Monday, October 28, 2013


This story first appeared in USA Today.

Trustee seeking to recover funds lost by investors wants Supreme Court to review case

The nation's largest bank isn't out of financial jeopardy for its business link to the Bernard Madoff fraud scandal.

The court-appointed trustee trying to recover billions Madoff stole in the now-infamous Ponzi scheme petitioned the U.S. Supreme Court this month, asking it to issue the final word on whether JPMorgan Chase should pay for taking little action on suspicious activity in the account Madoff held at the bank.

The petition also argues that Swiss banking giant UBS, global bank HSBC and other financial institutions should share legal liability with JPMorgan for failing to stop the fraud.

"Madoff did not sustain this unprecedented fraud for more than two decades by himself," David Rivkin, the counsel for trustee Irving Picard, wrote in the Oct. 9 petition. "Instead, he was aided by a network of financial institutions, feeder funds and individuals who funneled investments" into Madoff's firm, provided financial services "and (of course) skimmed off substantial amounts for their efforts."

The petition asks the Supreme Court to review a federal appeals court decision in June that upheld lower court rulings that barred the trustee from pursuing financial recovery from the financial institutions. The lower courts ruled the federal law that empowers the trustee limits him to customer claims against Madoff's now-insolvent business.

The high court set a Dec. 9 deadline for the banks and feeder funds to file legal responses. They have repeatedly said they acted in good faith and could not have detected or stopped Madoff's scheme.

Formally known as a writ of certiorari, the petition represents a legal long shot. The Supreme Court agrees to accept only a fraction of the thousands of cases submitted for review. But Picard's petition argues that several federal appeals courts around the nation have issued differing rulings on similar matters. The Supreme Court sometimes reviews such cases to resolve legal discrepancies.

David Sheehan, Picard's chief counsel, maintained the trustee has legal authority "to pursue compensation from any third party that collaborates with a broker to defraud its customers."

JPMorgan "was foremost among (financial institution) collaborators, standing at the very center of Madoff's fraud for over 20 years," Picard's petition argues.

Billions of dollars flowed through Madoff's retail checking account at the New York-based bank "in suspicious and repetitive round-trip transactions." Madoff was assumed to be making investments on behalf of thousands of mom-and-pop clients, celebrities, charities and financial institutions, and the account funds weren't "segregated in any fashion," the petition argued.

According to the trustee's petition, JPMorgan's chief risk officer, John Hogan, warned colleagues about 18 months before the fraud collapsed 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." But the bank response was to assign a junior employee "to see what a Google search could turn up about Madoff," the petition argues.

Despite its suspicions, JPMorgan ultimately invested with several feeder funds that funneled money to Madoff. But unlike thousands of other investors, JPMorgan Chase redeemed more than $276 million before the scheme crumbled. At that time, the bank sent a suspicious activity report about Madoff to the United Kingdom's Serious Organized Crime Agency.

"But these revelations came too late to do anyone, save JPM, any good," the petition argued.

Madoff confessed to the fraud in December 2008 and pleaded guilty the following year without standing trial. He's now serving a 150-year federal prison term. Accountants and other experts assisting Picard determined that the scam ran up nearly $20 billion in losses. Five former Madoff employees are currently on trial in New York on charges they were knowing participants in the scheme.

JPMorgan could also face criminal liability for its long financial relationship with Madoff. The New York Times reported Thursday that federal authorities and the bank have discussed a deferred prosecution agreement in which the bank would pay a financial fine and make acknowledgments concerning its Madoff-related activity.

The Times account, which cited information from people briefed on the inquiry, reported that JPMorgan could also be required to hire an independent monitor.

The Manhattan U.S. Attorney's office declined to comment. JPMorgan spokesman Joe Evangelisti reiterated previous statements that all personnel "acted in good faith" with regard to Madoff's banking.

Separately, JPMorgan is negotiating a potential record-setting $13 billion settlement to address the role the bank and its subsidiaries played in marketing mortgage-backed securities during the run-up to the 2008 financial collapse. The tentative agreement is expected to include a mixture of fines and consumer relief.

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