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As most of us know, Bernie Madoff ran his Ponzi scheme by simply depositing his clients' checks in his business account at Chase Manhattan Bank (before 1996, Chemical Bank).  Now Madoff trustee Irving Picard is suing parent firm JPMorgan Chase, saying that Chase continued to do business with Madoff even after it knew something about him smelled.

Senior executives at JPMorgan Chase expressed serious doubts about the legitimacy of Bernard L. Madoff’s investment business more than 18 months before his Ponzi scheme collapsed but continued to do business with him, according to internal bank documents made public in a lawsuit on Thursday.

The suit, viewable here, seeks $6.4 billion in damages and restitution.  It alleges that as early as 2006, Chase knew or should have known that Madoff's wealth management business was a fraud.  Even after reporting its suspicions to British authorities in October 2008, it allowed Madoff to move money around in his accounts right up until his arrest two months later.

The suit alleges that several Chase employees--including some pretty high up in the pecking order--expressed concerns that something was amiss about Madoff's activities.  For instance, Chase's private bank wasn't willing to invest with Madoff in part because it didn't meet oversight requirements. Additionally, on several occasions, concerns were expressed that Madoff's accountant of record was Frehling and Horowitz, a three-person accounting firm with only one active accountant.  

However, the private bank was for a time on the short end of what the NYT describes as "an internal tug-of-war" within Chase.  

One group of senior Chase bankers was pursuing profitable credit and derivatives deals with Mr. Madoff and his big feeder-fund investors, the hedge funds that invested their clients’ money exclusively with him. Another group was arguing against doing any more big-ticket "trust me" deals with a man whose business was too opaque and whose investment returns were too implausible.

The latter group gained the upper hand by 2008; by the time of Madoff's arrest Chase had yanked all but $35 billion of the $276 billion it had invested with him.

Meanwhile, Picard alleges, the retail-bank side of Chase was asleep at the switch.

Even after it had begun to act on its suspicions about Mr. Madoff, Chase did not freeze his bank accounts or alert his regulators — or its own — to the unusual patterns in those accounts, the trustee contended.

The bank "had only to glance at the bizarre activity" in the Madoff accounts "to realize that Madoff was not operating a legitimate business," the trustee asserted in the suit. The money coming in was not from the sale of securities, and the money going out was not for the purchase of securities — at a time when Mr. Madoff was supposedly making billions of dollars in trades as part of his investment strategy, the complaint asserted.

Madoff opened his account with what was then Chemical Bank in 1986.  Chemical merged with Chase in 1996; while Chemical was the nominal survivor, the merged bank took the Chase name.  In that time, Picard says, Chemical/Chase ignored voluminous evidence that Madoff was engaging in money laundering, check kiting and other suspicious activities.

The evidence against Chase sounds pretty damning.  To my mind, the only question is how soon it'll settle.  

Originally posted to Christian Dem in NC on Fri Feb 04, 2011 at 04:50 PM PST.

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