Madoff Trustee Sues JPMorgan Chase (primary banker sued for billions; facilitated money-launder)

Accounting Today ^ | 24/11 | Michael Cohn

[Liz]

The trustee liquidating Madoff’s asset management firm, has filed a complaint against JPMorgan Chase, claiming the bank had suspicions about Madoff’s Ponzi scheme going back to at least 2006, but waited until 2008 to alert authorities while it earned hundreds of millions of dollars from doing business with Madoff.

The complaint seeks to recover nearly $1 billion in fees and profits, and an additional $5.4 billion in damages, for JPMorgan Chase’s decades-long role as primary banker for Bernard L. Madoff Investment Securities’ (BLMIS), allegedly aiding and abetting Madoff’s fraud.

“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 BLMIS feeder funds,” said Deborah Renner, a partner at Picard’s law firm Baker & Hostetler. “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. Even then, JPMC executives did not restrict the BLMIS bank account, even though it was being used to launder money from the Ponzi scheme.”

The trustee alleges that JPMorgan Chase ignored its anti-money laundering obligations and repeatedly allowed suspicious transactions for high dollar amounts to occur in the Madoff account. The complaint alleges that, as Madoff’s banker for over two decades, JPMorgan Chase had financial reports in its possession that provided clear evidence of fraud and led a prominent fund manager at the bank to conclude that fraudulent activity was highly likely.

Employees at Chase also had concerns about Friehling & Horowitz, the small three-employee accounting firm located in a suburban strip mall in New City, N.Y., that audited Madoff’s lucrative investment management business. “Let's go see Friehling and Horowitz the next time we're in NY,” one of the bankers wrote,.” to see that the address isn't a car wash at least."

It was not until early 2006 that JPMorgan Chase performed even minimal due diligence on Friehling, according to the lawsuit. One JPMorgan Chase employee noted in an e-mail that “a quick check found that they [Friehling] are not registered with the Public Company Accounting Oversight Board, nor are they subject to peer reviews from the American Institute of Certified Public Accountants. Additionally, they have no website to provide background on their organization.”

Another employee noted that the choice of Friehling & Horowitz was an “odd choice” and questioned whether such a small firm was even competent to conduct an audit of an investment firm with “$650m in shareholder capital.”

In 2007, another JPMorgan Chase said he heard from a co-worker at lunch 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—Pls do that and let us know what you find."

JPMorgan Chase said in a statement that the lawsuit "is meritless and is based on distortions of both the relevant facts and the governing law," according to The Wall Street Journal, and claimed it "did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff." In October 2008, JPMorgan Chase filed a suspicious activity report with British authorities to relay some of its concerns about Madoff, but not the SEC.

It said in a filing with the U.K.’s Serious Organized Crime Agency that the claims for Madoff’s investments were “too good to be true—which means it probably is.” Two months later, Madoff confessed the Ponzi scheme to his two sons, calling it “one big lie,” and they alerted US authorities. Madoff is currently serving a 150-year prison sentence.

[CutePuppy]

Most people / fund managers who have invested with Madoff didn't think he ran a Ponzi scheme (or they would withdraw money much earlier), they thought he was using front-running to get his "stable results" and his unspectacular (relative to hot-shot hedge funds who boasted 20% or more) annual returns of about 8%-12% allowed him to fly under the radar of SEC and FInRA.

He had a trading floor (practically a mini-exchange) which made front-running a distinct probability, and should have exposed him to more regulatory scrutiny, not less, as was the case (him being a good liberal Democrat, and all). That was "the well-known cloud over the head of Madoff" but he was audited by SEC only a few times, on outside tips, with only a slap on the wrist for "regulatory compliance" misdemeanors.

Dropping or reporting a client because someone heard something from someone at lunch? Investment banking (or many other industries) would not exist if that were the case, but that kind of hearsay "warnings" always make great headlines in lawsuit news.

There is no substance here, the better case can actually be made against SEC and FInRA. But Picard can't lose by filing these kinds of lawsuits against "deep pockets" that are not currently favored by public at large - he might get a settlement (ridiculous $5B in "damages" to his clients should be thrown out out immediately) because it keeps him "in business" and collecting legal fees for several years while it would cost JPMorgan (and other "deep pockets") millions in legal fees, time, reputation and potential business. That's not very different from modus operandi that cons Larry Milberg and Melvyn Weiss (of former Milberg Weiss Bershad & Schulman) used in their sleazy class action lawsuits, only here it's actually authorized by the SPIC:

From - NY, 2011 February 04

< snip > ....."We've got a lot wrong this year, but we got this one right at least -- I said it looked too good to be true on that call with you in [September] . . . I guess it's true that when the tide goes out you see who is swimming naked," one staffer bragged after the humongous scam became public knowledge.

Now JPMorgan could be saddled with lawsuits from Madoff investors for "the next five, six, seven years," said banking analyst Richard Bove of Rochdale Securities.

That comment actually proves that they didn't know about Bernie's Ponzi scheme - only that it "looked too good to be true" for them to invest with him. They didn't have the responsibility to do the same kind of due diligence for anyone else, or even disclose it (may even have been prevented from external disclosure by lack of evidence and potential "defamation" or "loss of business" lawsuits).

Quick dismissal of this kind of lawsuit would be a positive step against legal abuse; "clawback" process shouldn't be used for "fishing expeditions" and "lawsuits with intent to settle" based on nothing more than some "degree of separation" with the schemer.

[CutePuppy]

From Lawsuit charges JPMorgan suspected, but ignored, Madoff fraud - NYP, By Chuck Bennett, Kaja Whitehouse and Bruce Golding, 2011 February 04

[Liz]

EXCERPT.......a JPM employee received a terrifying message from Aurelia Finance, a Swiss-based wealth-management firm that invested with Madoff feeder funds. "The rep made threats referring to 'Colombian friends' who could 'cause havoc,' telling [the JPM employee], 'we know where to find you,'" court papers say. BIG CLUE A JPMorgan banker handled a Madoff account for a decade...... money supposed to buy securities, just kept moving in and out of Madoff's bank account.......

LINK http://m.nypost.com/f/mobile/news/local/trustee_execs_fraud_shocker_chase_qHit6NpVPyZAZ0nZCgNNcL

POSTER'S ANALYSIS Feeder funds were placing enormous amounts with Bernie-----most never told investors where their money was going. The array of foundations and non-profits giving large sums to Bernie means he helped shady people commit tax evasion, by setting up offshore accounts.

Here's another rich and successful Madoff investor (/snix).

Hamptons Mega Mansion of Ira Rennert, Founder of Renco Group. Hamptonites complain the mansion is actually a yeshiva.

This Sagaponack, NY, obscenely gargantuan mansion, dubbed Fairfield, is reportedly the largest occupied residential compound in America Square Feet: 66,000 / 110,000 (including outbuildings). It is situated on 63 prime acres and houses 29 bedrooms and 39 bathrooms. It also has a dining room that stretches 90 feet long, a bowling alley, two tennis courts, a squash court, a 164 seat movie theater, and a 200 car garage. This home also contains a rather rare item; its own power plant. Fairfield is currently valued at more than $185 million.

SOURCE hubpages.com/hub/Top-Ten-Mega-Mansions

Or is this the rebuilt Temple of Solomon?

[Wiggins]

Thank you for the post. The depth of this crime is amazing. Here’s another link to a recent N.Y. Post article about the Wilpon’s and Saul Katz.

http://www.nypost.com/p/news/local/amazin_kin_all_had_to_bern_dwIueqtoYrU2uhjaoXEUaL

[Liz]

Thanx for the link. Man oh man-—the Wilpon family cleaned up. The trustee id’ed some 483 Wilpon accounts with Madoff. Wonder what their IRS returns look like (/snix).

All the parties pinged need to read this.

http://www.nypost.com/p/news/local/amazin_kin_all_had_to_bern_dwIueqtoYrU2uhjaoXEUaL

[Liz]

NYP EXCERPT Wilpon’s BIL Saul Katz told his country club friends that “nobody knows how Madoff does it.”

Madoff complained about Katz in a 2004 phone call to Katz’s business associates, Arthur Friedman, VP of Sterling Equities (the Wilpon’s investing entity).

Katz’s blathering irritated Madoff because his epic Ponzi scheme depended on an air of mystery and intrigue to ward off regulators and lure customers.

http://www.nypost.com/p/news/local/amazin_kin_all_had_to_bern_dwIueqtoYrU2uhjaoXEUaL

[ken5050]

Question: Sandy Koufax, one of the game’s greatest pitchers, is boyhood friends with Wilpon..they went to HS together. Koufax still makes an appearance at Mets spring trainig each year. Koufax had some financial difficulties a while back. I wonder if/why Wilpon ever had him invested with Bernie. Koufax is like a Jewish GOD to these guys..and admittedly, to me also, so I can’t believe they wouldn’t try to help him out...and Bernie would love to be able to say that Koufax was a client of his..heck..he’d probably have him atend his grandkids’ bar mitzvahs...it would be a coup..anyone see Sandy’s name on the list?

[Liz]

HUFFINGTON POST Sandy Koufax Invested With Madoff
AP   |  RONALD BLUM   |   February 5, 2009
LINK AT WEB SITE-----Madoff's Client List

EXCERPT — Hall of Famer Sandy Koufax, a high school baseball teammate and friend of Mets owner Fred Wilpon, was among the clients who invested with Madoff, according to a court filing. Accounts involving the Mets, their owners and Wilpon-affiliated companies were listed, many with Shea Stadium addresses. NOTE: Latest is Wilpons had 483 accounts with Madoff.

SOURCE http://www.huffingtonpost.com/2009/02/05/sandy-koufax-invested-wit_n_164283.html

[Liz]

SOURCE http://www.huffingtonpost.com/2009/02/05/sandy-koufax-invested-wit_n_164283.html
AP | RONALD BLUM | February 5, 2009

EXCERPT (As of 2009) Among the Wilpon-connected entities that had accounts with Madoff:

Sterling Mets, the Mets Limited Partnership;

the New York Mets Foundation;

Sterling Doubleday _ the entity that owned the team when Wilpon and Nelson Doubleday were partners;

Fred Wilpon and his wife, Judy, had individual accounts;

Fred's brother Richard;

Saul Katz, Wilpon's brother-in-law; Katz is the Mets' team president;

Jeff Wilpon, Fred Wilpon's son and the team's chief operating officer;

Valerie Wilpon, Jeff's wife;

Robin Wilpon Wachtler, Jeff's sister;

Charitable foundations of Fred and Judy Wilpon, and of Jeff and Valerie Wilpon;

several Wilpon family trusts;

Brooklyn Baseball Company, the Mets-controlled company that owns the minor league Brooklyn Cyclones,

Coney Island Baseball.

(As of 2009) Prosecutors claim Madoff admitted he lost more than $50 billion belonging to investors. Defense lawyers say he has cooperated with authorities to help identify assets.

(As of 2009) The Mets have not said how much the entities and individuals have lost. Jeff Wilpon said in December 2008 the money can be replenished over time as the operating businesses generate profits. "The individual partners lost some money at Madoff. It doesn't affect the Mets. It doesn't affect the Citi Field project. It doesn't affect SNY or any of our other operating businesses," Jeff Wilpon said.

[Wiggins]

I bet the IRS is still trying to calculate what the Wilpon’s owe and hid from them. The IRS is probably licking their chops on this one. The tax case will be coming next.

[ken5050]

Ah, thanks....I figured as much..

[nomorelurker]

Whatever my thoughts of Chase and other big banks God Forbid they should be policemen as well.

[CutePuppy]

Sandy Koufax was one of the "celebrity investors" with Madoff, along with several high profile celebrities including Kevin Bacon and his wife Kyra Sedgwick (from a wealthy New England/NY family) that gave investments with Madoff an aura of exclusivity.

Re multiple accounts, keep in mind that many of these accounts go back some 20-25 years, so it may depend what purpose and how they were created, in parallel or serially? For instance, if accounts were set up like non-liquid CDs or time deposits, it would mean that any additional funds deposited with Madoff would go into separate [CD-like] accounts. This sometimes could be helpful for tax accounting, determination of ST/LT profit tax rates, separation of accounts for loans against them and so on...

From your link Mets' owners' kin made millions from Madoff: suit - NYP, by Kathianne Boniello and Cathy Burke, 2011 February 06

< snip > ..... They "counted the purported equity in their wives' accounts toward their own total net worth, and also used funds withdrawn from their wives' accounts to meet their personal and/or business financial obligations," the documents said. ..... < snip >

..... And both clans -- and their trusts and related entities -- allegedly used $300 million in profits from Madoff investments as equity to get hundreds of millions more in loans and lines of credit. ..... < snip >

This confirms what I have suspected - while withdrawing some $48M in net profit from account(s) at Madoff, they used the account(s) and Madoff phony statements as a "soft collateral" for the loans to run Mets operations and execute contracts,
a) to avoid tax hit on profit and let it compound, and
b) use cheaper source of capital.

Now these loans are biting back, so they need to raise money (by selling part of ownership in the Mets) and gives some "legitimacy" to their claim of net loss with Madoff.

Interesting that Madoff had "liquidity problems" at the end of 2005; it suggests that he might have had unusually high rate of redemptions / withdrawal from his fund and had to to cover it by getting fresh capital, promising a higher rate of return in a "special investment opportunity".

From Wilpon labor pain - NYP, by Josh Kosman, 2011 February 08

Fred Wilpon's Bernie Madoff problem is expected to become an issue when the players' union and Major League Baseball open discussions soon on a new collective bargaining agreement, The Post has learned.

The Major League Baseball Players Association, concerned that owners may be unwisely investing millions of dollars in deferred compensation owed to players, will ask for stricter rules to be implemented that would better safeguard the cash and bar owners from playing fast and loose with it, sources told The Post.

Wilpon's Mets, which owe roughly $20 million in deferred compensation, invested that money with the scamster Madoff, according to a published report, alongside hundreds of millions of dollars in team, business and personal cash.

It is not known if the deferred-compensation money was among the hundreds of millions Wilpon and the Mets claim to have lost in the giant Ponzi scheme. ..... < snip >

The MLB may have to get involved with deferred comp contracts, change the rules, maybe mandate insurance or liens on accounts.

[Liz]

........while withdrawing some $48M in net profit from Madoff, the Wilpons used his phony statements as a "soft collateral" for loans a) to avoid tax hit on profit and let it compound, and, b) use cheaper source of capital. Now they need to raise money (by selling part ownership) and give some "legitimacy" to their claim of net loss with Madoff..........

Mmmmmmmm.......not to worry, The IRS will figure that all out. They're r-e-a-l-l-y good at math (/snix).

Interesting that Madoff had "liquidity problems" at the end of 2005; it suggests that he might have had unusually high rate of redemptions / withdrawals and had to cover it by getting fresh capital, promising a higher rate of return in a "special investment opportunity"....... ……

"Hi, I'm Bernie. Trust me."

[Wiggins]

No doubt MLB Players Association will be looking for some kind of regulation on how deferred money is invested by owners with the next CBA. I believe MLB will force the Wilpon’s to sell out completely to pay off this debt fast with the hopes that this thing goes away from at least a baseball perspective. Aside from all the victims that lost everything, this is giving MLB a black eye. Maybe two. Thank you for the post.

[ken5050]

Gotta disagree. ASs I said in my earlier post, deferred comp is a NON-QUALIFIED plan..the owners are not even required to set aside money in advance..they may choose to do so. Some teams do, some don’t, but even if they do so now, there’s nothing to prevent them from using that $$$ for something else later on. A-Rod wasn’t worried about losing his $250 mill, MLBB would have stepped up and made him whole...they have to. This is one issue the players aren’t worried about

[ken5050]

Gotta disagree. ASs I said in my earlier post, deferred comp is a NON-QUALIFIED plan..the owners are not even required to set aside money in advance..they may choose to do so. Some teams do, some don’t, but even if they do so now, there’s nothing to prevent them from using that $$$ for something else later on. A-Rod wasn’t worried about losing his $250 mill, MLBB would have stepped up and made him whole...they have to. This is one issue the players aren’t worried about

[CutePuppy]

Looks like JPMorgan's lawyers figured this out:

From JPMorgan claims no wrongdoing in Madoff mess - NYP, 2011 February 09

JPMorgan Chase, the bank where Bernard Madoff kept his clients' money, said in a court filing Tuesday that it had no legal obligation to figure out that the Ponzi king's investment scheme was a fraud. ..... < snip >

..... Firing back, JPMorgan said in a lengthy court filing that Picard was effectively trying to get the courts to create new law holding banks to much tougher accountability standards.

“The trustee is entirely wrong in asserting that JPMorgan violated any federal statutes or regulations; quite simply, the trustee's interpretation of federal banking law would impose broad investigative duties on banks that do not exist,” the bank's lawyers wrote.

The bank also challenged Picard's legal standing to bring the case. JPMorgan said that as the trustee for Madoff's company, he had no authority to bring what amounted to “an enormous backdoor class action” on behalf of Madoff's customers. ..... < snip >

Sounds familiar - this is effectively a "deep pockets" class action extortion suit à la Milberg Weiss; it's not within the letter, the spirit or the purview of the "clawback" law. A quick dismissal should put Picard in his place and back on track looking for the money and the real culprits / co-conspirators, not the scapegoats.

[Liz]

JP Morgan is using a "deep pockets" class action extortion suit à la Milberg Weiss; it's not within the letter, the spirit or the purview of the "clawback" law. A quick dismissal should put Picard in his place and back on track looking for the money and the real culprits / co-conspirators, not the scapegoats.

Lest we forget---Milberg and Lerach are enjoying the facilities at the Graybar Hotel (.snix).

=====================================

The "class action" scam.

EXCERPT---NYP---June 3, 2008 -- Mel Weiss, co-founder and chief trial counsel for the securities law firm Milberg LLP, was sentenced to 2 1/2 years for illegally paying clients to file shareholder suits that earned $251M in fees. Weiss pleaded guilty, admitting he helped secretly pay a stable of plaintiffs to file 150 suits, 1979-2005. They and their counterparts engineered cases and paid litigants to sue, that forced companies to payout $45B.........and damaged millions of stockholders. Indictments included racketeering conspiracy, mail fraud, money laundering. Lerach also made shady donations to John Edwards’ campaign.