Securities Regulation Daily Claim that JPMorgan was controlling person over Madoff was untimely
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Thursday, August 11, 2016

Claim that JPMorgan was controlling person over Madoff was untimely

By Rodney F. Tonkovic, J.D.

An 11th Circuit panel has affirmed that a controlling person claim arising out of JPMorgan Chase's involvement in Bernard Madoff's Ponzi scheme were untimely. The plaintiff investors had accused JP Morgan, which provided banking services to Madoff, of being an indispensable part of his scheme. The panel affirmed the district court's conclusion that the complaint's controlling person claim was untimely and that the RICO claim was precluded by the PSLRA (Dusek v. JPMorgan Chase & Co., August 10, 2016, Titus, R.).

In the wake of the SEC and bankruptcy proceedings filed against Madoff and BLMIS, several class actions were filed against JPMorgan Chase & Co. and affiliated entities. In early 2014, JPMorgan entered into a global resolution in which it settled the bankruptcy claims and agreed to pay a $1.7 billion penalty for two felony violations of the Bank Secrecy Act and to pay $218 million to settle the class action (the Shapiro action). The class action included only net losers; as net winners (having withdrawn more than they invested before the scheme collapsed), the plaintiffs in this matter were excluded from the settlement.

Controlling person claim. According to the complaint in this action, BLMIS had a continuous banking relationship with JPMorgan and held a series of linked direct deposit and custodial accounts there. The investors argued that JPMorgan and two JPMorgan employees, its Chief Risk Officer and the Client Relationship Manager for one of Madoff’s accounts, were liable as control persons under the federal securities laws due to their banking relationship with Madoff and BLMIS and their access to BLMIS's bank accounts.

The district court dismissed with prejudice the complaint's controlling person and RICO claims. According to the court, the controlling person claim was untimely and there was no showing that JPMorgan had power over BLMIS's general, day-to-day affairs, or any direct or indirect influence over its corporate policies. The federal RICO claim was barred by the PSLRA because the conduct giving rise to the claim amounted to securities fraud.

Tolling. On appeal, the investors asserted that Section 20(a)'s five-year repose period was tolled under American Pipe by the pendency of the Shapiro action. At issue, then, was whether American Pipe applies to statutes of repose. The panel noted that both the Second and Sixth Circuits have found, based on the Rules Enabling Act, that American Pipe tolling does not apply to Section 20(a) controlling person claims. Also, the Eleventh Circuit and others have described the American Pipe rule as one of equitable, rather than legal, tolling, and the district court followed these decisions.

The panel affirmed the district court's judgment that American Pipe tolling did not apply to the statute of repose in this case. The investors' right to bring their Section 20(a) claim expired on December 11, 2013, five years after Madoff was arrested. Because the complaint was filed in March 2014, the claims were time-barred.

RICO. The panel then affirmed the district court's dismissal of the RICO claim. The investors' claims of mail and wire fraud, the panel said, were clearly based on Madoff's fraudulent conduct relating to securities investments. The RICO claim, therefore, was properly dismissed as precluded by the PSLRA.

The case is No. 15-14463.

Attorneys: Helen Davis Chaitman (Becker & Poliakoff) for Russell Dusek. John Ford Savarese (Wachtell, Lipton, Rosen & Katz) and Carlos Juan Canino (Stearns Weaver Miller Weissler Alhadeff & Sitterson) for JPMorgan Chase & Co., JPMorgan Chase Bank N.A. and J.P. Morgan Securities LLC.

Companies: JPMorgan Chase & Co.; JPMorgan Chase Bank N.A.; J.P. Morgan Securities LLC

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