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Caught in a trap

16 February 2011 By Antony Currie

JPMorgan may struggle to shake off the stink of its association with Bernie Madoff. The imprisoned fraudster for years used accounts at the bank led by Jamie Dimon to stash and distribute cash tied up in the scheme. That prompted Irving Picard, the trustee overseeing attempts to recoup money for Madoff’s victims, to sue JPMorgan for $6.4 billion, claiming the bank was at the center of the plot. Now even the Ponzi mastermind says banks had to know what he was up to.

Unsurprisingly, JPMorgan is fighting the charges. Stephen Cutler, the bank’s general counsel, told a gathering of institutional investors on Tuesday that Picard’s accusations relied on 20/20 hindsight and took skeptical comments by employees out of context. That may be so – and JPMorgan may be guilty of no more than failing to spot a fraud that bedeviled and ensnared many others including the Securities and Exchange Commission.

But Picard’s reclamation project has gathered momentum. The estate of long-time Madoff friend and investor Jeffry Picower forked over $7.2 billion. The trustee also recovered $500 million from Swiss private bank Union Bancaire Privée. And he’s still hounding HSBC, UBS, Citi and others.

It didn’t take much sniffing around to uncover enough suspicion to cause concern before the scheme collapsed. Reporters had been chasing the story on and off for years, often encouraged to investigate Madoff’s asset management business by outraged Wall Streeters convinced it was a fraud. A little digging found that some big and reputable fund managers didn’t even realize Madoff was in the business at all. But some suspicious traders couldn’t find a way to replicate Madoff’s gains and concluded he was either front-running his clients or operating a Ponzi scheme.

None could prove it though. They stayed away from Madoff all the same and advised clients to steer clear too. Just because JPMorgan and its sophisticated team of financiers continued to do business with the eventually exposed fraudster doesn’t prove it was complicit. Madoff himself is a discredited witness with an ax to grind. But his words, when added to JPMorgan’s tainted ties, the many market suspicions and Picard’s growing success, are bound to make Dimon’s resistance that much tougher to sustain.


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