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JPMorgan 'complicit' in Madoff fraud

February 04, 2011 13:44 IST

Global financial services firm JPMorgan Chase & Co was "at the very centre" of and "complicit" in the $50 billion Ponzi scheme masterminded by disgraced investment manager Bernard Madoff, a lawsuit filed in a US bankruptcy court has alleged.


The $6.4 billion lawsuit filed by Irving Picard, a court-appointed trustee seeking to recover money for former Madoff clients, alleges that despite being aware of the fraud, the US bank continued to do business with the scamster in the hope of protecting the bank's investments.


Picard also claims the concerns of bank employees were ignored and irregularities in Madoff's accounts were overlooked.


"While numerous financial institutions enabled Madoff's fraud, JPMorgan Chase was at the very centre of that fraud and thoroughly complicit in it," said the complaint filed with the US bankruptcy court in Manhattan.


The lawsuit unsealed on Thursday further alleged that the bank did not pay attention to billions of dollars passing through Madoff Investment Securities' main JPMorgan account or to discrepancies in the account balance and unreported obligations, including a $95 million loan.


"They had, legally, an obligation to make an inquiry, and they didn't. You are literally seeing millions of dollars going in and out on a daily basis and not one phone call is being made," Picard's attorney, David Sheehan, is quoted as saying in a Wall Street Journal report.


Picard's lawyers said JPMorgan and its affiliates were "willfully blind" to the "numerous" red flags surrounding Madoff. JPMorgan had a "decades-long role" as Madoff's primary banker, "aiding and abetting" the fraud, they added.


The bank allowed Madoff to move billions of dollars of investors' cash in and out of his JPMorgan Chase bank accounts right up to the day of his arrest in December, 2008.


However, by then, the bank had withdrawn all but $35 million out of the $276 million it had invested in Madoff-linked hedge funds, the litigation added.


The lawsuit alleges that the bank reported its suspicions on Madoff to British authorities only in late-October, 2008, less than two months before he surrendered and the fraud was exposed.


The 115-page lawsuit seeks the return of $1 billion in JPMorgan's profits and fees and $5.4 billion in damages.


The complaint cites a June 15, 2007, email by an investment bank risk officer saying, "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 Ponzi scheme."


Another bank official expressed amazement that the bank and hedge fund executives that were funneling money to Madoff had asked so few questions about his strategy and that some seemed afraid to confront him.


"It's almost a cult [Madoff] seems to have fostered," wrote the official.


Picard's attorney said: "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 in Bernard L Madoff Investment Securities LLC feeder funds.


The lawsuit cited internal emails and also includes information about the bank's efforts, starting in 2006, to make money by offering products tied to Madoff through investment funds that fed money to him.


The complaint includes details supporting allegations that JPMorgan "knew, or should have known" that BLMIS was engaging in fraud, said Picard.


Reacting to the lawsuit, JPMorgan said in a statement that the lawsuit "is meritless and is based on distortions of both the relevant facts and the governing law".


The bank said it "did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff" and that Madoff's firm "was not an important or significant customer" in the scheme of its overall commercial banking business.


"JPMorgan intends to defend itself vigorously against the unfounded claims brought by the trustee," said the bank.


Madoff, 72, pleaded guilty in March, 2009, to the multi-billion dollar fraud and is serving a 150-year sentence in a North Carolina federal prison.


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Yoshita Singh in Boston
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