Top executives at JP Morgan Chase & Co. knew about the massive Ponzi scam of the bank's client Bernard Madoff much before it became public but turned a blind eye to it, hoping to protect the bank's interests, according to a $6.4 billion lawsuit filed by a court-appointed trustee seeking to recover money for former Madoff clients.
According to Securities Investor Protection Act (SIPA) Trustee Irving Picard, the second largest bank in the U.S. put its personal interest ahead of public interest by allowing Madoff to rip-off his clients by operating a Ponzi scheme, which was subsequently estimated at $65 billion. A Ponzi scheme is one in which corrupt money managers use funds from some clients to pay other clients. The scheme collapses when they are eventually unable to meet redemptions.
While numerous financial institutions enabled Madoff's fraud, JPMorgan Chase was at the very centre of that fraud, and thoroughly complicit in it, the unsealed complaint filed with the U.S. bankruptcy court in Manhattan said.
The lawsuit claims the bank turned a blind eye to Madoff's fraud as it wanted to continue its decades-long relationship with one of its best customers - Madoff's firm Bernard L. Madoff Investment Securities (BLMIS).
It cites a a June 15, 2007 email by an investment bank risk officer: For whatever it's worth, I am sitting at lunch with (a bank employee) who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a (P)onzi scheme.
Madoff's Ponzi scheme was unearthed on Dec. 11, 2008. By that time, investors had lost almost $17.1 billion in principal, according to the complaint.
The complaint also quoted a JPMorgan employee, who had in February 2006 had urged that the bank assess quality and detail of reports from Madoff's firm, noting potential significant penalties if statements proved fraudulent or inaccurate.
In another instance, the bank employees had raised a red flag, wondering why BLMIS, which is so big, was being audited by a small suburban accounting firm. According to the complaint, one bank employee wrote to another in an email, Let's go see (auditors) Friehling and Horowitz the next time we're in NY...to see that the address isn't a car wash at least.
The lawsuit also mentions that the bank didn't pay attention to billions of dollars passing through Madoff Securities' main JPMorgan account, much of it by hand-written check, or discrepancies in the account balance and unreported obligations, including a $95 million loan.
Picard is seeking to recover from JPMorgan nearly $1 billion in fees and profits, plus $5.4 billion in damages.
The bank, however, has responded to the allegation by denying any wrongdoing.
JPMorgan did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff, a bank spokesperson.
According to the spokesperson, Madoff's firm was not an important or significant customer in the context of JPMorgan's commercial banking business and the revenues the bank earned from Madoff's bank account were modest.
The trustee makes no attempt to substantiate or support his unfounded claim that JPMorgan earned extraordinary sums from the Madoff account, and that claim is demonstrably false, the spokesperson said, adding that the bank will vigorously defend itself against Picard's meritless and unfounded claims.
However, the trustee's lawyers claim otherwise, saying JPMorgan earned at least $500 million in fees and profits off the backs of Madoff's victims.
JP Morgan ignored its anti-money laundering obligations and repeatedly allowed suspicious transactions for high dollar amounts to occur in the BLMIS account, said David J. Sheehan, lead counsel for Picard and a partner at Baker & Hostetler.
The complaint further alleges that, as the BLMIS banker, JP Morgan had financial reports in its possession that clearly evidenced fraud. The same reports led a prominent fund manager to conclude that fraudulent activity was highly likely.
In addition to the indicia of fraud JP Morgan saw given its role as BLMIS's primary banker for more than two decades, JP Morgan gained additional, unique insight into Mr. Madoff and his operation at BLMIS as it conducted due diligence for its own investments in BLMIS feeder funds.
JP Morgan had everything it needed to unmask the fraud.
Agrees Deborah Renner, also a partner at Baker & Hostetler.
The bank's top executives were warned in blunt terms about speculation that Madoff was running a Ponzi scheme, yet the bank appears to have been concerned only with protecting its own investments in BLMIS feeder funds, Renner said in a statement.
Renner said the bank knew of Madoff's Ponzi scheme for several years but decided to remain a silent spectator to the fraud being perpetrated until October 2008 - or two months before Madoff's firm collapsed - when it reported its concern to the U.K.'s Serious Organized Crime Agency. At that time, the bank had allegedly told the regulator that concerns around Madoff's business were based on the investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true - meaning that it probably is.
To date, Picard, who has been given the task of liquidating Madoff's firm, has filed a string of lawsuits of more than $50 billion against various individuals and businesses, including HSBC Holdings Plc, UBS AG and Fred Wilpon, whose family owns the New York Mets baseball team. Wilpon said earlier this week that he may sell part of the Mets as a result of Picard's litigation.
Picard, who is also a partner at the law firm, has already recovered roughly $10 billion from various parties to repay former Madoff clients.
The present lawsuit could be damning for JPMorgan, which is thought to be the only bank not at risk of failure when the financial crisis was at its peak in late 2008.
Madoff, 72, who admitted in his March 2009 guilty plea that that he ran his scheme for at least two decades, using his secretive investment advisory service to cheat thousands of individuals, charities, celebrities and institutional investors, is now serving a 150-year sentence in a North Carolina federal prison.
The case is Picard v. JPMorgan Chase & Co et al, U.S. Bankruptcy Court, Southern District of New York, No. 10-ap-04932.