Citigroup Inc.’s Citibank ignored warning signs of Bernard L. Madoff’s Ponzi scheme, and a bank executive knew the con man’s stated trading strategy couldn’t generate the reported returns, the trustee liquidating Madoff’s firm said in a lawsuit.
The unidentified Citibank executive, who was responsible for making recommendations to clients on derivatives, “concluded” by June 2007 that returns reported by a Madoff feeder fund, Fairfield Sentry Ltd., couldn’t have come from the strategy, trustee Irving Picard said in a complaint unsealed yesterday. The executive reached his conclusion after meeting with analyst Harry Markopolos, a whistleblower who also alerted U.S. regulators to the fraud, Picard said.
The Citibank official later communicated with Markopolos orally and in writing, specifically discussing the fraud before the Ponzi scheme was exposed in December 2008, Picard alleged.
“Citi knew, and was on notice of, irregularities and problems concerning the trades reported by BLMIS, and strategically chose to ignore these concerns in order to continue to enrich themselves,” Picard said in the complaint, referring to Madoff’s firm, Bernard L. Madoff Investment Securities LLC.
Picard laid out in the complaint details of a lawsuit he filed under seal in December against New York-based Citigroup and other banks. He is demanding $425 million from Citigroup-- money it received “in connection with” a loan to a Madoff feeder fund and a swap transaction with a Swiss hedge fund linked to a second feeder fund, Picard said.
“Citi will vigorously defend against these claims by the trustee as they are entirely without merit and completely false,” Danielle Romero-Apsilos, a spokeswoman for the bank, said today in an e-mail.
Around March 2008, Citibank learned “red flag information” that Madoff was making fraudulent transfers from an unidentified employee whose previous firm had blacklisted Madoff-related investments, Picard said in the complaint.
Soon after, the bank began to unwind its Madoff trades and rid itself of its remaining Madoff exposure, he said.
Madoff is serving a 150-year sentence in federal prison in Butner, North Carolina, after pleading guilty to orchestrating the biggest Ponzi scheme in U.S. history. At the time of his arrest, Madoff’s statements reflected 4,900 accounts with $65 billion in nonexistent balances. Investors lost about $20 billion in principal.
The main case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, and the Citigroup case is Picard v. Citibank, 10-05345, U.S. Bankruptcy Court, Southern District of New York Manhattan).
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