How We Got Here.

It's a Richard Hatch Survivor style world out there in the financial trenches...  (reminds me of the brief "break" between WWI and WWII, when nothing from the first conflict had been solved really.)

Joe Nocera of the NYTimes tells us about walking away from the efforts to clean up the Bernie Madoff stink:

Still, in all the fighting between net winners and net losers, what tends to get overlooked is that the big boys — the “deep pockets” who could actually afford to compensate the Madoff victims — are being allowed to walk away from the fraud.

Early on, the trustee made an enormous effort to investigate the roles of HSBC, JPMorgan Chase and other financial institutions that were in one way or another linked to the Madoff fraud. (JPMorgan was Madoff’s banker, for instance.) It found various HSBC due diligence reports, to cite one example, that clearly showed bank executives declining to look too deeply into Madoff — even though internally they had acknowledged that his returns were too good to be true.

At one point, the trustee had up to $100 billion worth of lawsuits, most of them against some of the biggest financial firms in the world. But those cases are starting to be tossed out of court. Though the trustee is appealing, the odds of him gaining a reversal — and thus being able to claw back from Madoff’s enablers — are not high.

The crux of the problem is a longstanding legal doctrine called in pari delicto. What it essentially means is that “thieves can’t sue thieves,” says Peter Henning, a law professor at Wayne State University who writes about white-collar crime for DealBook in The Times.

That’s all well and good, I suppose, except that in the view of the law, Irving Picard is a thief. Even though he is trying to get money back for victims, the fact that he is representing the Madoff estate in bankruptcy court means that, in the eyes of the law, he is standing in the shoes of a very bad man. So when he alleges that the big banks played a role in the fraud, he has no legal standing to do so, the courts have ruled. A thief can’t sue a thief.

Nor is Madoff the only time in pari dilecto has been trotted out in recent years. According to Frederick Feldkamp, a retired lawyer who has dug into its implications, it has become a common tactic to shield lawyers, accountants, banks and other enablers of fraud that winds up in bankruptcy court. “It’s being used everywhere,” he told me. Bankruptcy trustees can’t overcome the hurdle it poses, and thus are stuck with clawing back money from victims.

If Picard can’t sue the big banks for wrongdoing in the Madoff case, then who can? You might think the answer would be the Madoff victims themselves. When Colleen McMahon, a federal judge, threw out Picard’s lawsuit against JPMorgan last year, she suggested that, indeed, only the victims had the standing to sue.

Sure enough, a group of Madoff victims decided to file a class-action lawsuit against the bank. Guess what. It’s probably not going anywhere either — thanks to a law, passed in the mid-1990s, that drastically limits the ability to sue companies for securities fraud.

You can’t blame the judges for making these rulings. They are doing what the law plainly tells them to do. But it does make you wonder who the law is supposed to serve: huge institutions that can hide behind legal niceties, or victims of fraud.

Sadly, these days, the answer seems obvious.