Madoff Trustee Irving Picard Sues JPMorgan for $6.4 Billion; Will Investors Follow?

By Allan Dodds Frank  DEC 03, 2010 8:30 AM

If Irving convinces judge to unseal the case, class-action lawyers will likely comb through the complaint to look for evidence to sue the bank on behalf of investors.


Babysitting Bernie Madoff was worth $1 billion in profits and fees to JPMorgan Chase (JPM), at least according to the calculations of the Madoff bankruptcy trustee.

In what amounts to an allegation that JPMorgan Chase executed an extended cover-up of the world’s greatest Ponzi scheme, Madoff trustee Irving Picard Thursday sued the bank -- the holder of Madoff’s primary account -- for $6.4 billion.

The civil complaint remains sealed at US Bankruptcy Court in Manhattan at JPMorgan Chase’s request, at least for now. Picard vowed to try to make his allegations public as soon as possible, but for now, he settled for a press release blistering the bank for its “significant role” in aiding and abetting Madoff.

The Picard complaint accuses the nation’s second largest bank of failing to reveal what it had discovered on its own: Namely, that one of its best customers for more than two decades -- Bernard L. Madoff -- was a fraud and his investment company a criminal enterprise.

“JPMorgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff,” says Picard’s right hand man, David J. Sheehan, in the press release.

“While many financial institutions enabled Madoff's fraud, JPMC was at the very center of that fraud, and thoroughly complicit in it,” Sheehan continued. “….Madoff would not have been able to commit this massive Ponzi scheme without this bank. JPMC should pay the price for its central role in enabling Madoff’s fraud.”{FLIKE}In a statement, JPMorgan Chase dismissed the trustee’s allegations as “utterly baseless and demonstrably false…meritless and unfounded” and a distortion “of the facts and the law in an attempt to grab headlines.”

According to Picard’s legal team from Baker Hostetler, JPMorgan Chase collected $1 billion in fees from Madoff and his companies, causing the bank to “willfully” overlook questions about Madoff’s veracity and solvency.

(Other court papers filed since Madoff was charged on Dec. 11, 2008, show that JPMorgan Chase, at any given moment, held hundreds of millions of dollars for Bernard L. Madoff Investment Securities.)

“JPMC was willing to ignore decades of suspicious and inexplicable activity,” instead of getting to know its customer, said Deborah Renner, another of Picard’s team in the press release.

Picard’s team also makes a pointed reference to reports that JPMorgan Chase -- months before Madoff was caught -- withdrew its own investments from Madoff without revealing its suspicions to others. “JPMC admitted in the months before Madoff’s arrest that BLMIS’s returns were too good -- especially in down markets -- to be believable, but for years they pretended that was not the case,” said Renner. “Just as in the children’s fable, they knew the ‘Emperor had no clothes,’ but looked the other way, allowing the fraud to continue.”

JPMorgan Chase stock closed up Thursday despite the Picard attack. However, if the trustee succeeds in convincing Bankruptcy Judge Burton Lifland to unseal the case, class-action lawyers certainly will comb through the complaint to try to find evidence to sue the deep-pocketed bank on behalf of investors, especially those who got into Madoff indirectly through hedge funds that also may have been clients of the bank.

If the strong language and alleged facts made public in Picard’s $2 billion complaint last week against UBS are any indication what’s inside the sealed complaint, JPMorgan Chase could get a public-relations black eye, even should it prevail in court.

UBS helped hedge funds, including one it sponsored called LuxAlpha, invest with Madoff and then falsely claimed to be holding the securities involved, Picard’s complaint says. LuxAlpha lost more than $1 billion with Madoff.

Instead, says the trustee, UBS left the so-called custodial duties to Madoff’s firm. “Madoff’s scheme could not have been accomplished unless the UBS had agreed to look the other way and to pretend they were truly ensuring the existence of assets and trades when in fact they were not and never did.”

Of more than 100 lawsuits filed by Picard, only one -- against the estate of financier Jeffry Picower -- is larger. In that case, Picower, who died last year in his Palm Beach swimming pool, is alleged to have gotten $5 billion more out of his Madoff accounts than he ever put in.

The trustee is asking for $7.2 billion from the Picower estate and may be near a settlement close to that amount. The settlement had been expected for months, but apparently is being held up as the US Attorney’s Office in New York continues its criminal investigation.

No positions in stocks mentioned.

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