Trustee: J.P. Morgan “Knew” or “Should Have Known” About Madoff Fraud

February 12, 2011

As I mentioned in an earlier post about the owners of the New York Mets, Madoff’s bankruptcy trustee is suing J.P. Morgan (Madoff’s investment advisor).  Since Madoff’s company went bankrupt (and can’t pay its debts/victims) the trustee is trying to recover from others who may have been part of the fraud.  According to Bloomberg:

As banker, JPMorgan had legal duties to make sure it wasn’t laundering ill gotten gains, duties Picard says it blew off. The lawsuit accuses the bank of allowing the “stolen money” to be washed under its roof, seeming not to notice suspicious activity and glaring inconsistencies and omissions in regulatory reports.

We are talking jump-off-the-page inconsistencies. Madoff’s business repeatedly underreported the account’s cash on hand to regulators, once by as much as $290 million, according to the suit.

Madoff turned in at least 15 reports that should have shown millions of dollars in customer activity but which showed none.

(Of course, the U.S. Securities and Exchange Commission somehow missed the fraud, too.)

The bank also should have noticed that the Madoff account had money coming in from customers and money going out to other customers, the suit claims, but no purchases or sales of stocks, bonds or Treasury bills. What did it think was happening?

JPMorgan also had duties to clients because it structured and sold them products linked to Madoff feeder funds. But whenever it attempted due diligence and ran into Madoff’s stone wall, it never even slowed down, according to the lawsuit.

The trustee is probably heading in the right direction prosecuting J.P. Morgan.  This is common, when a company goes bankrupt, it’s the trustee’s job to point fingers elsewhere, because the bankrupt company can’t satisfy its debts.

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