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Last updated: February 4, 2011 12:04 am
A senior JPMorgan Chase risk officer was warned that Bernard Madoff had “a well-known cloud” over his head and was suspected of running a Ponzi scheme nearly 18 months before the New York broker was charged with presiding over a $19.6bn fraud, according to a newly unsealed court filing.
The allegation is part of a $6.4bn lawsuit filed against the US bank by Irving Picard, the trustee charged with recovering money for Mr Madoff’s victims. The lawsuit seeks to recover $1bn in fees and profits that JPMorgan reaped as the primary banker to Mr Madoff’s business and by structuring Madoff-related derivatives, plus $5.4bn in damages.
The 114-page complaint unsealed Thursday was originally filed secretly at JPMorgan’s request. It was one of nearly 60 lawsuits the trustee filed late last year seeking more than $40bn from dozens of banks, hedge funds and individuals he claims profited from Mr Madoff’s fraud.
Mr Picard alleges that JPMorgan ignored billions of dollars in suspicious transfers in Mr Madoff’s bank business account and repeatedly failed to follow up on concerns raised by employees involved in Madoff structured products.
JPMorgan said Mr Picard’s complaint “is meritless and is 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,” it said.
The bank also said it had complied with all laws and regulations governing bank accounts and that the revenues it earned from Mr Madoff’s account “were modest and entirely consistent with conventional market rates and fees.”
JPMorgan was Madoff’s primary US bank for more than 20 years and it also sold structured products related to the hedge funds that sent money to the scheme. As part of the latter process, the bank did due diligence on the hedge funds and their relationship with Mr Madoff. Mr Picard’s complaint quotes from several emails in which JPMorgan employees raised questions.
“It doesn’t look pretty,” wrote one about the Aurelia hedge fund’s arrangements, and another alllegedly complained “Mr. Madoff will not allow us to conduct any due diligence on him.”
The conversation with the risk officer allegedly occurred in June 2007 when JPMorgan was considering backing more Madoff-related structured products.
The complaint quotes an email in which the risk officer allegedly wrote that he had been told by another JPM employee “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-he said if we google the guy we can see the articles for ourselves....I think we owe it to ourselves to investigate further.”
The risk officer later approved $250m in structured products, the complaint said.
JPMorgan began pulling its own money out of Madoff-related products in 2008, after the acquisition of Bear Stearns prompted a new look at hedge fund exposure. It reported the broker to the UK Serious Organised Crime Agency in October 2008, saying Madoff’s returns “appear too good to be true.” Mr Madoff turned himself in to authorities in December 2008 and is serving a 150 year sentence for fraud.
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