A Federal court dismissed a shareholder lawsuit in connection with Bernie Maddoff's ponzi scheme and ruled that the big banks involved in managing Madoff's ponzi scheme funds can't be sued by shareholders and investors who sustained losses.
JP Morgan Chase and New York Bank of Mellon both managed Madoff Securities, the now reputed Madoff Ponzi scheme which received its life-blood from "Feeder Funds" that funneled billions of dollars into the ponzi scheme.
In 2011, investors Dana Trezziova and Neville Seymour Davis sued several foreign investment funds, accusing them of being such "feeder funds"in exchange for lucrative fees, while representing to investors that the funds were carefully managed by investment advisers, all before the ponzi scheme was exposed.
The investors also accused JPMorgan Chase, Madoff Securities' principal banker, of having not merely ignored "red flags" of fraud, but of having "actually knowledge that [Madoff Securities] was violating its fiduciary duties and committing fraud."
Nevertheless, "the JPMorgan Chase defendants kept their mouths shut to ensure their own profits at the expense of plaintiffs and the other members of the class," the complaint stated. Similarly, Bank of New York Mellon Corporation, which also provided banking services to Madoff Securities, allegedly had evidence of Madoff's fraud but chose to look the other way to continue collecting large fees.
But the 2nd Circuit appellate court dismissed the shareholders' claims against the two banks on a technicality. Trezziova and Davis failed to meet a standard required by the Securities Litigation Uniform Standards Act (SLUSA) enacted in 1998. The SLUSA is a complicated piece of legislation governing securities litigation. The law requires plaintiffs allege "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security."
Trezziova and Davis unsuccessfully argued that the complicated SLUSA law did not apply to their particular fact pattern but the appellate court disagreed.