JPMorgan Got Out of Madoff -Linked Funds Last Fall, But Didn't Warn Its ClientsJan 29, 2009 | Parker Waichman LLP
JPMorgan Chase got out of two hedge funds linked to accused Ponzi schemer Bernard Madoff in the nick of time, and now says its losses related to any Madoff investments are "pretty close to zero". But the New York Times is reporting that some of the bank's European clients who invested in the same funds through JPMorgan want to know why they weren't told of the bank's concerns.
Madoff was arrested on one count of securities fraud on December 11. Madoff - once a chairman of the Nasdaq stock exchange - is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.
According to the FBI complaint against Madoff, that business was largely a Ponzi scheme. The FBI said Madoff “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.” Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.
Lots of banks and hedge funds invested with Madoff, including JPMorgan. According to The New York Times, in 2006, the bank had started offering investors a way to leverage their bets on the future performance of two Fairfield Greenwich Group hedge funds that invested with Madoff. To protect itself from the resulting risk, the bank put $250 million of its own money into those funds, the Times said.
Last fall, JPMorgan began taking its own money out the hedge funds, but never let its investors know, the Times said. Now, some clients in Europe are accusing JPMorgan of protecting itself at the expense of its clients.
A spokesperson for the bank told the Times that JPMorgan decided to take its money out of the Fairfield funds after a review of its hedge fund exposure last fall. The bank was concerned with the "lack of transparency to some questions we posed as part of our review." The spokesperson also said that under sales agreements, “we did not have the right to disclose our concerns.”
Now, JPMorgan clients are left with investments that probably aren't worth the paper they're written on. Some investors told The New York Times that even now, JPMorgan had not provided any further information about their potential losses, even when asked for updates.