JPMorgan and Bernie Madoff: Will the Ponzi King Sink Jamie Dimon

A newly unsealed complaint alleges JPMorgan executives suspected Bernie Madoff was a fraud long before he was exposed—yet did nothing. Allan Dodds Frank on how far the fallout could reach.

Bernie Madoff and Jamie Dimon. Credit: Michael Nagle / Bloomberg via Getty Images; Simon Dawson / Bloomberg via Getty Images

How much did JPMorgan CEO and Chairman Jamie Dimon know about his bank’s valued customer Bernie Madoff, and when did he know it?

These two crucial questions have been lingering below the surface for more than two years, even as the JPMorgan Chase leader cemented his reputation as the nation’s most important, most upright, and most highly regarded banker.

Madoff was arrested on December 11, 2008 in the greatest Ponzi scheme on record, it was clear that Dimon, the leader of the bank where Bernie kept much of the money he stole, was going to have to answer some hard questions. That became doubly apparent when early news reports suggested that JPMC had whiffs of trouble at least a year earlier as some executives grew increasingly suspicious of Bernie. Still, the bank allegedly overlooked irregularities in his accounts and the way his hedge fund feeder clients operated.

In a 121-page complaint unsealed Thursday by the U.S. Bankruptcy Court, Madoff bankruptcy trustee Irving Picard lays out with authority what until now had been rumors held in check by the bank’s masterful damage control efforts. The trustee wants JPMorgan Chase to disgorge $1 billion in profits and fees and another $5.4 billion in damages.

The bank’s own executives, the complaint said, recognized a “well-known cloud” over Madoff’s activities, perhaps in 2006 and certainly by June, 2007—18 months before Bernie confessed. Picard’s complaint damns the bank by saying: “By October, 2008, JPMC’s London office reported to the United Kingdom’s Serious Organised Crime Agency (SOCA) that it knew Madoff was 'too good to be true,' and a likely fraud….Incredibly…JPMC still did nothing to stop the fraud.”

Madoff, his family, and his securities firm were loyal JPMorgan Chase customers for more than two decades as the bank processed billions of dollars through his accounts.

“JPMorgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff.”

Shortly after

Picard’s team actually filed the complaint last December 2, but Judge Burton Lifland sealed it at the bank’s request over Picard’s objections. And shockingly, no news organization—despite the obvious implications of the suit—bothered to sue on January 21 to unseal files in the Madoff bankruptcy case until the Wilpon family and their problems with the New York Mets’ finances and Bernie boiled into full view. The pressure from the lawsuit by news organizations may have been enough for JPMorgan Chase to realize it had to take its finger out of the dike and allow the case to be revealed.

So now what exactly do we have? The octopus legal team of Picard’s at Baker & Hostetler has wrapped many tentacles around the bank and stripped away–thanks to the legal power of examination and discovery—some of JPMC’s initial defenses. For JPMorgan Chase, the Bernie Madoff stench can no longer be hermetically sealed. It is out for all to smell and the bank hopes the “cloud” dissipates quickly, maybe while the markets worry about Eygpt.

The allegations unveiled Thursday by the trustee amount to accusing the senior management of the bank (without naming anyone) of ignoring the public good to protect profits—and Bernie. Back when the complaint was under seal, Picard’s No. 1 counsel David Sheehan had asserted: “JPMorgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff.” In his statement, Sheehan said: “JPMC was at the very center of that fraud, and thoroughly complicit in it.” At the time, the bank called the trustee “irresponsible” and said the complaint was aimed at “headline-grabbing.”

For its part, JPMorgan Chase said Thursday that the bankruptcy trustee’s complaint is “based on distortions of both the relevant facts and the governing law. Contrary to the trustee’s allegation, JPMorgan did not know about or in any way become a party to the fraud orchestrated by Bernard Madoff.”

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The statement continued: “Madoff’s firm was not an important or significant customer in the context of JPMorgan’s commercial banking business, and the revenues earned from Madoff’s bank account were modest and entirely consistent with conventional market rates and fees.” The statement added that the trustee’s claims that the bank earned big bucks from Madoff “is demonstrably false.”

The bank’s statement made no mention of the supposed First Rule of Banking: “Know Your Customer.”

My simultaneous translation of the JPMorgan statement is this: “We are such a giant global bank that whatever profits we made from Madoff are chump change. A settlement would not affect earnings, even though we have to stipulate that we administered the accounts Bernie used to carry out the largest Ponzi fraud in history, and even though we neither admit nor deny turning a blind eye to his machinations and making hundreds of millions in the process.”

When you are the nation’s largest bank with 2010 profits of $17.4 billion on revenue of $104.8 billion with assets of nearly $2 trillion, it becomes facile to project invulnerability. Still, if this case publicly morphed into a serious problem with implications of a cover-up inside the bank, the regulators might be forced to do something and so might the prosecutors.

So as to the bank’s suggestion that Picard’s claims are “demonstrably false,” I can hardly wait to see Jamie Dimon on the witness stand under oath in some court.

Should Dimon actually testify, he, of course, would be risking perjury if he did not fully disclose exactly what happened. No doubt, he would be the final star witness after a parade of bank executives who reported to him and had the legal responsibility to tell him what risks the bank faced from Madoff.

So while the bank characterizes as a small amount what it earned from ministering to Bernie, I would be willing to wager an equal amount (if I had it) that the bank will settle this radioactive case as soon as possible. Jamie Dimon will never darken the doorway of a court house to pay for Bernie’s sins.

Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime stories. He also is the former president of the Overseas Press Club of America, one of the many journalism organizations that protests the arrests of journalists abroad and repression of freedom of speech.