Lawsuit Charges JPMorgan Suspected But Ignored Madoff Fraud

Bernie Madoff was not a criminal mastermind who single-handedly made fools of the world's sophisticated investors.

Bernie Madoff was not a criminal mastermind who single-handedly made fools of the world's sophisticated investors.

An explosive lawsuit charges he got help from his friendly bankers at Chase -- who had serious suspicions but coldly decided not to make waves while they were raking in a half-billion dollars in fees and profits from the Ponzi schemer's victims.

The suit, filed by Irving Picard, the court-appointed trustee for those victims, seeks $6.4 billion from JPMorgan Chase for the investors who took paper losses totaling $65 billion.

"Incredibly, 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," said Deborah Renner, a lawyer on Picard's team.

Starting in 1986, the bank enjoyed a close relationship with Madoff, and by the mid-2000s, it was making hundreds of millions of dollars by putting his firm together with hedge funds and other so-called "feeder funds" that invested their own clients' money with the scammer.

This relationship continued, the lawsuit says, despite the bank's own concerns over numerous "red flags" and "Oz-like signals" that suggested Madoff had been a "fraud for years."

Its senior staffers kept mum until October 2008, just two months before Madoff revealed that his genius investment strategy had actually been invented by Charles Ponzi back in the 1920s JPMorgan Chase, the second-largest bank in the nation, said it will "vigorously" fight the charges, which it called "meritless" and "based on distortions."

"JPMorgan did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff," said Jennifer Zuccarelli, a spokeswoman for the bank and its chairman and CEO, Jamie Dimon.

She added that the jailed fraudster "was not an important or significant customer" and the fees collected from him "were modest."

"At all times, JPMorgan complied fully with all laws and regulations governing bank accounts, including the regulations invoked by the trustee," she said.

But the 114-page complaint chronicles a damning list of e-mails and statements by top staffers that prove they were long suspicious of Madoff's impossibly high returns and his unwillingness to disclose anything about his investment strategy, Picard said.

Picard, in the midst of a two-year campaign to recoup lost Madoff investments, has also filed multibillion dollar suits against HSBC and UBS.

"While numerous financial institutions enabled Madoff's fraud, [JPMorgan Chase] was at the very center of that fraud and totally complicit in it," the legal papers charge.

Among Picard's charges:

* In 2007, several Chase executives lunching together discussed the probability that Madoff was a scammer -- and then e-mailed a co-worker comparing Madoff to Refco, a brokerage firm that collapsed in a fraud scandal in 2005

* The same staffers expressed fears in another e-mail that the bank was violating its own "know your client" rules by failing to investigate the lack of due diligence by its Madoff feeder-fund clients.

* A JPMorgan risk analyst talked about how the feeder funds were so "scared of Madoff," they "seemed unwilling to ask him any difficult questions" and he cultivated a "cult" aura.

* Other bank staffers believed Madoff and his feeder funds reported impossibly high returns that could not be "reverse-engineered."

* Another JPMorgan Chase worker noted that it seemed impossible that Madoff feeder Fairfield Greenwich Group generated an amazing 6 percent return during a down market in 2002 that saw the S&P 100 index plunge 30 percent.

The names of the Chase employees quoted by Picard were redacted from the papers made public, although John Hogan was head of risk management at the time. He didn't return calls for comment.

Picard estimates that the bank pocketed at least $500 million "in fees and profits off the backs of [Madoff's] victims, and is responsible for at least $5.4 billion in damages for its role in allowing the Ponzi scheme to continue unabated for years," the suit charges.

In 2006 alone, JPMorgan received $145 million in "fraudulent transfers" from Madoff, the suit says.

Bank profits also came from packaging complicated "exotic" credit and derivatives deals for Madoff and his network of feeder funds -- private wealth managers for the very rich or institutional investors -- that parked their clients' money with him.

The bank's due-diligence team found "the likelihood of fraud" with Madoff's "unexplainable returns," but its executives were "not concerned with the devastating effect of fraud on investors," the lawsuit alleges.

"There is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme," one exec wrote in 2007.

Rather than live up to its responsibility to sound the alarm, JPMorgan just crunched the numbers to determine what size fraud might harm its bottom line, Picard said. That number was $3 billion.
In 2008, JPMorgan decided it couldn't stomach the risk and started severing its connection to Madoff and his feeder funds.

It blew the whistle to British authorities in October of that year after one of its employees received a terrifying message from Aurelia, a Swiss-based wealth-management firm that invested its clients' money with Madoff feeder funds.

"The Aurelia Finance representatives made threats to [a JPMorgan Chase employee] referring to 'Colombian friends' who could 'cause havoc' and telling [the employee] 'we know where to find you,' " the court papers say.

The bank then launched its own probe of Aurelia to see if it was involved with laundering drug money, according to Picard.

Madoff's returns to his investors appeared "too good to be true -- meaning that it probably is," the bank told the British authorities.

Picard noted that Madoff had his own accounts with Chase, and they should have raised enough suspicions to trigger the bank's own money-laundering alarms.

A JPMorgan banker who handled a Madoff account for a decade confessed he didn't know if it was "used for market-making activities, investment-advisory services, or both," the suit charges.

It should have seemed strange that the money, which was supposed to have been used to buy securities, instead just kept moving in and out of Madoff's bank account, the suit notes.
After Madoff, 72, who is now serving 150 years in federal prison for fraud, was busted, the bankers congratulated themselves for severing ties with him.

"We've got a lot wrong this year, but we got this one right at least -- I said it looked too good to be true on that call with you in [September] . . . I guess it's true that when the tide goes out you see who is swimming naked," one staffer bragged after the humongous scam became public knowledge.

Now JPMorgan could be saddled with lawsuits from Madoff investors for "the next five, six, seven years," said banking analyst Richard Bove of Rochdale Securities.

Click here for more on this story from the NYPost. 

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