Lawsuit: JPMorgan was warned on Madoff

By Charles Riley, staff reporter


NEW YORK (CNNMoney) -- JPMorgan Chase executives suspected that Bernard Madoff's investment strategy was actually a Ponzi scheme years prior to its collapse, but did nothing to stop it, according to the court-appointed trustee trying to recove assets stolen by Madoff.

The claims come in a lawsuit filed by trustee Irving Picard against JPMorgan Chase (JPM, Fortune 500). The suit, filed in a New York bankruptcy court in December, was unsealed Thursday.

The complaint seeks to recover nearly $1 billion in fees and profits and an additional $5.4 billion in damages stemming from the bank's long stint as Madoff's banker.

The complaint contains a redacted e-mail from a JPMorgan risk officer warning as early as June 2007 that Madoff was running a Ponzi scheme, and using the bank to hold his money.

"For whatever it[']s worth, I am sitting at lunch with [JPMC Employee 1] 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," the e-mail reads.

Despite the warning about Madoff's activities in 2007, the complaint alleges that JPMorgan didn't bring the matter to the attention of authorities until October 2008.

At that time, the bank admitted in a filing made to the United Kingdom's Serious Organized Crime Agency that Madoff's firm's performance was "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."

But even that failed to stop JPMorgan's involvement, according to Deborah Renner, a partner at Baker & Hostetler, the court-appointed counsel for the trustee.

"Even then, JPMC executives did not restrict the BLMIS [Madoff's] bank account, even though it was being used to launder money from the Ponzi scheme," said Renner.

In addition to the e-mails, the trustee says JPMorgan should have been tipped off by the way Madoff's account was being used. According to the complaint, the account had frequent large dollar transactions, suspicious spikes in activity, and wire activity with offshore accounts, all of which should have raised red flags.

In a statement to CNNMoney, a JPMorgan spokeswoman said the complaint is "meritless" and "based on distortions of both the relevant facts and the governing law."

"Contrary to the trustee's allegations, JPMorgan did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff," she said, adding that at all times, "JPMorgan complied fully with all laws and regulations governing bank accounts."

The complaint was initially filed under seal, but after an agreement between lawyers for the two parties, the document was made public.

"We have reached an agreement with opposing counsel to unseal a large majority of the complaint, with the exception of several allegations as well as the identities of the bank's employees and customers," said Renner, the lawyer for the trustee.

What remains unclear is exactly which executives at JPMorgan were allegedly warned about Madoff, but a statement from Renner says that senior management was involved.

"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," Renner said. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 18,132.70 -81.72 -0.45%
Nasdaq 4,963.53 -24.36 -0.49%
S&P 500 2,104.50 -6.24 -0.30%
Treasuries 2.00 -0.01 -0.69%
Data as of 9:54am ET
Company Price Change % Change
Bank of America Corp... 15.81 -0.23 -1.43%
Apple Inc 128.46 -1.96 -1.50%
General Electric Co 25.99 0.10 0.39%
Microsoft Corp 43.85 -0.20 -0.47%
Chesapeake Energy Co... 16.68 -0.52 -3.02%
Data as of Feb 27
Sponsors

Sections

Berkshire Hathaway CEO Warren Buffett released his 50th annual letter to shareholders. The Oracle of Omaha thinks the next 50 years will be great and knows who will replace him. More

Potential presidential candidate says that improvement in unemployment rate is due to millions of jobless not being counted. More

These people say they've already finished watching all 13 episodes of the new season of 'House of Cards.' More

A social media frenzy about the color of a dress is bringing fame and fortune for one small British fashion company. More

The top 5 consumer complaints have to do with identity theft, debt collectors, imposters, telephone companies and banks. More