JP Morgan could be "complicit", by omission -ignoring signs of potential fraud -- as well as by commission, according to white collar lawyers I have consulted today.
It did not have to be an active partner in the Ponzi Scheme to be found guilty of a civil liability, lawyers say. Rather, the bank's omission would be ignoring several red flags -- troublesome signs of potential fraud -- and never investigating their accuracy or meaning. The bank did not fulfill its requirement to investigate Madoff fully and so could be found to be compliant in the scam.
Nevertheless, JPM denies being a party to the fraud and tries to defend its role by insisting that Madoff was not a major client of the bank.
It apparently received many signs of trouble, but generally ignored or neglected these signs, according to the complaint filed yesterday. The suit alleges that JP Morgan earned approximately $500 million from servicing Madoff.
There were numerable red flags, starting in 2002, that the bank never sought to pin down. Once the bank believed that Madoff's performance figures were not possible in 2002, when the stock market was down 30%, JP Morgan Chase had a duty to cease its banking services and report Madoff to the authorities, some lawyers believe.
JP Morgan, which was Madoff's main banker, never investigated the reasons for hundreds of millions of dollars being transferred from Madoff's account in New York to one in London -- and then back to New York again.
At the very least, JP Morgan was lax in not reporting these movements of cash to authorities under the requirements of regulations covering the issue of money laundering, say lawyers.
In another instance, there were serious doubts about the due diligence done by a feeder fund to Madoff's operation.
In other words, the nation's second largest bank, heretofore relatively unscathed, may be forced to settle the $6.4 billion suit brought against it by the bankruptcy trustee for Madoff's firm, Irving Picard.
In fact, it was not until 2008 -- several months before Madoff came clean about the scam, that JP Morgan told Britain's Organized Crime Agency that Madoff's investment performance appeared to be "too good to be true."
This move came only after a bank employee in London had been threatened with physical injury by an officer of Swiss-based feeder fund Aurelia, who was trying to withdraw money from the Madoff fund in London. That is a shockingly long time for the bank to wait before informing the authorities.
Mind you, JP Morgan did not then or any other time inform either the SEC, the Justice Department or the Treasury about its suspicions about Madoff. Not a particularly impressive performance by the House of Morgan. Better clean house of those patsies, Jamie.