendants.   A contribution claim

13   was asserted under New York law.

14       On a motion by the UniCredit entities, the district

15   court withdrew the reference to the bankruptcy court, for

16   the limited purpose of deciding two threshold issues: (1)

17   the Trustee’s standing to assert the common law claims, and

18   (2) preemption of these claims by the Securities Litigation

19   Uniform Standards Act (“SLUSA”).

20       The common law claims and the contribution claim were

21   dismissed by Judge Rakoff in July 2011, on the grounds that


          9
            This proceeding consolidated two actions, one against
     HSBC and one against UniCredit and Pioneer.
                                   19
1    the Trustee was in pari delicto with the defendants, lacked

2    standing to assert the common law claims on customers’

3    behalf, and could not demonstrate a right to contribution.

4    See Picard v. HSBC Bank PLC, 

, 37 (S.D.N.Y.

5    2011).    The court did not reach the question whether SLUSA

6    bars the Trustee’s claims.    Id.

7        The Trustee’s adversary proceeding against JPMorgan was

8    commenced in December 2010.    As in the proceedings against

9    HSBC and UniCredit, the Trustee asserted common law claims

10   seeking $19 billion for, inter alia, aiding and abetting

11   fraud, aiding and abetting breach of fiduciary duty, unjust

12   enrichment, and conversion.

13       The adversary proceeding against UBS followed.    Also

14   named were Access, several of its affiliates, and two feeder

15   funds.    Again, the Trustee asserted common law claims for

16   aiding and abetting fraud, aiding and abetting breach of

17   fiduciary duty, unjust enrichment, and conversion, among

18   others.    Damages of approximately $2 billion were sought on

19   behalf of the customers of BLMIS (rather than BLMIS itself).

20       All Defendants (except Luxalpha and two individual

21   Defendants) moved to dismiss the common law claims and the

22   contribution claim.    In November 2011, Judge McMahon granted

23   the motions.    See Picard v. JPMorgan Chase & Co., 

1    84 (S.D.N.Y. 2011).     Judge McMahon concluded (as did Judge

2    Rakoff) that the Trustee lacks standing to bring an action

3    on behalf of third parties and has no valid claim for

4    contribution.     Id. at 106.

5                                DISCUSSION

6        We review de novo a district court’s dismissal of

7    causes of action for failure to state a claim for relief or

8    lack of standing.     See Fulton v. Goord, 

, 41 (2d

9    Cir. 2009).     Point I considers the Trustee’s claims as

10   asserted by him on behalf of BLMIS itself; Point II

11   considers claims asserted by the Trustee on behalf of

12   BLMIS’s customers.

13                                   I

14       We agree with the district courts that the Trustee’s

15   common law claims asserted on behalf of BLMIS are barred by

16   the doctrine of in pari delicto.

17                                   A

18       Under New York law,10 one wrongdoer may not recover

19   against another.     See Kirschner v. KPMG LLP, 

,


          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.,
     

, 86 (2d Cir. 2000) (citation and internal
     quotation marks omitted). New York law governs here.
                                     21
1    950 (N.Y. 2010).   The principle that a wrongdoer should not

2    profit from his own misconduct “is . . . strong in New

3    York.”   Id. at 964.   The New York Appellate Division, First

4    Department, has long applied the doctrine of in pari delicto

5    to bar a debtor from suing third parties for a fraud in

6    which he participated.   See Barnes v. Hirsch, 

    536, 539 (App. Div. 1st Dep’t 1925) (“The bankrupts could

8    not recover against these defendants for bucketing orders

9    because they were responsible for the illegal transaction

10   and parties to the fraud.”), aff’d, 

 (N.Y.

11   1926).

12       A “claim against a third party for defrauding a

13   corporation with the cooperation of management accrues to

14   creditors, not to the guilty corporation.”    Shearson Lehman

15   Hutton, Inc. v. Wagoner, 

, 120 (2d Cir. 1991)

16   (citing Barnes, 212 N.Y.S. at 537).    The debtor’s misconduct

17   is imputed to the trustee because, innocent as he may be, he

18   acts as the debtor’s representative.    See Wight v.

19   BankAmerica Corp., 

, 87 (2d Cir. 2000)

20   (“[B]ecause a trustee stands in the shoes of the

21   corporation, the Wagoner rule bars a trustee from suing to

22   recover for a wrong that he himself essentially took part


                                    22
1    in.”); accord Breeden v. Kirkpatrick & Lockhart LLP (In re

2    Bennett Funding Grp., Inc.), 

, 99-100 (2d Cir.

3    2003) (applying Wagoner rule in the context of “the greatest

4    Ponzi scheme [then] on record” and holding that “the

5    defrauded investors and not the bankruptcy trustee” were

6    entitled to pursue malpractice claims against attorneys and

7    accountants arising from the fraud).11

8        Picard alleges that the Defendants were complicit in

9    Madoff’s fraud and facilitated his Ponzi scheme by providing

10   (well-paid) financial services while ignoring obvious

11   warning signs.   These claims fall squarely within the rule

12   of Wagoner and the ensuing cases: Picard stands in the shoes

13   of BLMIS and may not assert claims against third parties for

14   participating in a fraud that BLMIS orchestrated.

15


          11
            See also Kirschner v. Grant Thornton LLP, No. 07
     Civ. 11604 (GEL), 

, 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, 

 (2d Cir. 2010); Hirsch v.
     Arthur Andersen & Co., 

, 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
1         Picard’s scattershot responses are resourceful, but

2    they all miss the mark.   He contends that a SIPA trustee is

3    exempt from the Wagoner rule, but adduces no authority.      He

4    argues that the rationale of the in pari delicto doctrine is

5    not served here because he himself is not a wrongdoer; but

6    neither were the trustees in the cases cited above.12   He

7    contends that in pari delicto should not impede the

8    enforcement of securities laws, citing Bateman Eichler, Hill

9    Richards, Inc. v. Berner, 

 (1985); but Bateman

10   Eichler is inapposite.    See id. at 315-16 (holding that in

11   pari delicto would not prevent defrauded tippee from

12   bringing suit against defrauding tipper, at least absent

13   further inquiry into “relative culpabilities” of tippee and

14   tipper).13   He invokes the “adverse interest” exception,

          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, 

, 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
1   which directs a court not to impute to a corporation the bad

2   acts of its agent when the fraud was committed for personal

3   benefit.   See The Mediators, Inc. v. Manney (In re

4   Mediators, Inc.), 

, 827 (2d Cir. 1997).

5   However, “this most narrow of exceptions” is reserved for

6   cases of “outright theft or looting or embezzlement . . .

7   where the fraud is committed against a corporation rather

8   than on its behalf.”14   Kirschner v. KPMG LLP, 

   941, 952 (N.Y. 2010).    It is not possible thus to separate



    a significant role in the enforcement scheme.” Gatt
    Commc’ns, Inc. v. PMC Assocs., L.L.C., 

, 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
1    BLMIS from Madoff himself and his scheme.    Finally, Picard

2    argues that the district courts should not have applied the

3    in pari delicto doctrine at the pleadings stage; but the New

4    York Court of Appeals has held otherwise.    See id. at 947

5    n.3; see also Wagoner, 944 F.2d at 120.     Early resolution is

6    appropriate where (as here) the outcome is plain on the face

7    of the pleadings.

        The Trustee’s claim for contribution is the only one

10   that may escape the bar of in pari delicto.     See Barrett v.

11   United States, 

, 127 n.3 (2d Cir. 1988)

12   (explaining that parties seeking contribution are

13   necessarily in pari delicto).15   The Trustee seeks

14   contribution for payments made to BLMIS customers under

15   SIPA, on the theory that the Defendants are joint

16   tortfeasors with BLMIS under New York law.

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.), 

, 529 (Bankr. S.D.N.Y. 2005);
     Silverman v. Meister Seelig & Fein, LLP (In re Agape World,
     Inc.), 

, 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
1           The New York statute provides that “two or more persons

2    who are subject to liability for damages for the same

3    personal injury, injury to property or wrongful death, may

4    claim contribution among them whether or not an action has

5    been brought or a judgment has been rendered against the

6    person from whom contribution is sought.”    N.Y. C.P.L.R.

7    § 1401 (McKinney).    Section 1401 “requires some form of

8    compulsion; that is, the party seeking contribution must

9    have been compelled in some way, such as through the entry

10   of a judgment, to make the payment against which

11   contribution is sought.”    N.Y. State Elec. & Gas Corp. v.

12   FirstEnergy Corp., No. 3:03-CV-0438 (DEP), 

,

13   at *7 (N.D.N.Y. May 11, 2007) (emphasis added).

14          However, the SIPA payments for which Picard seeks

15   contribution were not compelled by BLMIS’s state law fraud

16   liability to its customers; his obligation to pay customers

17   their ratable share of customer property is an obligation of

18   federal law: SIPA.    SIPA provides no right to contribution,

19   and it is settled in this Circuit that there is no claim for

20   contribution unless the operative federal statute provides

21   one.    See Nw. Airlines, Inc. v. Transp. Workers Union of

22   Am., AFL-CIO, 

, 97 n.38, 97-99 (1981); see also


                                    27
1    Herman v. RSR Sec. Servs. Ltd., 

, 144 (2d Cir.

2    1999) (affirming dismissal of New York state law

3    contribution claims for liability under the Fair Labor

4    Standards Act); KBL Corp. v. Arnouts, 

,

5    341 (S.D.N.Y. 2009) (“[A] plaintiff cannot use New York

6    State common law as an end-around to make a claim for

7    contribution that it could not make under the federal

8    statutory scheme.”); Lehman Bros., Inc. v. Wu, 

    2d 504, 505 n.1 (S.D.N.Y. 2003) (“[W]hether contribution is

10   available in connection with a federal statutory scheme is a

11   question governed solely by federal law.”) (citation and

12   quotation marks omitted).

13       Picard emphasizes that he is not seeking contribution

14   for violations of SIPA or any other federal statute, but

15   that is beside the point.   “The source of a right of

16   contribution under state law must be an obligation imposed

17   by state law.”   LNC Invs., Inc. v. First Fid. Bank, 

   Supp. 1333, 1349 (S.D.N.Y. 1996) (emphasis added).      The

19   issue is therefore whether the payments made by the Trustee,

20   for which he is seeking contribution, are required by state

21   or federal law--an easy question.

22


                                   28
1        The $800 million paid out to customers fulfilled an

2    obligation created by SIPA, a federal statute that does not

3    provide a right to contribution “either expressly or by

4    clear implication,” Texas Industries, Inc. v. Radcliff

5    Materials, Inc., 

, 638 (1981).   Unlike the

6    Bankruptcy Act, SIPA does not require customers to establish

7    a basis of liability as a prerequisite for the Trustee’s

8    disbursement obligation.   The loss itself is enough.     See 15

9    U.S.C. § 78fff-2(c) (the Trustee “shall allocate customer

10   property of the debtor . . . to customers of such debtor,

11   who shall share ratably in such customer property on the

12   basis and to the extent of their respective net equities”);

13   cf. Hill v. Day (In re Today’s Destiny, Inc.), 

,

14   753-56 (Bankr. S.D. Tex. 2008) (holding that Texas law

15   governed contribution claim where debtor sought contribution

16   for obligations set forth in proofs of claim alleging fraud

17   under state law).   Because the Trustee’s payment obligations

18   were imposed by a federal law that does not provide a right

19   to contribution, the district courts properly dismissed

20   these claims.

21

22


                                   29
1                                  II

2        Having rejected the Trustee’s claims asserted on behalf

3    of BLMIS, we consider next whether the Trustee may assert

4    such claims on behalf of BLMIS’s customers.    To proceed with

5    these claims, the Trustee must first establish his standing.

6    This he cannot do.

7        Standing is a “threshold question in every federal

8    case, determining the power of the court to entertain the

9    suit.”   Warth v. Seldin, 

, 498 (1975).    Standing

10   depends, first, on whether the plaintiff has identified a

11   “case or controversy” between the plaintiff and the

12   defendants within the meaning of Article III of the

13   Constitution.   Ass’n of Data Processing Serv. Orgs., Inc. v.

14   Camp, 

, 152 (1970).    “To have standing, ‘[a]

15   plaintiff must [1] allege personal injury [2] fairly

16   traceable to the defendant’s allegedly unlawful conduct and

17   [3] likely to be redressed by the requested relief.’”

18   Hirsch v. Arthur Andersen & Co., 

, 1091 (2d Cir.

19   1995) (alterations in original) (quoting Allen v. Wright,

20   

, 751 (1984)).   In addition, the plaintiff must

21   comply with “prudential” limitations on standing, of which

22   the salient one here is that a party must “assert his own


                                   30
1    legal rights and interests and cannot rest his claim to

2    relief on the legal rights or interests of third parties.”

3    Warth, 422 U.S. at 499.

4        We consider below Picard’s arguments that: (A) existing

5    Second Circuit precedent allows for third-party standing in

6    a SIPA liquidation; and (B) SIPA itself confers standing,

7    both by creating a bailment relationship between the Trustee

8    and the debtor’s customers, and by authorizing SIPC to

9    pursue subrogation claims on customers’ behalf.16

10                                 A

11       The implied prohibition in Article III against third-

12   party standing applies to actions brought by bankruptcy

13   trustees.   In Caplin v. Marine Midland Grace Trust Co. of

14   N.Y., 

 (1972), the Supreme Court ruled that

15   federal bankruptcy law does not empower a trustee to collect

16   money owed to creditors.   That is because a bankruptcy

17   trustee is not empowered “to collect money not owed to the

18   estate”; the trustee’s proper task “is simply to collect and

          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., 

, 92-97
     (S.D.N.Y. 2011) (McMahon, J.), and the Trustee has abandoned
     it on appeal.
                                   31
1    reduce to money the property of the estates for which (he is

2    trustee).”   Id. at 428-29 (citation and internal quotation

3    marks omitted).    “[N]owhere in the statutory scheme is there

4    any suggestion that the trustee in reorganization is to

5    assume the responsibility of suing third parties” on behalf

6    of creditors.     Id. at 428.   This way, creditors can “make

7    their own assessment of the respective advantages and

8    disadvantages, not only of litigation, but of various

9    theories of litigation,” id. at 431; no consensus is needed

10   as to “the amount of damages to seek, or even on the theory

11   on which to sue,” id. at 432; and disputes over inconsistent

12   judgments and the scope of settlements can be avoided, id.

13   at 431-32.

14       Our Court has hewed to this principle.      In Wagoner, the

15   misappropriation of funds by the owner and president of the

16   debtor company was facilitated by stock transactions

17   effected through a third-party brokerage firm.      Shearson

18   Lehman Hutton, Inc. v. Wagoner, 

, 117 (2d Cir.

19   1991).   The trustee’s claim that the brokerage aided and

20   abetted the fraud was dismissed on summary judgment, and we

21   affirmed, observing that “[i]t is well settled that a

22   bankruptcy trustee has no standing generally to sue third


                                      32
1    parties on behalf of the estate’s creditors, but may only

2    assert claims held by the bankrupt corporation itself.”     Id.

3    at 118 (citing Caplin, 406 U.S. at 434); see also Hirsch v.

4    Arthur Andersen & Co., 

, 1094 (2d Cir. 1995)

5    (holding that Chapter 11 trustee had no standing to bring

6    creditor claims against accountants and law firms that had

7    provided services to the debtor, a real estate partnership

8    operated as a Ponzi scheme); The Mediators, Inc. v. Manney

9    (In re Mediators, Inc.), 

, 826 (2d Cir. 1997)

10   (affirming dismissal of breach of fiduciary duty claim

11   brought by creditors’ committee functioning as bankruptcy

12   trustee, against bank and law firm for allegedly aiding and

13   abetting debtor’s fraud).

14       The Trustee makes little effort to explain why Caplin

15   and its progeny do not control.   Instead, he relies on a

16   single Second Circuit case that was overruled by the Supreme

17   Court, and on dicta in another.   Apart from lacking

18   precedential force, both cases are readily distinguishable.

19                                1

20       In Redington v. Touche Ross & Co., 

 (2d

21   Cir. 1978), rev’d, 

 (1979), a SIPA trustee sued

22   the accountant of an insolvent brokerage for violations of


                                  33
1    record-keeping provisions of Section 17(a) of the Securities

2    Exchange Act, as well as violations of state common law.

3    The district court dismissed the Section 17(a) claim for

4    lack of an implied private right of action, and concluded

5    that it lacked jurisdiction over the common law claims.     See

6    Redington v. Touche Ross & Co., 

, 492-93

7    (S.D.N.Y. 1977).

8        In reversing, we held that Section 17(a) did create an

9    implied private right of action.    See Redington v. Touche

10   Ross & Co., 

 (2d Cir. 1978), rev’d, 

11   (1979).   We then considered the trustee’s claim that “[h]e

12   is responsible for marshalling and returning [customer]

13   property; to the extent that he is unable to do so, he

14   argues, he may sue on behalf of the customer/bailors any

15   wrongdoer whom they could sue themselves.”   Id. at 625.

16   Relying on the Federal Rules of Civil Procedure, Redington

17   concluded that “the Trustee, as bailee, is an appropriate

18   real party in interest,” id., and that “SIPC is subrogated

19   to the right of action implied in section 17 in favor of

20   brokers’ customers against third parties such as

21   accountants.”   Id. at 624.   Redington would favor Picard’s

22   case, except that Redington is no longer good law.



                                    34
1        The Supreme Court granted certiorari in Redington to

2    decide whether Section 17(a) created an implied right of

3    action and whether a SIPA trustee and SIPC had standing to

4    assert that claim.     See Touche Ross & Co. v. Redington, 442

 (1979).     The Court held that no private right of

6    action existed under Section 17(a), id. at 579, and

7    therefore considered it “unnecessary to reach” the standing

8    issue, id. at 567 n.9.     The case was remanded to consider

9    whether an alternative basis for jurisdiction existed, but

10   none was found.     See Redington v. Touche Ross & Co., 612

, 70 (2d Cir. 1979).

12       Picard argues that the Supreme Court left the standing

13   question “untouched” because the opinion was “limited to a

14   merits-based reversal on the issue of whether a private

15   right of action existed under section 17(a).”     Appellant Br.

16   31 (11-5044).     However, the question of who may assert a

17   right of action is presented ordinarily only if a right of

18   action has been found to exist.      See Nat. R.R. Passenger

19   Corp. v. Nat. Assoc. of R.R. Passengers, 

, 456

20   (1974) (“[T]he threshold question clearly is whether the

21   Amtrak Act . . . creates a [private] cause of action . . .

22   for it is only if such a right of action exists that we need


                                     35
1    consider whether the respondent had standing to bring the

2    action[.]”).17   The Supreme Court’s reversal on the

3    threshold question drained the Second Circuit Redington

4    opinion of force on other questions.     See Newdow v. Rio

5    Linda Union Sch. Dist., 

, 1041 (9th Cir. 2010)

6    (“[W]hen the Supreme Court reverses a lower court’s decision

7    on a threshold question,” the Court “effectively holds the

8    lower court erred by reaching [other issues].”).

9        Following the Supreme Court’s reversal, this Court

10   vacated its original judgment on the ground that subject

11   matter jurisdiction was lacking.     See Order, Redington v.

12   Touche Ross, Nos. 77-7183, 77-7186 (2d Cir. Aug. 8, 1979);

13   Appellee Br. Addendum A (11-5207).     As the Trustee concedes,

14   vacatur dissipates precedential force.     See Appellant Br. 30

          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
1    (11-5044).   See also O’Connor v. Donaldson, 

,

2    577 n.12 (1975) (observing that vacatur “deprives [the]

3    court’s opinion of precedential effect”); Brown v. Kelly,

4    

, 476-77 (2d Cir. 2010).

5        Since Redington, at least six judges in this Circuit

6    have questioned or rejected third-party claims brought by

7    SIPA trustees, beginning with Judge Pollack in Mishkin v.

8    Peat, Marwick, Mitchell & Co., 

, 556-58

9    (S.D.N.Y. 1990).18   See also Picard v. JPMorgan Chase & Co.,

10   

, 100-101 (S.D.N.Y. 2011) (McMahon, J.); Picard

11   v. HSBC Bank PLC, 

, 33-34 (S.D.N.Y. 2011)

12   (Rakoff, J.); Picard v. Taylor (In re Park South Sec., LLC),

13   

, 516 (Bankr. S.D.N.Y. 2005) (Drain, J.);

14   Giddens v. D.H. Blair & Co. (In re A.R. Baron & Co., Inc.),

15   

, 804 (Bankr. S.D.N.Y. 2002) (Beatty, J.); SIPC

16   v. BDO Seidman, LLP, 

, 653 (S.D.N.Y. 1999)

17   (Preska, J.), rev’d on other grounds, 

 (2d Cir.

18   2000).

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
1        Yet Redington has enjoyed something of a half-life,

2    with several courts (including this one) assuming without

3    deciding that Redington retains residual force.19   Redington

4    should be put to rest; it has no precedential effect.

5        Even if Redington retained some persuasive value, it

6    would not decide this case.   First, Redington considered

7    chiefly whether the trustee and SIPC had standing to bring a

8    cause of action under Section 17 of the Exchange Act; the

9    opinion said nothing about a SIPA trustee’s ability to

10   orchestrate mass tort actions against third parties.     See

11   Redington v. Touche Ross & Co., 

, 618 (2d Cir.

12   1978), rev’d, 

 (1979) (“[W]e are presented with

13   the question whether a private cause of action exists under

14   section 17 of the Securities Exchange Act of 1934 against

          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.” 

 at 653. On appeal, this Court “assume[d], without
     deciding, that . . . SIPC has standing as the customers’
     subrogee,” SIPC v. BDO Seidman, LLP, 

, 69 (2d
     Cir. 2000), and ultimately dismissed its claims on
     substantive grounds, id. at 71-76.


                                   38
1    accountants who prepare misleading statements of a broker’s

2    financial affairs, and if so, who may maintain such an

3    action.”).     Second, our holding in Redington turned, in

4    part, on an analysis of Fed. R. Civ. P. 17(a), which sets

5    forth rules concerning real parties in interest, and which

6    has no application here.     See id. at 625; see also infra p.

7    51 n.25.     Third, Redington involved claims against a single

8    accounting firm for a few discrete instances of alleged

9    misconduct (the preparation of misleading financial

10   statements).    As a result, the policy concerns we express

11   below (see infra pp. 59-69) would have been considerably

12   diminished--and, indeed, were not even addressed by the

13   Court.     Fourth, and finally, in Redington the brokerage firm

14   was not complicit in the wrongdoing, but rather “an entity

15   distinct from its conniving officers [that] was directly

16   damaged by Touche Ross’ unsatisfactory audit.”     592 F.2d at

17   620.     The Redington Court therefore did not have occasion to

18   consider whether the doctrine of in pari delicto barred all

19   or part of the suit.     In sum, Redington is both non-binding

20   and inapposite.

21
22
23

                                     39
1                                   2

2        The Trustee relies on St. Paul Fire & Marine Insurance

3    Co. v. PepsiCo, Inc., 

 (2d Cir. 1989), for the

4    proposition that a trustee may assert creditors’ claims if

5    they are generalized in nature, and not particular to any

6    individual creditor.    However, the holding of that case has

7    no application here.

8        PepsiCo had been guarantor of bonds issued by a

9    subsidiary that later was acquired by a subsidiary of Banner

10   Industries.    When the (later) merged entity defaulted on the

11   bonds, PepsiCo sued Banner, alleging diversion of assets and

12   alter ego.    The merged entity went bankrupt, and the trustee

13   sued Banner for misappropriation.    We ruled that the

14   trustee--and not PepsiCo--could pursue Banner because Ohio

15   law allowed a subsidiary to assert an alter ego claim

16   against its parent, so that “[t]he cause of action therefore

17   becomes property of the estate of a bankrupt subsidiary, and

18   is properly asserted by the trustee in bankruptcy.”      Id. at

19   703-04.

20       Picard directs us to a passage in St. Paul--stating

21   that a trustee may bring a claim if the “claim is a general

22   one, with no particularized injury arising from it, and if


                                    40
1    that claim could be brought by any creditor of the debtor,”

2    id. at 701--and contends that the third-party claims here

3    are common to all customers because all customers were

4    similarly injured by Madoff’s fraud and the Defendants’

5    facilitation.    This argument is flawed on many levels:

6        •    St. Paul decided the “specific question” whether a

7    creditor may bring an alter ego claim against the debtor’s

8    parent when the debtor itself also possesses such a claim.

9    Id. at 699.     But Picard seeks to assert claims that are

10   property only of the creditors, not of the debtor.

11       •    The Trustee’s broad reading of St. Paul would

12   bring the Court’s holding into conflict with a line of cases

13   that came before and after it.       As discussed supra pp. 32-

14   34, it is settled that a trustee may not assert creditors’

15   claims against third parties.        See, e.g., Shearson Lehman

16   Hutton, Inc. v. Wagoner, 

 (2d Cir. 1991).        And,

17   of course, St. Paul could not alter the Supreme Court’s

18   ruling in Caplin.     Picard’s argument thus conflicts with

19   Supreme Court and Second Circuit precedent.       See generally

20   In re Stanwich Fin. Servs. Corp., 

, 228 n.4

21   (Bankr. D. Conn. 2004) (highlighting this tension).

22


                                     41
1        •    The language cited by Picard from St. Paul is not

2    a pronouncement about third-party standing; it voices the

3    maxim that only a trustee, not creditors, may assert claims

4    that belong to the bankrupt estate.    As St. Paul elsewhere

5    states: “‘[T]he Trustee in bankruptcy has standing to

6    represent only the interests of the debtor corporation.’

7    Our decision today goes no further than to say that causes

8    of action that could be asserted by the debtor are property

9    of the estate and should be asserted by the trustee.”     St.

10   Paul, 884 F.2d at 702 n.3 (internal citation omitted)

11   (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass,

12   

, 62 n.4 (2d Cir. 1985)).   As illustrated by St.

13   Paul, when a creditor seeks relief against third parties

14   that pushed the debtor into bankruptcy, the creditor is

15   asserting a derivative claim that arises from harm done to

16   the estate.   Judge Posner described this distinction:

17            The point is simply that the trustee is confined
18            to enforcing entitlements of the corporation. He
19            has no right to enforce entitlements of a
20            creditor. He represents the unsecured creditors
21            of the corporation; and in that sense when he is
22            suing on behalf of the corporation he is really
23            suing on behalf of the creditors of the
24            corporation. But there is a difference between a
25            creditor’s interest in the claims of the
26            corporation against a third party, which are
27            enforced by the trustee, and the creditor’s own
28            direct--not derivative--claim against the third

                                   42
1                  party, which only the creditor himself can
2                  enforce.
3
4    Steinberg v. Buczynski, 

, 893 (7th Cir. 1994).

5    See generally Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863

, 792 (Del. Ch. 2004).

7           •      The customers’ claims against the Defendants are

8    not “common” or “general.”       A debtor’s claim against a third

9    party is “general” if it seeks to augment the fund of

10   customer property and thus affects all creditors in the same

11   way.       Picard, however, seeks to assert claims on behalf of

12   thousands of customers against third-party financial

13   institutions for their handling of individual investments

14   made on various dates in varying amounts.       The Defendants’

15   alleged wrongful acts, then, could not have harmed all

16   customers in the same way.20

            20
            A recent case arising out of the BLMIS bankruptcy
     provides a useful contrast. In Fox v. Picard (In re
     Madoff), 

 (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.


                                       43
1                                   B

2        The Trustee attempts to blunt the force of Caplin and

3    its progeny by arguing that a SIPA liquidation is unique and

4    is therefore not controlled by precedent under the

5    bankruptcy code.   He advances two theories for why a SIPA

6    trustee enjoys standing to assert third-party claims.

7                                   1

8        Picard contends that, for SIPA purposes, the customers

9    of a failed brokerage are bailors, and that he--acting as

10   bailee--“has a sufficient possessory interest to permit him

11   to ‘recover for the wrongful act of a third party resulting

12   in the loss of, or injury to, the subject of the bailment.’”

13   United States v. Perea, 

, 640 (2d Cir. 1993)

14   (quoting Rogers v. Atl., Gulf & Pac. Co., 

, 664

15   (N.Y. 1915)).   We disagree.

16       First, the statute is not written or cast in terms of

17   bailment.   “To the extent consistent with the provisions of

18   this chapter, a liquidation proceeding shall be conducted in

19   accordance with, and as though it were being conducted under

20   [the Bankruptcy Code].”   15 U.S.C. § 78fff(b).   As a general

21   rule, SIPA vests trustees with “the same powers and title

22   with respect to the debtor and the property of the debtor


                                    44
1    . . . as a trustee in a case under Title 11.”        15 U.S.C. §

2    78fff-1(a).   True, a SIPA trustee has some powers not

3    conferred on a trustee under Title 11.        Most notably, SIPA

4    creates a fund of customer property that is separate from

5    the debtor estate and that has priority over other

6    creditors’ claims, and authorizes the trustee to ratably

7    distribute those funds based on customers’ net equity.          See

8    15 U.S.C. § 78fff–2(c)(1)(B); In re Bernard L. Madoff

9    Investment Secs., 

, 231 (2d Cir. 2011), cert.

10   denied, 

 (2012).        But the statute does not

11   confer upon SIPA trustees a power, denied all other

12   bankruptcy trustees, to sue third parties on claims that

13   belong to persons other than the estate.        Nowhere does the

14   statute reference bailment, or characterize customers as

15   “bailors” or trustees as “bailees,” or in any way indicate

16   that the trustee is acting as bailee of customer property.

17       Picard alternatively invokes the principle of bailment

18   under the common law.   This is dubious: courts are careful

19   to avoid overlaying common law principles onto a statutory

20   framework, even when (unlike here) the statute makes clear

21   reference to common law.   See Moore v. PaineWebber, Inc.,

22   

, 179-80 (2d Cir. 1999) (“That the statute . . .



                                     45
1    borrow[s] in part from the common law should not mislead us:

2    it remains the statute and its purpose that governs.”).

3    This caution is especially apt here because the statute

4    creates a ramified scheme that makes no mention of common

5    law.

6           In any event, the analogy to the common law of bailment

7    is flawed from start to finish.     A bailment is “a delivery

8    of personalty for some particular purpose, or on mere

9    deposit, upon a contract express or implied, that after the

10   purpose has been fulfilled it will be redelivered to the

11   person who delivered it, or otherwise dealt with according

12   to that person’s directions, or kept until it is reclaimed.”

13   9 N.Y. Jur. 2d Bailments and Chattel Leases § 1 (West 2013).

14   Even assuming that the customers’ investments could be

15   deemed bailed property, the only delivery that took place

16   was when customers made their investments, either in BLMIS

17   directly, or through the feeder funds.     See Pattison v.

18   Hammerstein, 

, 1040 (App. Div. 1st Dep’t

19   1896); see also United States v. $79,000 in Account No.

20   2168050/6749900 at Bank of N.Y., 96 CIV. 3493 (MBM), 

   648934, at *6 (S.D.N.Y. Nov. 7, 1996) (“Delivery to the

22   bailee is required to create a bailment.”).     So: any



                                    46
1    supposed bailment pre-dated Picard’s appointment; he was not

2    entrusted with any customer property until after it had been

3    impaired; and he never had control over the missing funds

4    that he now seeks to recoup.     He therefore is not the proper

5    party to bring such an action.      See 9 N.Y. Jur. 2d Bailments

6    and Chattel Leases § 115 (West 2013) (explaining that bailee

7    may only “bring an action to recover for the loss of or

8    injury to the bailed property while in his or her

9    possession”).21

10       Moreover, Picard is not seeking to recover specific

11   bailments for return to individual bailors.     See 9 N.Y. Jur.

12   2d Bailments and Chattel Leases § 82 (West 2013) (“One of

13   the most important rights of the bailor is that, on the

14   termination of the bailment, the bailor will return to him

15   or her the identical thing bailed . . . .”).     Unlike

16   “customer name securities,” which are separately held and

17   returned to individual customers outside the normal

18   distribution scheme,22 Picard’s claims are intended to

          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., 

, 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
                                    47
1    augment the general fund of customer property so that it can

2    be distributed ratably based on customers’ net equity.     This

3    arrangement is not an analog to a bailment, in which the

4    bailee is entrusted with an item that is to be recovered by

5    the bailor at some later time.

6        SIPC urges that we view the transaction as though

7    BLMIS, not the Trustee, acted as the bailee of customer

8    property, and that the Trustee is simply acting on BLMIS’s

9    behalf to recover the bailed property.   The short answer is

10   that Madoff (and, by extension, BLMIS) took the investment

11   money from the customers in order to defraud them--and a

12   thief is not a bailee of stolen property.   See Pivar v.

13   Graduate Sch. of Figurative Art of the N.Y. Acad. of Art,

14   

, 522 (App. Div. 1st Dep’t 2002) (holding

15   that a bailment relationship arises if the bailee takes



     customer property); see also In re New Times Sec. Servs.,
     Inc., 

, 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
1    “lawful possession” of property “without present intent to

2    appropriate”).

3        Madoff’s commingling of customer funds also defeats any

4    analogy to bailment.     Notwithstanding Madoff’s pretense, he

5    failed to maintain customers’ investments in separate named

6    accounts.     He deposited all customer funds into a general

7    account (the 703 Account) and distributed those new

8    investments to earlier customers in lieu of actual returns.

9    This arrangement, which enabled the fraud, made a bailment

10   impossible.     See Peoples Westchester Sav. Bank v. F.D.I.C.,

11   

, 330 (2d Cir. 1992) (distinguishing special

12   accounts from general accounts); see also United States v.

13   Khan, No. 97-6083, 

, at *2 (2d Cir. 1997)

14   (holding that a deposit into a general bank account

15   “destroys a potential bailment” under New York law).23

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, 

, 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).


                                     49
1        SIPC attempts to obviate these difficulties by relying

2    on SEC Rule 15c, which establishes bookkeeping segregation

3    requirements for brokers.   17 C.F.R. § 240.15c3-3.    Judge

4    Rakoff was “mystified” by this argument, Picard v. HSBC Bank

5    PLC, 

, 32 (S.D.N.Y. 2011), as are we.

6        Rule 15c requires brokers to maintain a minimum cash

7    balance in a reserve account and segregate all such cash for

8    customers’ benefit.   See 17 C.F.R. § 240.15c3-3.     It also

9    “specifically contemplates the commingling of customer

10   monies and the lending of customer securities.”     Levitin v.

11   PaineWebber, Inc., 

, 706 (2d Cir. 1998).

12   Whatever Rule 15c may do, it does not confer power on a SIPA

13   trustee to sue on behalf of customers.     First, the Rule is

14   not a part of SIPA.   Second, such a rule would exceed the

15   scope of agency rule-making.   See generally Alexander v.

16   Sandoval, 

, 291 (2001) (“Language in a

17   regulation may invoke a private right of action that

18   Congress through statutory text created, but it may not

19   create a right that Congress has not.”).     In any event, the

20   Rule does not suggest that the broker (or the Trustee)

21   serves as a bailee of customer property, or that the Trustee

22   may assert claims on behalf of customers.


                                    50
1       Finally, SIPC and the Trustee infer a bailment

2   relationship from federal common law and the Federal Rules

3   of Civil Procedure.   The inferences are strained at best.

4   Federal common law, which does not speak to the powers of a

5   SIPA trustee, offers no useful insight.24   Nor do the

6   Federal Rules of Civil Procedure.25

7                                 2

8       The Trustee argues that, because SIPC advanced funds to

9   customers at the outset of the liquidation, SIPC is

         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, 

, 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, 

, 121 (10th Cir.
    1973).
                                  51
1    subrogated to those customers’ claims against the

2    Defendants; SIPC therefore may assert those claims as

3    subrogee; and Picard is authorized to enforce that right on

4    SIPC’s behalf.     But SIPC is a creature of statute, and

5    neither the plain language of the statute, nor its

6    legislative history, supports the Trustee’s position.

7        True, a SIPA trustee (unlike a trustee in bankruptcy),

8    advances money to pay claims.        The statute takes this fact

9    into account by subrogating SIPC to customers’ net equity

10   claims to the extent of the advances they received.           But it

11   goes no further.

12       The Trustee’s subrogation theory is premised in

13   § 78fff-3(a):

14            To the extent moneys are advanced by SIPC to the
15            trustee to pay or otherwise satisfy the claims of
16            customers, in addition to all other rights it may
17            have at law or in equity, SIPC shall be subrogated
18            to the claims of such customers with the rights
19            and priorities provided in this chapter, except
20            that SIPC as subrogee may assert no claim against
21            customer property until after the allocation
22            thereof to customers as provided in section 78fff-
23            2(c) of this title.
24
25   15 U.S.C. § 78fff-3(a).    It is undisputed that the phrase

26   “claims of customers” refers (as throughout the statute) to

27   customers’ net equity claims against the estate.        See

28   generally In re Bernard L. Madoff Inv. Sec. LLC, 

1    229, 233 (2d Cir. 2011), cert. denied, 

 (2012).

2    SIPA thus allows only a narrow right of subrogation--for

3    SIPC to assert claims against the fund of customer property

4    and thereby recoup any funds advanced to customers once the

5    SIPA trustee has satisfied those customers’ net equity

6    claims.

7        The Trustee urges us to conclude that § 78fff-3(a) does

8    more--much more--by creating a right of subrogation that

9    allows SIPC (and, by extension, the Trustee) to step into

10   customers’ shoes and to initiate and control litigation on

11   their behalf, against any number of defendants, until SIPC

12   has been repaid in full.   As we emphasized earlier, SIPA

13   grants trustees the “same powers and title with respect to

14   the debtor and the property of the debtor” as a Title 11

15   trustee, 15 U.S.C. § 78fff-1(a), and the Supreme Court has

16   squarely rejected attempts by Title 11 trustees to capture

17   such litigation, see Caplin v. Marine Midland Grace Trust

18   Co., 

, 428 (1972).     As a final resort, the

19   Trustee relies on a catch-all provision included in the 1978

20   amendments to SIPA, which states that the subrogation rights

21   afforded by § 78fff-3(a) should not be read to diminish “all

22   other rights [SIPC] may have at law or in equity.”    15



                                   53
1    U.S.C. § 78fff-3(a).    From here, the Trustee claims an

2    implied right of equitable subrogation, “the principle by

3    which an insurer, having paid losses of its insured, is

4    placed in the position of its insured so that it may recover

5    from the third party legally responsible for the loss.”

6    Winkelmann v. Excelsior Ins. Co., 

, 843 (N.Y.

7    1995).    He thus claims a wide grant of authority to initiate

8    class-action lawsuits and assert any number of tort claims

9    against third parties on customers’ behalf.26   This is a

10   long, long reach.

11       There is no sign that Congress intended an expansive

12   increment of power to SIPA trustees.    In 1973, the SIPC

13   chairman appointed a Special Task Force to consider possible

14   amendments to the 1970 Act.    The resulting July 1974 report

15   separately listed its “major policy recommendations” and its

16   proposed “technical refinements.”    See Report to the Board

17   of Directors of SIPC of the Special Task Force to Consider

18   Possible Amendments to SIPA, Letter of Transmittal (July 31,

19   1974).    Recommendation II.A.9, deemed a “Major Policy

20   Recommendation,” states that “claims of SIPC as subrogee

21   (except as otherwise provided), should be allowable only as

          26
            We use the term “class-action lawsuits” loosely
     here, without taking a position on the SLUSA question.
                                    54
1    claims against the general estate.”        Id. at 12 (emphasis

2    added); see also SIPA Amendments of 1975: Hearings on H.R.

3    8064 Before the Subcomm. on Consumer Protection and Fin. of

4    the H. Comm. on Interstate and Foreign Commerce, 94th Cong.

5    64 (1976) (hereinafter “Hearings on H.R. 8064”).

6         Notably, Caplin was decided in 1972, before the Task

7    Force report and six years before Congress amended § 78fff-

8    3(a) to include “all other rights [SIPC] may have at law or

9    in equity.”   If Congress sought to exempt SIPA trustees from

10   Caplin’s rule and expand SIPC’s subrogation rights to tort

11   actions against third parties, we would expect such intent

12   to be manifested in the statutory wording and in the

13   record.27

14        The wording cited by Picard was proposed by SIPC itself

15   as a “Minor Substantive or Technical Amendment[]” in order

16   to “make clear that SIPC’s subrogation rights under the 1970

17   Act are cumulative with whatever rights it may have under

18   other State or Federal laws.”        Hearings on H.R. 8064, 94th


          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., 

, 1227 n.9
     (8th Cir. 1987). Significantly, this provision was deleted
     prior to enactment. Id.
                                     55
1    Cong. 197, 199 (1976) (Memorandum of the Securities Investor

2    Protection Corporation in Regard to Certain Comments

3    Concerning H.R. 8064).    Congress “does not alter the

4    fundamental details of a regulatory scheme in vague terms or

5    ancillary provisions--it does not . . . hide elephants in

6    mouseholes.”   Whitman v. Am. Trucking Assocs., Inc., 531

, 468 (2001).

8        The Trustee adduces rules of insurance law to justify

9    his claim, an analogy with some intuitive appeal: Principles

10   of equity generally permit subrogees wide scope to sue

11   third-party tortfeasors, a claim that arises most commonly

12   with insurance.    See, e.g., Winkelmann, 650 N.E.2d at 843.

13       But this argument succumbs to the same critique as

14   Picard’s bailment theory: We avoid engrafting common law

15   principles onto a statutory scheme unless Congress’s intent

16   is manifest.   See supra p. 46.     The clearest Congressional

17   intent here is that we should treat SIPA as a bankruptcy

18   statute, not as an insurance scheme.     “SIPA and FDIA are

19   independent statutory schemes, enacted to serve the unique

20   needs of the banking and securities industries,

21   respectively.”28   SIPC v. Morgan, Kennedy & Co., 

             Congress rejected some early versions of the SIPA
     bill “which were patterned on FDIA and which extended
                                    56
1    1314, 1318 (2d Cir. 1976).     We have since warned against

2    oversimplified comparisons between insurance law and federal

3    statutory law: “While this Court has referred to SIPC as

4    providing a form of public insurance, it is clear that the

5    obligations imposed on an insurance provider under state law

6    do not apply to this congressionally-created nonprofit

7    membership corporation.”     In re Bernard L. Madoff Inv. Sec.

8    LLC, 

, 239 (2d Cir. 2011), cert. denied, 133 S.

9    Ct. 25 (2012) (internal citations and quotation marks

10   omitted).

11       Relatedly, Picard argues under principles of equity

12   that unless he can spearhead the litigation on behalf of

13   defrauded customers, the victims will not be made whole,

14   SIPC will be unable to recoup its advances, and third-party

15   tortfeasors will reap windfalls.29    No doubt, there are


     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
1    advantages to the course Picard wants to follow.     But equity

2    has its limits; it may fill certain gaps in a statute, but

3    it should not be used to enlarge substantive rights and

4    powers.   Cf. In re Ozark, 816 F.2d at 1230 (observing that

5    while Bankruptcy Code allows a court to apply equitable

6    principles when necessary, “[t]hese powers . . . do not

7    include the ability to award equitable relief where the

8    party asserting the cause of action for such relief does not

9    have standing under any other section of the Code”).

10       As the Supreme Court observed, “SIPC’s theory of

11   subrogation is fraught with unanswered questions.”       Holmes

12   v. SIPC, 

, 270 (1992) (ultimately declining to

13   decide subrogation issue and instead holding that link

14   between stock manipulation and harm to customers was too

15   remote to support SIPC’s RICO claim).     As in Holmes, SIPC

16   has left courts “to guess at the nature of the ‘common law

17   rights of subrogation’ that it claims.”    Id. at 271.

18       The practical skepticism voiced in Caplin in a

19   traditional bankruptcy context is justified here as well.

20   Would such suits prevent customers from “mak[ing] their own



     entitled to bring, but have already initiated their own
     action.” Redington v. Touche Ross & Co., 

, 635
     (2d Cir. 1978) (Mulligan, J., dissenting).
                                   58
1    assessment of the respective advantages and disadvantages,

2    not only of litigation, but of various theories of

3    litigation”?     Caplin, 406 U.S. at 431.    Can a SIPA trustee

4    control customers’ claims against third parties if SIPC has

5    not fully satisfied the customers’ claims against the

6    estate?     How would inconsistent judgments be avoided, given

7    that “independent actions are still likely because it is

8    extremely doubtful that [the parties] would agree on the

9    amount of damages to seek, or even on the theory on which to

10   sue”?     Id. at 432.   Who would be bound by a settlement

11   entered into by either the Trustee or by each customer who

12   brings suit?     Id.    The size and scope of the litigation here

13   only amplify these concerns.

14       As Caplin advises, it is better to leave these

15   intractable policy judgments to Congress:

16               Congress might well decide that reorganizations
17               have not fared badly in the 34 years since Chapter
18               X was enacted and that the status quo is
19               preferable to inviting new problems by making
20               changes in the system. Or, Congress could
21               determine that the trustee . . . was so well
22               situated for bringing suits . . . that he should
23               be permitted to do so. In this event, Congress
24               might also determine that the trustee’s action was
25               exclusive, or that it should be brought as a class
26               action on behalf of all [creditors], or perhaps
27               even that the [creditors] should have the option
28               of suing on their own or having the trustee sue on
29               their behalf. Any number of alternatives are

                                       59
1            available. Congress would also be able to answer
2            questions regarding subrogation or timing of law
3            suits before these questions arise in the context
4            of litigation. Whatever the decision, it is one
5            that only Congress can make.

6   Caplin, 406 U.S. at 434-35.

7                            *    *    *

8       For the foregoing reasons, the judgments are affirmed.




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