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.
JP Morgan Lawyer Says Concerns About Madoff 'Shared By Many'
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.
As part of the letter, assistant general counsel Rebecca Smith in JP Morgan's London office said that the bank had initiated an investigation of Madoff after the alleged confrontation with Aurelia, and found that concerns about Madoff's lack of transparency were well-documented, public and "shared by many" in the financial industry."
Smith noted, however, that the U.S. government had made inquiries into Madoff's business because of these issues and "as of late 2008, had found no wrongdoing and had taken no action whatsoever." She said that the bank "at no time prior to Madoff's arrest in December 2008 discovered or believed Madoff was a fraud."
Victims' Lawyers: 'JP Morgan Was Willfully Blind'
Baker & Hostetler, the law firm appointed to recover funds for victims, filed suit against JP Morgan in a Manhattan bankruptcy court Thursday, asking for $1 billion in fees and profits and an additional $5.4 billion in damages. In a statement accompanying the filing, the firm said its sealed complaint states that JP Morgan Chase "had clear, documented suspicions about the legitimacy of BLMIS's operations. Instead of acting on that information, it simply continued to collect fees and profit from the fraud."
Deborah Renner, a partner with Baker & Hostetler, said in a statement Thursday that "JP Morgan Chase admitted in the months before Madoff's arrest that [Madoff's] returns were too good -- especially in down markets -- to be believable, but for years they pretended that was not the case."
Baker & Hostetler partner Daniel Sheehan said "JP Morgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff."
A spokesperson for JP Morgan Chase said that the complaint filed by the Madoff victims' lawyers in bankruptcy court Thursday distorted the facts and the law, and that "any suggestion that JP Morgan supported Madoff's fraud is utterly baseless and demonstrably false."
"Contrary to the trustee's allegations," said Jennifer Zuccarelli, "JP Morgan did not know about or in any way assist in the fraud orchestrated by Bernard Madoff. As a provider of regular commercial banking services to Madoff's brokerage firm, JP Morgan complied fully with all applicable laws and regulations governing customer accounts. Moreover, to the extent foreign affiliates of JP Morgan made indirect investments with offshore funds that in turn invested with Madoff, those affiliates invested significantly more than they ever redeemed."
A French investigating magistrate, Renaud van Ruymbeke, is currently probing what JP Morgan knew about Madoff. "JP Morgan was making hundreds of millions of dollars with Bernie Madoff and his businesses," said Emmanuel Asmar, a Paris-based attorney for Madoff victims. Asmar said he believed that banks that had done business with Madoff were in a "risky" position legally and he predicted that the banks would become "liable."
Judge Threw Out Florida Suit Against JP Morgan
In April 2009, JP Morgan was accused in a U.S. lawsuit by Florida investors who lost $12.8 million of conspiring with Madoff after learning that his investment returns were false.
The suit, filed by MLSMK Investments Co., a Palm Beach, Florida-based partnership, claimed the bank learned of the fraud in September 2008 after investigating why funds that it had invested with Madoff hadn't suffered steep losses in the global sell-off.
The bank "quietly liquidated its entire $250 million cash position" with a fund that had invested with Madoff while continuing to provide fee-generating services to Madoff's business, according to the complaint.
The suit also alleged that Chase should have been suspicious of fraud because of the activity in Madoff's personal checking account. The account was supposed to hold the assets of investors, but by fall of 2008 had dropped from millions to close to zero.
In July 2010, however, a federal judge in New York threw out the MSLMK suit.
"While it might have been possible for defendants to determine that Madoff was committing fraud from the 'red flags' that plaintiff points out, plaintiff alleges no facts to demonstrate that defendants actually did make such a discovery," Judge Barbara Jones wrote in her opinion.