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JPMorgan Ensnared in Madoff Lawsuit

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MLSMK Investments Co., a Palm Beach, Florida- based partnership, has filed suit against JPMorgan Chase over losses it sustained as a result of   Bernard Madoff’s Ponzi scheme.

As we reported in January, in 2006, JPMorgan  had started offering investors a way to leverage their bets on the future performance of two Fairfield Greenwich Group hedge funds that invested with  Madoff. MLSMK invested $12.8 million with JPMorgan  in this manner from October to December. 

To protect itself from the resulting risk, the bank put $250 million of its own money into those funds.  Last fall, JPMorgan began taking its own money out the hedge funds, but never let its investors know.

JPMorgan, according to the complaint, “began to grow suspicious of Madoff’s results and embarked on a due diligence investigation of Madoff’s operations,”  Bloomberg.com said.  According to the lawsuit, that investigation determined it wasn’t plausible for Madoff to be generating the returns he claimed. According to the MLSMK complaint, JPMorgan’s decision last fall to begin liquidating its position in the Madoff-linked hedge funds was prompted by its due diligence investigation.

According to Bloomberg.com, Madoff himself had a checking account with JPMorgan.  The  MLSMK Investments’ lawsuit claims that JPMorgan had indications that something  odd was going on with Madoff’s accounts. For instance, the average balance in his checking accounts at JPMorgan Chase ran into the billions of dollars between 2006 and the middle of 2008, as nervous customers moved money from seemingly riskier investments and deposited it with Madoff. Then in September 2008, the cash balance “began to drop precipitously,” sometimes hovering near zero until Madoff could transfer fresh funds in  his London affiliate.

According to the Times, attorneys representing MLSMK said that the erratic activity in Madoff’s accounts should have “raised alarms” at JPMorgan.

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