Chase exec in 07: Madoff returns ‘are speculated to be part of a Ponzi scheme’

Zachary Roth
Senior National Affairs Reporter
The Lookout

Yesterday we told you about a lawsuit accusing JPMorgan Chase of being "at the very center" of Bernie Madoff's $50 billion Ponzi scheme. The suit (pdf), filed by the trustee representing victims of the fraud, seeks $6.4 billion in profits and damages from the bank.

In unusually dramatic language, the lawsuit calls Chase, which for over 20 years, served as the principal banker for Madoff's operation, "complicit" in his crimes. But how, exactly?

In short, the trustee, Irving Picard, alleges that Chase should have known that Madoff's profits were fraudulent, and failed in its duty to adequately monitor his account's activity. The suit documents how senior bank executives expressed serious suspicions about Madoff's operation, but continued to do business with him anyway. Picard's complain also charges that when Chase finally did begin to remove most of the money it had invested in Madoff-linked funds, the bank still didn't alert government regulators to its suspicions, or freeze Madoff's account.

Here's a roundup of some of the warning signs that, according to Picard's filing, Chase failed to act on:

• A Chase risk analyst who examined the bank's use of a Madoff feeder fund in February 2006 reported that the returns did far better than the individual securities that were said to be in its portfolio -- and Picard alleges that the inflated returns were clear evidence of Madoff's  fraud. "It's almost a cult [Madoff] seems to have fostered," the analyst wrote.

• In June 2007, a high-level Chase risk management officer sent an email to colleagues informing them that another executive--the names have been redacted--"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."

• The suit also details how, over a stretch of in December 2001, Madoff's Chase account received a $90 million check from a customer's account "on a daily basis." Then, on one day in 2002, Madoff made 318 separate payments of $986,301 to the customer's account, for no apparent reason. The trustee alleges that such large and irregular transactions should have been flagged by Chase's money-laundering software.

"Madoff's firm was not an important or significant customer in the context of JPMorgan's commercial banking business," Chase responded in a statement. "The revenues earned from Madoff's bank account were modest and entirely consistent with conventional market rates and fees."

It added: "At all times, JPMorgan complied fully with all laws and regulations governing bank accounts, including the regulations invoked by the trustee."

(AP Photo/The New York Times, Ruby Washington)