JPMorgan Chase & Co., sued by the trustee for Bernard Madoff’s defunct firm for $6.4 billion for allegedly aiding the con man’s fraud, asked a judge to remove the case from bankruptcy court because it raises “novel and unsettled questions” beyond the court’s scope and expertise.
In a lawsuit unsealed last week, Madoff trustee Irving Picard accused JPMorgan of actively assisting Madoff’s crimes to protect earnings from his bank accounts, in the process violating federal banking law. The earnings were “wholly immaterial” and the allegations about law-breaking were “not the domain of bankruptcy law,” JPMorgan said yesterday.
Picard was appointed to liquidate the Madoff brokerage firm, JPMorgan said in a filing in U.S. Bankruptcy Court in Manhattan. Instead, he is mostly pursuing non-bankruptcy claims on behalf of Madoff’s customers, the bank said.
“The trustee is trying to pursue an enormous backdoor class action to recoup damages incurred by individuals and entities other than the firm to which he is the appointed successor,” said JPMorgan, the second-biggest U.S. bank.
Addressing a U.S. District Court in Manhattan, the New York-based bank said it has a right to a jury trial by law in an appropriate federal court. Picard “falsely” accused the bank of complicity in the largest securities fraud in U.S. history, JPMorgan said.
Madoff opened accounts with JPMorgan or banks it bought in 1986, depositing customer investments and transferring money out of the accounts, the bank said in the filling. Its fees were $597,000 in the six years before Madoff’s 2008 bankruptcy, it said, citing Picard. JPMorgan earned less than $3.5 million in interest by loaning $145 million to Madoff’s firm in 2005 and 2006, the bank said.
Starting in 2006, JPMorgan invested about $338 million in four Madoff feeder funds, whose assets were managed by Madoff. The investments were “a hedge” for financial products tied to Madoff’s reported returns, it said. JPMorgan redeemed $276 million of its original investments in the funds after buying Bear Stearns in 2008, losing the rest when the Ponzi scheme was revealed, it said.
Picard wants to recoup the money redeemed, the loan payments, interest and fees, in addition to $5.4 billion in damages, allegedly the amount lost by Madoff customers in the four years through December 2008, JPMorgan said. To get the damages, he used theories of aiding and abetting fraud and breach of fiduciary duty, as well as a theory of fraud on regulators, it said.
The Madoff trustee’s suit against JPMorgan is “very aggressive,” bankruptcy lawyer Harvey Miller told Bloomberg Television today. “He is pushing the envelope to the limit.”
‘Aiding and Abetting’
According to a statement by Picard last week, JPMorgan had a “decades-long role” as Madoff’s primary banker, “aiding and abetting” the fraud. While the bank was warned Madoff may have been running a Ponzi scheme and “had a palpable concern that Madoff was a fraud for years,” it wasn’t until October 2008 that it reported Madoff to government officials, the trustee’s lawyers said in the statement.
The banks’ executives didn’t restrict the Madoff firm’s bank account “even though it was being used to launder money from the Ponzi scheme,” they said.
In response, JPMorgan said Picard’s interpretation of banking law “would impose broad investigative duties on banks that do not exist.”
While federal banking laws do provide “broad guidelines” for detecting money laundering, the guidelines have rarely been interpreted by the courts, it said.
Picard asserted a “novel claim” that JPMorgan committed a fraud on regulators including the U.S. Securities and Exchange Commission and the Federal Reserve by not alerting them to Madoff’s crimes, it said.
‘Array’ of Statutes
“The bank’s relationships with its regulators are governed by an array of federal statutes and regulations, none of which creates an express private right of action against banks for fraud on the regulator,” it said.
Picard would have to prove in the correct federal court that he had a right to pursue a claim of fraud on regulators, it said.
Kevin McCue, a Picard spokesman, didn’t respond to an e-mail seeking comment on the JPMorgan filing.
JPMorgan is leading a “charge in legal maneuver” to slow trustees, St. John’s University business professor Anthony Michael Sabino said in an e-mailed statement. He predicted JPMorgan and others fighting Picard would lose the fight, saying Picard had a right under bankruptcy law to bring lawsuits to recover money for Madoff customers.
The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The adversary case is Picard v. JPMorgan Chase & Co., 10-AP-4932, U.S. Bankruptcy Court, Southern District of New York (Manhattan).