Madoff trustee has nothing to lose gunning for JPM

December 2, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Irving Picard’s decision to lob a $6.4 billion lawsuit in JPMorgan’s path might smack of desperation. After all, the trustee responsible for recovering assets for victims of Bernie Madoff’s gargantuan Ponzi scheme has had almost two years to file suits and now has just a week left. He’s hitting up UBS for $2 billion as well for its role aiding feeder funds. But Picard has nothing to lose.

For starters, he still has a giant hole to fill. To date he has distributed most of the $750 million in compensation provided by the Securities Investor Protection Corp and has recouped some $1.5 billion, including by selling Madoff’s assets. That leaves him $3.5 billion short of covering approved claims from investors.

The two Wall Street firms aren’t the only ones Picard is putting the thumbscrews on. He had already filed 19 suits to try to recover $15.5 billion from feeder funds, Madoff friends and family members and others. And this week he went after more than 100 so-called net winners — investors in Madoff’s scam who had taken out more cash than they had put in before it collapsed in December 2008.

Picard argues JPMorgan was complicit in the fraud because it was Madoff Securities’ main bank and was “willfully blind to the fraud, even after learning about numerous red flags.” The Ponzi schemer admitted early last year to using an account at the bank to stash and distribute the cash investors thought was being put to work in the market.

Does that mean JPMorgan is culpable for not spotting and stopping the fraud? It’s too early to tell. JPMorgan says the charge is baseless and false. And there’s a difference between actively abetting a fraud and simply not spotting one — after all, however obvious the red flags surrounding Madoff may now seem, the Securities and Exchange Commission failed to find anything glaring enough to act even after suspicions were raised.

As yet, neither Picard nor the bank has made any evidence available. Picard may simply be hoping that a final barrage of well-publicized lawsuits will put a couple of deep-pocketed financial firms on the defensive so that they will settle. And even if that doesn’t happen, at least he will be seen to have tried everything.

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