Madoff’s Banks Claim: Does that raise the Heat on JP Morgan?

  • Share
  • Read Later

Madoff says his Ponzi scheme was known by others (Photo: U.S. Marshals/REUTERS)

Nearly two years ago, just months after the Madoff scam was revealed, wrote a story questioning whether JP Morgan Chase was hiding evidence that it knew of the Bernie Madoff Ponzi scheme.  Now it appears, Bernie Madoff is making the same accusations.

In his first interview since being jailed, Madoff told the New York Times that the bankers and large investors who were either his clients or of which he was a customer “had to know” about his $20 billion Ponzi scheme. He doesn’t name individual banks. But in the past few months, the heat has been turning up on JP Morgan and what it did or did not know about the Madoff scam. Irving Picard, the trustee for the Madoff estate who is trying to recover investors’ lost money and doing a good job of it, has sued a number of different parties involved in the Madoff case from large investors to the funds that helped Madoff solicit investors. But one of the biggest cases, seeking $6.4 billion, that Picard has filed is against JP Morgan Chase. Picard in his complaint says numerous JP Morgan executives raised concerns about Madoff, and yet did nothing to alert authorities about the possibility of a fraud or shut it down. JP Morgan denies the allegations, and is fighting the case.

So does Bernie Madoff saying others knew make Picard’s case against JP Morgan or Mets owner Fred Wilpon, who Picard is also suing, a slam dunk? Not quite. Here’s why:

First of all, the claims that Madoff makes in the Times article are as confusing as the fraud was in its original days. But perhaps we should expect no different from a man that lead a double life for so long. Madoff told a reporter at the Times that the banks and large investors that he dealt with as either clients or as a customer purposely didn’t ask questions about what he was doing:

He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

But just a few paragraphs later in the article Madoff  has this to say:

Mr. Madoff said he was startled to learn about some of the e-mails and messages raising doubts about his results — now emerging in lawsuits — that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,” he said with a faint smile.

To me, these statements contradict. If Madoff believes the banks knew, why would he be surprised there would be e-mails saying as much.

Second, John Coffee, a law professor at Columbia University who has followed the Madoff case and has looked at Picard’s complaints against JP Morgan and others, says it doesn’t appear that Madoff has provided a smoking gun to Picard in either the case against JP Morgan or the Mets’ Wilpon. In fact, in the Wilpon instance, Madoff may actually hurt Picard’s case against the Mets owner and his business partner Saul Katz. He repeatedly told the Times that Wilpon and Katz knew nothing.

What would be really damaging would be a specific meeting where JP Morgan bankers questioned Madoff about the validity of his investment returns or instructed him not divulge certain information that would have made it clear that he was running a scam. But there isn’t any evidence that either of those things occurred, at least not in the complaints that have been filed. And the admission to the New York Times, says Coffee, doesn’t seem to be any different. “I don’t see anything that is admissible or damaging in what Madoff has told the New York Times or Irving Picard,” says Coffee.

What’s more, it’s unlikely that Picard would use Madoff as a witness in a trial anyway. He’s not really a credible witness. Actually he’s not really a credible anything. And my sense is that a jury would immediately think that he was just trying to shift the blame or at least have someone else share in the blame for the fraud with him, as long as that someone isn’t a family member. On the other hand, Madoff’s claim that Wilpon didn’t know anything probably doesn’t help Wilpon’s case either. It is known that he and Wilpon were long-time friends, and Madoff is likely just trying to protect him.

So where does this all leave things? A source at Picard’s camp says the testimony that Madoff has given the trustee does not conflict. Coffee says while the Madoff interview reveals no new evidence, it does have people talking. And that may increase the pressure on JP Morgan to settle. Coffee says cases like this are hard for banks and other large firms to go to court on because they can cause huge reputational damage along the way. “This affects the atmosphere around the case,” says Coffee.”If JP Morgan senses there will be a rolling page 1 story about the bank and Madoff that may make them more willing to settle.”


From Prison, Madoff says banks ‘had to know’ of fraud (NY Times)