Oct. 21 (Bloomberg) -- JPMorgan Chase & Co. and Bank of New York Mellon Corp., custodians of Bernard Madoff’s bank accounts, were added as defendants in a lawsuit against the imprisoned money manager along with new claims that he and others at his firm used stolen money for drugs and wild parties.

JPMorgan held billions of dollars for Madoff and indirectly encouraged investments with him by selling Madoff-linked structured notes to investors, according to the California law firm Cotchett Pitre & McCarthy. Bank of New York acted as administrator of so-called feeder funds to Madoff and failed to carry out its duties to independently determine the value of his funds, the law firm alleged yesterday in a statement.

In an amended complaint filed in New York State Supreme Court in Manhattan, the investors accused the banks and KPMG LLP of breach of fiduciary duty, aiding and abetting fraud and unjust enrichment. KPMG served as the auditor for Madoff’s London operations, according to a copy of the lawsuit posted on the law firm’s Web site.

“This fraud was not accomplished in isolation,” the investors said in the complaint. “The size and scope of the fraud necessitated the cooperation and assistance of many individuals and institutions who either knowingly or with willful blindness participated in the fraud.”

Declined to Comment

David Wells, a spokesman for New York-based JPMorgan, and Dan Ginsburg, a spokesman for New York-based KPMG, declined to comment. Bank of New York spokesman Ron Gruendl declined to immediately comment.

Additionally, the new complaint alleged the use of cocaine and other drugs in Madoff’s office was “rampant,” and employees described parties with topless entertainers. A “significant amount of money stolen from investors” paid for female escorts and massages for Madoff, according to the complaint.

Starting in 1975, according to the complaint, Madoff began sending a long-time employee and office messenger to obtain drugs for himself and others.

“A culture of sexual deviance existed in the office,” according to the complaint. “Employees described it as a wild, fast-talking, drug-using office culture.”

Madoff, 71, is serving a 150-year sentence in a federal prison in North Carolina for running a $65 billion Ponzi scheme.

Lower Bunk

Investor attorney Joseph Cotchett said in July that he spoke with Madoff at the prison and obtained names and facts for his firm’s lawsuit. The amended complaint alleged that he sleeps on the lower bunk in a cell he shares with a 21-year-old prisoner convicted of drug crimes, and that the money manager eats pizza cooked by a convicted child molester.

“I’m not going to comment on his allegations other than to say that he should have filed them with People magazine instead of the court,” Ira Sorkin, Madoff’s attorney, said yesterday in a phone interview. “What does this have to do with your lawsuit?”

The lawsuit, originally filed in January on behalf of investors who put money in a fund managed by Tremont Partners Inc., alleges that banks, auditors, advisers and feeder funds to Madoff and the entities that dealt in Madoff-related investments ignored indications that should have led them to investigate and lied to investors.

The case is Jay Wexler v. KPMG, 101615/09, Supreme Court of New York (Manhattan).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: October 21, 2009 12:19 EDT