Top JPMorgan Officials Suspected Madoff Years Before Fall

Feb 4 2011 | 2:16am ET

JPMorgan Chase executives and risk managers had—and aired—grave suspicions about Bernard Madoff almost three years before his $65 billion Ponzi scheme collapsed, according to a lawsuit unsealed yesterday.

The court-appointed trustee in the case, Irving Picard, alleged that Chase, Madoff's primary bank for more than 20 years, "knew or should have known" that its client was up to no good. Instead, the bank stayed quiet and continued to reap fees, earning more than $500 million.

The complaint, filed in December and unsealed by mutual agreement between Picard and Chase, puts meat on the Dec. 2 accusation by one of Picard's lawyers that Madoff "would not have been able to commit this massive Ponzi scheme without this bank."

Picard cites several internal documents showing that, as early as February 2006, some at the bank were expressing misgivings about Madoff. The first analyst to have a look at a Madoff feeder fund reported that it was reporting returns far in excess of the securities it allegedly held. More than a year later, in June 2007, a risk manager at the firm reported that another executive at the bank "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."

"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" Madoff feeder funds, Deborah Renner, a Picard lawyer, said in a statement. "As we allege in the complaint, JPMC had a palpable concern that Madoff was a fraud for years, but it was not until October 2008 that it reported Madoff to government officials." Madoff's scheme collapsed in December.

Picard is seeking $1 billion in restitution from JPMorgan and $5.4 billion in damages. Chase said it will "vigorously" fight the allegations, which it said were "based on distortions of both the relevant facts and the governing law." Chase said that "Madoff's firm was not an important or significant customer in the context of JPMorgan's commercial banking business…. At all times, JPMorgan complied fully with all laws and regulations governing bank accounts, including the regulations invoked by the trustee."

Picard alleges that JPMorgan sold some $130 million in derivatives linked to Madoff feeder funds and planned to sell a further $1.2 billion's worth, but the firm's hedge fund underwriting committee refused to increase its exposure beyond $250 million.

"Mr. Madoff will not allow us to conduct any due diligence on him directly," one employee complained.

Picard further alleges that Madoff's everyday banking at Chase should have raised serious alarms. One day in 2002, Madoff made 318 payments of $986,301 to one customer's account, the lawsuit alleges. A year earlier, Madoff had received $90 million checks from the same customer "on a daily basis."

A simple "glance at the bizarre activity" should have sufficed for JPMorgan "to realize that Madoff was not operating a legitimate business," the lawsuit alleges.

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