It has been nearly five years since the Ponzi scheme perpetrated by Bernard L. Madoff came to light, and litigation surrounding the case grinds on.

The trustee seeking to recover funds for defrauded investors, Irving H. Picard, asked the Supreme Court to overturn a lower court decision barring him from pursuing banks for their role in helping perpetuate the fraud.

Meanwhile, the prosecution of five former employees of Mr. Madoff’s firm began last week. The criminal trial is likely to expose more tidbits about the operation of the long-running fraud, including lurid details about sexual liaisons among staff members involving perhaps even Mr. Madoff himself. Yet, despite the titillating aspects of the case, it is really more of a footnote to his scheme.

The more important case concerns Mr. Picard’s efforts to recover funds from a number of banks, including JPMorgan Chase, UBS, HSBC and UniCredit. He accused them of aiding in the Madoff scheme by ignoring warning signs about the fraud that allowed it to grow. As time went on, the scheme cost investors about $17 billion, and wiped out billions more, as they were led to believe the money was safely in their accounts.

The trustee’s claim against JPMorgan alone seeks nearly $19 billion, so recovering even a portion of that amount could add significantly to the $9 billion Mr. Picard has already gathered to compensate investors.

As is frequently the case, the issue is not about the banks’ role in the fraud – at least not yet. Rather, it focuses on whether certain arcane legal doctrines will permit the lawsuits to move forward. The banks have been successful in obtaining dismissals of the complaints on the ground that Mr. Picard does not have the authority to pursue claims on behalf of the defrauded investors…..

Read the rest of the article at the NY Times.

At a March 2012 meeting, a group of examiners at the Federal Reserve Bank of New York agreed that Goldman Sachs had inadequate procedures to guard against conflicts of interest — guidelines aimed at stopping firms from putting their pursuit of profit ahead of their clients’ best interests.

The examiners voted to downgrade a confidential rating assigned by the New York Fed that could have spurred costly enforcement actions and other regulatory penalties. It is not known whether the vote in fact led to a rating change. The former examiner who pushed for a downgrade, Carmen M. Segarra, now contends in a lawsuit filed on Thursday that just weeks after the vote, her superiors asked her to change her findings on Goldman and fired her after she refused.

The vote to downgrade, which has not been previously reported, could have been a big blow for Goldman.

“Goldman Sachs does not have a conflicts-of-interest policy, not firmwide, and not for any divisions,” Ms. Segarra wrote to Michael F. Silva, a senior executive at the New York Fed. “I would go so far as to say they have never had a policy on conflicts.”

The lawsuit, along with a review by The New York Times of confidential government documents and internal e-mails, raises questions about the success of Goldman’s efforts to police potential conflicts.

The bank has been buffeted by accusations that it has put its own interests ahead of its clients, a contention it denies. Goldman, for instance, faced accusations that in the run-up to the financial crisis that it sold billions of dollars in souring real estate assets to unsuspecting clients. Just weeks before the examiners’ vote last year, the bank was publicly excoriated by a federal judge who found that Goldman had conflicts in a huge energy deal.

The lawsuit also provides a look into the often-opaque relationship between federal regulators and Wall Street. After the financial crisis, banking regulators faced criticism that they were too cozy with the banks that they were overseeing — a familiarity that failed to thwart some of the risky behavior precipitating the housing crisis and ensuing recession…

Read the rest of the article at the NY Times.

Even as it wrestles with the $18 billion of debt that has overwhelmed it, Detroit has already been billed more than $19.1 million by firms hired to sort through that debt, search for ways to restructure it, and now guide the city through court. That does not include more costs that the city is expected to bear for the support staff for its state-appointed emergency manager, and for another set of lawyers and consultants to represent city retirees.

“It’s just ridiculous,” Edward L. McNeil, an official with the local council of the American Federation of State, County and Municipal Employees, said of the mounting costs. “The only thing that’s getting done is that these people are getting paid big-time while the citizens of Detroit are getting ripped off.”

The uncharted scale of Detroit’s bankruptcy — it is the largest municipal bankruptcy filing in the nation’s history in terms of both the city’s population and its debt — suggests that it may also become the costliest, experts say. City officials offer no estimate for a final tab, but some bankruptcy experts say the collapse could ultimately cost Detroit taxpayers as much as $100 million. As of last week, 15 firms had contracts with the city that could total as much as $60.6 million, city records show.

Some lawyers and other consultants are accepting discounted fees, and a fee examiner has been appointed to ensure that bills stay within reason. Still, the soaring costs are a jolt to retirees and creditors bracing for cuts to payments they once expected.

Some lawyers from the firm Jones Day, which charged the city $3.6 million for four months of work this year, bill for as much as $1,000 an hour, documents filed with the city show. The firm also forgave the city more than $1.2 million in additional costs during the same period, and accepted fee caps as part of its contract, the records show, resulting in effective hourly rates that are lower.

Read the rest of the article at the NY Times.

Class-action lawsuits are the bane of most financial firms, and many recoil at the prospect of paying out millions to groups of clients if investments go sour. Now, the discount brokerage firm Charles Schwab & Company finds itself at odds with regulators as it seeks to eliminate the option of such suits for its clients.

For Wall Street, the skirmish has inadvertently brought fresh and unwelcome attention to the investor arbitration process and its flaws, and could severely curtail efforts by investors hurt by widespread problems, including claims of being marketed unsuitable investments by brokers who gave a deceptive sales pitch.

Investors generally have not been able to use the public court system for their disputes with their stockbrokers since 1987, when the Supreme Court ruled in Shearson v. McMahon that a brokerage firm could force customers to agree to arbitration. Since then, virtually every firm has added a so-called mandatory arbitration agreement to its new-account documents.

One exception was for issues that were pervasive enough to warrant class-action status, that way allowing groups of investors to sue a firm or firms.

But in 2011, Schwab added a clause to its customer agreement that required clients to agree not to pursue or participate in class-action suits….

Read the rest of the article at the NY Times.

The Justice Department, as you’ll recall, has accused S&P (MHFI) of helping cause the 2008 financial crash by inflating its ratings of esoteric subprime-backed securities. The company’s purported motive: pleasing the investment banks that pay its fees. The rating agency’s first line of defense was that it couldn’t be held liable for its claims of integrity because no sensible investor would believe its “AAA” rubber stamp.

In July, a federal judge in Santa Ana, Calif., brusquely rejected S&P’s “mere puffery” defense. If one read between the lines of his ruling, U.S. District Judge David Carter seemed incredulous that a company that bases its reputation on independent judgment would maintain with a straight face that it’s immune from legal consequences because no one takes its judgment seriously. “If no investor believed in S&P’s objectivity,” the judge wrote, “is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?” It seemed like something from the theater of the absurd….

Read the rest of the article at Bloomberg.

In the world of sovereign debt defaults, it is hard to imagine a less sympathetic debtor than Argentina. It has defaulted again and again for nearly two centuries, with few apologies. After the country’s most recent default, in 2001, it refused to negotiate for four years and then offered creditors a deal worth about 30 cents on the dollar — and vowed that those who refused would receive nothing.

After a second offer — on the same terms — in 2010, all but 7 percent of the bonds have been exchanged. But some of the remaining ones were owned by hedge funds that went to court. Last week they won a decision from the United States Court of Appeals for the Second Circuit in New York that has caused considerable concern at institutions like the Treasury Department and the International Monetary Fund.

The decision essentially says that Argentina cannot pay any creditors if it does not pay all of them, and says banks — in the United States and perhaps around the world — could face contempt charges if they allow Argentina to make payments to only those lenders it wishes to pay.

“While we strongly disagree with Argentina’s actions in the international financial arena,” a senior Treasury official, who spoke on the condition of anonymity, said this week, “we have serious concerns that the Second Circuit’s decision will undermine the orderliness and predictability of sovereign debt restructuring and could roll back years of progress.”

The United States government, in a brief filed with the appeals court before it made its decision, urged that it not take the course it ultimately took, warning that the decision could damage the status of New York as a chief world financial center and cause “a detrimental effect on the systemic role of the U.S. dollar” by encouraging countries to denominate their debt in other currencies and put them outside the jurisdiction of United States courts…..

Read the rest of the article at the NY Times.

The trial over the merger of AMR Corp. (AAMRQ) and US Airways Group Inc. should wait at least until March instead of starting in November, the U.S. government told a court.

Rushing to try the antitrust lawsuit isn’t a good idea given the case’s complexity and the potential for the merger to hurt competition and consumers, the Justice Department said in papers filed yesterday in federal court in Washington.

Short-term costs and uncertainties must be balanced against “the need for a full and fair exploration of the claims at issue, and the merger’s potential for long-term harm to consumers,” the government said.

Given the volume of trial materials to be exchanged, including interviews, expert testimony and data, “that is hardly a leisurely schedule,” it said.

The Justice Department’s request for a trial date of March 3 “is entirely unreasonable” given that the department has already been investigating the merger for more than 16 months, Tempe, Arizona-based US Airways and Fort Worth, Texas-based American Airlines said in a joint statement. The airlines proposed a November starting date for the trial….

Read the rest of the article on Bloomberg.