JP Morgan Chase (“Chase”) is not the largest bank in the land (that moniker belongs to Bank of America) but it just might be the luckiest. As readers of this blog know (click here and here for examples of past stories), Chase negotiated a sweetheart deal with the FDIC for the purchase Washington Mutual (“WAMU”). The price was right ($1.8 billion). Why? Because the FDIC didn’t let any other banks bid. Better yet, the FDIC agreed to accept responsibility for all future liabilities of WAMU. Wow! Yes, it’s called indemnification. Media darling and Chase CEO, Jamie Dimon pulled off the banking coup of the decade.
Chase now faces a new hurdle, fending off the pesky Irving Picard, receiver for the bankrupt Madoff enterprise. After two years, Picard has finally figured out that Madoff could not have run a $50 billion dollar Ponzi scheme without a credible banking facility. How would it look if investors were getting their returns from the (Turks and Caicos International) or another paragon of the banking world (Nigeria International Bank)? Beyond the loss in credibility, surely Chase had to have seen over those many years that not one penny was ever sent by mail, by wire, by messenger, or by carrier pigeon to an entity for the purchase of securities of any kind. Instead, money flowed from new investors to pay off old investors (with a healthy chunk going to Mr. Madoff and Company).
“JP Morgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff,” said David J. Sheehan, a lawyer for Picard, in a statement. “While many financial institutions enabled Madoff’s fraud, (JP Morgan Chase) was at the very center of that fraud, and thoroughly complicit in it.”
But be careful Mr. Sheehan. It’s going to take more than “red flags” and “willful blindness”. Those clever folks at Chase know all too well that for Picard to prevail he must establish Chase had “actual knowledge” of the fraud. Mere suspicions just ain’t gonna cut it. I’m rooting for the victims of the Madoff fraud, but I fear Mr. Dimon may have the winning hand. I will hold my final judgment until the Complaint is unsealed and we see Mr. Picard’s hand.
(Berk Law, my firm, is currently counsel to investors of several Ponzi Schemes who have filed claims against Bank of America and JP Morgan Chase).