Madoff trustee Irving Picard has sued UBS twice, seeking a combined total of $2.6 billion, but it looks like the bank may be able see that number reduced by as much as $2 billion.  As reported by Bloomberg, Picard may have to drop about $2 billion in claims after he informed a federal district court judge that he would stop demanding damages from the Swiss bank, based on data from a filing by UBS.

While the lawsuits focus on allegations that Zurich-based UBS AG aided Bernie Madoff’s fraud by setting up so-called feeder funds and agreeing “to look the other way” at irregularities, Mr. Picard told Judge Colleen McMahon earlier this month he would ask UBS only to return money taken from the Ponzi scheme before its 2008 collapse. 

“Picard may have made a tactical decision” to retreat from bigger claims, said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, KY, who's not involved in Madoff litigation.  

After reviewing Picard’s original suit against UBS, Bowles said the trustee “will get large sums of money using garden variety bankruptcy law, but he is giving up at least $2 billion based on common and state law claims.”

Impact on Madoff Investors.    Madoff investors stand to receive much less money if Picard follows this scenario in other cases - i.e., drops damage claims.  He's going after JPMorgan for $19 billion in damages, equal to all money lost in the fraud.  His $1bn lawsuit against New York Mets’ owners uses common-law claims to demand the return of $700 million in principal.

A spokesperson for Mr. Picard, however, said the trustee’s decision to drop 2 common law causes of action against UBS and its affiliates “has no impact either on the strength of our case or on the amounts of recoveries and damages that the trustee’s actions will seek for ultimate distribution” to Madoff customers.

Impact on UBS.   UBS shares trading in Switzerland before U.S. markets opened rose as much as 4.4% on this news.  In New York Stock Exchange composite trading, UBS rose 3.7% as of 3 p.m. - but all Wall Street stocks were up, big time. 

Picard’s letter to the judge wasn’t filed in court.  Judge McMahon, who is reviewing the case, noted the trustee’s “amendment of right” and withdrawal of common law claims in a letter to both sides’ lawyers filed yesterday in court.  She asked them to clarify by 7/22/11 what claims remain and what funds Picard is trying to recoup relying solely on “garden variety bankruptcy” principles.

Ms. McMahon is also the judge in Picard’s $19 billion suit against New York-based JPMorgan.  She granted UBS’s request to review the case this month, saying it raises similar issues to the JPMorgan suit about whether Picard has a right to demand damages.

Picard filed 1,000 suits to recover $100 billion for Madoff investors. Instead of trying to recoup only money taken out of the bankrupt firm, he mostly demanded damages, using common law and other laws that banks say a liquidator isn’t entitled to use.

HSBC Holdings Plc (HSBA) asked U.S. District Judge Jed Rakoff to dismiss a $9 billion suit against the U.K. bank and so-called feeder funds, arguing that Picard went beyond his role as liquidator of the Madoff firm. 

Rakoff also is considering whether the trustee had a right to use U.S. racketeering law to triple his demands in a $59 billion suit against UniCredit SpA; Bank Medici AG; its founder, Sonja Kohn; and dozens of Italian and Austrian parties.

The case is Picard v. UBS AG, 11-cv-04213, U.S. District Court, Southern District of New York (Manhattan).    [Bloomberg, 7/20/11]