Documents obtained by ABC News show that two months before Bernie Madoff's arrest JP Morgan Chase suspected that his investment returns were probably "too good to be true." The bank, however, was still doing business with Madoff when federal authorities discovered his Ponzi scheme.
Lawyers representing the victims of Madoff's massive investment fraud filed a $6.4 billion lawsuit against JP Morgan Chase Thursday, claiming the bank continued its relationship with Madoff despite having documented suspicions about him.
The lawyers' complaint remains sealed, and lawyers did not specify in a public statement on the lawsuit how JP Morgan had documented those suspicions, but ABC News has obtained a "Suspicious Activity Report" that the London office of JP Morgan Chase filed with the U.K.'s Serious Organized Crime Agency in October 2008, two months prior to Madoff's arrest, that specifically notes Madoff's investment returns were most likely "too good to be true."
The document shows that the company was already removing its money from funds that did business with Madoff – so-called "feeder funds" -- by the time it alerted the British government to its concerns. The London office did not issue a similar alert to U.S. authorities, and an Inspector General's Report from the U.S. Securities and Exchange Commission issued in the wake of Madoff's arrest did not mention any warnings from JP Morgan.
The company filed the report, an attorney for JP Morgan would later say, after a representative of a Madoff feeder fund became angry when JP Morgan began removing money from the fund. The representative of Geneva-based Aurelia Finance, which was acting as an advisor to one of the feeder funds, allegedly hinted at violence against the JP Morgan employee involving Aurelia's "Colombian friends" who could "create havoc."
But the report also emphasizes concerns about Madoff based on "the investment performance achieved by its funds which is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear too good to be true – meaning it probably is."
It also cites Madoff's "lack of transparency" surrounding his trading techniques, the "implementation" of Madoff's investment strategy, the "identity" of its over-the-counter (OTC) option counterparties, and Madoff's "unwillingness to provide helpful information."
As a result, the report says, JP Morgan has "sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds --referring funds Lagoon, Fairfield Sentry/Sigma Ltd and Herald Fund SPC."
While the London office of the bank sent its warning letter to British authorities, and withdrew its funds from the Madoff feeder funds, it did not send a similar notification to U.S. authorities.
Madoff was arrested by U.S. authorities on Dec. 11, 2008 and charged with fraud.
ABC News has also obtained a letter sent this August by an attorney for JP Morgan to Britain's Serious Fraud Office that attempts to explain JP Morgan's report to the Serious Organized Crime Agency two years ago.