Criminal Investigation of Madoff and JPMorgan Shines Harsh Light on NYU

By Pam Martens: October 28, 2013

Last week the business press reported that the U.S. Department of Justice may assert charges against JPMorgan Chase for its role in perpetuating the Bernard Madoff Ponzi scheme which defrauded investors out of $17 billion in actual funds and $64 billion in paper losses based on the falsified values shown on client statements. Unnamed sources said the Justice Department may agree to a deferred prosecution agreement in exchange for an outside monitor or, in the alternative, charge JPMorgan’s banking division with violations of the Bank Secrecy Act for failing to report its Madoff suspicions to Federal authorities. Interestingly, JPMorgan did report its suspicions to a government regulator – in the United Kingdom, not in the U.S.

Such a development would also raise serious new questions about how the Board of Trustees of NYU handles conflicts of interest. The Board is already under withering criticism from a group of 400 faculty members. In July, the faculty group issued a letter demanding that Martin Lipton, Chairman of the Board for the past 15 consecutive years, step down over a raft of conflicted actions which came to a head when Ariel Kaminer of the New York Times reported in June in a front page article that NYU, a taxpayer subsidized nonprofit, was doling out forgivable mortgage loans on vacation homes to an elite group of faculty and administrators.

Lipton is a founding partner of the Wall Street law firm, Wachtell Lipton Rosen & Katz, which served as legal counsel to JPMorgan to fight a lawsuit brought by the Madoff Trustee assigned to secure funds for defrauded investors. This was at a time when both Lipton and top executives of JPMorgan served on the Board of NYU units that had themselves been defrauded and could have benefited from monetary clawbacks from JPMorgan.

In the Federal tax returns filed by New York University and NYU Hospitals Center for the 2008 fiscal year, the two entities reported initial estimates of $26 million and $5 million, respectively, in losses stemming from the Bernard Madoff Ponzi scheme. NYU said its losses came from its endowment fund.

According to the tax filings, NYU had invested through a feeder fund, Ariel Fund Limited, overseen by J. Ezra Merkin. NYU has said in court filings that Merkin never revealed to it that he was turning the money over to Madoff. NYU Hospitals Center states on its tax filing that it had invested directly with Madoff Securities.

On the same tax return disclosing NYU Hospitals Center’s loss from the largest Ponzi scheme in U.S. history, the nonprofit also revealed that there was an ongoing business relationship between two members of its Board of Trustees, Jamie Dimon and Heidi G. Miller. At the time the Madoff losses were discovered, Jamie Dimon was serving as both a Trustee to the NYU Hospitals Center as well as Chairman and CEO of JPMorgan Chase. Heidi Miller was both a Trustee and CEO of Treasury and Securities Services at JPMorgan Chase.

Dimon and Miller’s business relationship goes far back. The two were part of Sandy Weill’s empire building operation at Travelers Group, which merged with Citicorp to become Citigroup in the late 90s, forcing the eventual repeal of the depression era investor protection legislation known as the Glass-Steagall Act. When Dimon was pushed out of the merged behemoth by Weill, Miller eventually followed Dimon to Bank One Corp., which was purchased by JPMorgan in 2004.

Rumors of a Justice Department settlement with JPMorgan over the Madoff fraud comes in the same month that the Madoff Trustee, Irving Picard, has filed a scorching outline of his case against JPMorgan with the U.S. Supreme Court, seeking to overturn an Appellate ruling against him.

In his petition to the Supreme Court, Picard says JPMorgan stood “at the very center of Madoff’s fraud for over 20 years.” Picard bases this claim on his well-documented district court filing that showed JPMorgan was well aware that Madoff was claiming to invest tens of billions of dollars in a strategy that involved buying large cap stocks in the Standard and Poor’s 500 index while simultaneously hedging with options. But the Madoff firm’s primary bank account at JPMorgan, which the bank had intimate access to review for over 20 years, was devoid of evidence of stock or options trading.

The petition to the Supreme Court reads: “As JPM [JPMorgan] was well aware, billions of dollars flowed from customers into the 703 account, without being segregated in any fashion. Billions flowed out, some to customers and others to Madoff’s friends in suspicious and repetitive round-trip transactions. But in the 22 years that JPM maintained the 703 account, there was not a single check or wire to a clearing house, securities exchange, or anyone who might be connected with the purchase of securities. All the while, JPM knew that Madoff was using the account to run an investment advisory business with thousands of customers and billions under management and knew that Madoff was using its name to lend legitimacy to his enterprise…”

Picard also told the Court that JPMorgan was well aware of the suspicions surrounding Madoff. Its own Chief Risk Officer, John Hogan, had warned his colleagues 18 months prior to Madoff’s revelation of his Ponzi scheme that “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a ponzi scheme.”

Picard, in a lower court lawsuit, calls out the division that Heidi Miller headed, the Treasury and Securities Services unit, writing: “Evidence of Madoff’s fraud permeated every facet of JPMC.  It ran from the Broker/Dealer Group, where BLMIS [Bernard L. Madoff Investment Securities LLC] maintained a bank account that no one honestly could have believed was serving any legitimate purpose, to Equity Exotics, where JPMC learned of the red flags inherent in BLMIS’s investment strategy, to JPMC’s London office, which learned that individuals might be laundering money through BLMIS feeder funds, to the Private Bank, which maintained intimate relationships with one of BLMIS’s largest customers, to Treasury & Security Services, which was responsible for investing the balance of the 703 Account in short-term securities.”

Not only did JPMorgan provide the bank account through which Madoff perpetrated his decades-long fraud, but JPMorgan, despite its serious suspicions, invested over $250 million of its own money with Madoff feeder funds while simultaneously creating structured products that allowed investors to make leveraged bets on the returns of the feeder funds invested with Madoff.

Around September 2008, just two months before Madoff’s enterprise would be outed as a fraud by Madoff himself, JPMorgan conducted a new round of due diligence and decided it was time to get out of its $250 million investment in the feeder funds.

On October 28, 2008, JPMorgan Chase sent a “suspicious activity report” not to its U.S. regulators but to the United Kingdom’s Serious Organized Crime Agency (SOCA). The document reads:

JPMorgan’s “concerns around Madoff Securities are based (1) on the investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true – meaning that it probably is; and (2) the lack of transparency around Madoff Securities’ trading techniques, the implementation of its investment strategy, and the identity of its OTC option counterparties; and (3) its unwillingness to provide helpful information. As a result, JPMCB has sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds.”

In October 2008, JPMorgan sent out notices to redeem its $250 million from the feeder funds according to Picard.

Because JPMorgan was still on the hook to pay the leveraged returns on the structured investments tied to the performance of Madoff funds that it had sold to investors, the Trustee expressed the belief that by redeeming its own $250 million hedge on this payout, JPMorgan demonstrated further evidence of its knowledge of the Madoff fraud.

Madoff pleaded guilty and is serving a 150-year sentence in Federal prison. Irving Picard, the Trustee, has thus far recovered $9.5 billion and distributed $4.8 billion to customers. Jamie Dimon remains a Trustee of the NYU Medical Center.

A series of emails to NYU seeking an update on how much NYU and the Hospitals Center have lost in the Madoff fraud and how much has been recouped through the efforts of Picard, resulted in this unresponsive question to my question: “Is there a reason this is coming up now?”


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