By Jonathan Stempel
NEW YORK (Reuters) - A federal appeals court threw out a lawsuit accusing JPMorgan Chase & Co <JPM.N> of violating U.S. racketeering law by conspiring with Bernard Madoff to further his Ponzi scheme.
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Thursday's decision, in a case brought by a Florida partnership that invested with Madoff, came less than two weeks after the trustee seeking money for Madoff victims separately filed an amended $19.9 billion lawsuit against JPMorgan, accusing it of enabling Madoff's fraud and ignoring red flags.
The trustee, Irving Picard, is trying to use the same racketeering law to recover as much as $58.8 billion from dozens of European defendants in his largest Madoff lawsuit.
In Thursday's decision, the 2nd U.S. Circuit Court of Appeals of New York rejected an allegation by MLSMK Investment Co that JPMorgan violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by conspiring with Madoff to "fleece" customers, and failing to freeze his accounts.
MLSMK, based in Palm Beach, Florida, said it lost its $12.8 million investment with Bernard L. Madoff Investment Securities LLC when Madoff was arrested on December 11, 2008. It sought to hold JPMorgan liable for conspiracy under RICO, which allows treble damages, by aiding and abetting Madoff's fraud.
But Judge Robert Sack, writing for a three-judge panel, said a federal ban on civil RICO claims based on securities fraud also covers aiding and abetting claims.
"As the plaintiff concedes," he wrote, "the purpose of the bar was to prevent litigants from using artful pleading to bootstrap securities fraud cases into RICO cases, with their threat of treble damages."
District Judge Barbara Jones had dismissed MLSMK's RICO claim on different grounds. The 2nd Circuit had on June 6 also upheld her dismissal of four New York state law claims.
"The circuit essentially said aiders and abetters of securities fraud have a free pass, because plaintiffs cannot sue them for securities fraud or RICO," Howard Kleinhendler, a partner at Wachtel & Masyr representing MLSMK, said in an interview. "I don't think that's a correct result, or what Congress intended."
He said his client may appeal to the U.S. Supreme Court.
Patricia Hynes, a partner at Allen & Overy representing JPMorgan, called the decision "a very important ruling."
She said it resolved a split of opinion among judges in the 2nd Circuit, and makes clear that plaintiffs cannot do an "end run" around laws barring RICO claims based on securities fraud by presenting their claims differently.
Picard filed his $58.8 billion lawsuit against dozens of defendants including Austria's Bank Medici AG, its founder, Sonja Kohn, and Italy's UniCredit SpA <CRDI.MI>. He alleged $19.6 billion of damages, which could be tripled under RICO.
Thursday's decision "could be problematic for the trustee" in that case, Kleinhendler said.
A spokeswoman for Picard had no immediate comment. A UniCredit lawyer declined to comment.
Picard has filed roughly 1,050 lawsuits on behalf of Madoff victims to recover more than $103 billion.
Madoff, 73, is serving a 150-year prison sentence.
The case is MLSMK Investment Co v. JPMorgan Chase & Co et al, 2nd U.S. Circuit Court of Appeals, No. 10-3040.
(Editing by Steve Orlofsky)