JPMorgan Chase is facing a lawsuit over its dealings with admitted Ponzi schemer Bernard Madoff. According to Bloomberg.com, the lawsuit alleges that JPMorgan learned that Madoff was running a scam last fall, but kept quiet to protect its own interests.
Madoff pleaded guilty to 11 fraud counts on March 12. The former chairman of the Nasdaq stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Last November, Madoff told his investors that his fund held more than $64 billion, but in reality, he only had a fraction of that amount.
Lots of banks had dealings with Madoff, including JPMorgan. As we reported in January, in 2006, JPMorgan 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. Last fall, JPMorgan began taking its own money out the hedge funds, but never let its investors know.
According to Bloomberg.com, Madoff himself had a checking account with JPMorgan. In fact, just a month ago the bank agreed to transfer $2.4 million in a Madoff account to the trustee liquidating his assets. According to The New York Times, Madoff has admitted moving millions of dollars through his checking accounts to give the illusion of active investing, when in fact he purchased no securities at all for his thousands of clients.
The Madoff lawsuit against JPMorgan was filed by MLSMK Investments Co., a Palm Beach, Florida– based partnership that deposited $12.8 million with JPMorgan from October to December. The lawsuit claims that in the same time period, JPMorgan allowed its brokers to trade with Madoff’s market-making business, which he used to generate legitimate trading volume that satisfied regulator audits and inquiries.
According to The New York Times, MLSMK Investments’ lawsuit claims that JPMorgan had indications that something odd was going on with Madoff’s accounts. For instance, the average balance in his checking accounts at JPMorgan Chase ran into the billions of dollars between 2006 and the middle of 2008, as nervous customers moved money from seemingly riskier investments and deposited it with Madoff. Then in September 2008, the cash balance “began to drop precipitously,†sometimes hovering near zero until Madoff could transfer fresh funds in his London affiliate. According to the Times, attorneys representing MLSMK said that the erratic activity in Madoff’s accounts should have “raised alarms” at JPMorgan.
JPMorgan, according to the complaint, “began to grow suspicious of Madoff’s results and embarked on a due diligence investigation of Madoff’s operations,†Bloomberg.com said. According to the lawsuit, that investigation determined it wasn’t plausible for Madoff to be generating the returns he claimed. According to the MLSMK complaint, JPMorgan’s decision last fall to begin liquidating its position in the Madoff-linked hedge funds was prompted by its due diligence investigation.
According to Bloomberg.com, the MLSMK lawsuit charges JPMorgan with racketeering, negligence and breach-of-duty. It seeks $12.8 million in compensatory damages plus punitive damages.
