Citigroup and JP Morgan traders sent emails in 2007 and 2008 warning of the risk of dealing with Bernard Madoff, according to separate lawsuits against the banks.
The banks deny charges that they turned a blind eye to warnings raised around Madoff’s business. But the unveiling of their private emails brings back under the spotlight the high potential for confidential email communications becoming public knowledge in court.
In a $425 million (£262 million) lawsuit against Citigroup, filed by trustee Irving Picard on Monday, a trader at Citigroup Global Markets is detailed as sending emails to another bank, in an apparent expression of pressing concerns over Madoff. The lawsuit claims Citi ignored warning signs from 2005 onwards around the scheme.
“We’re needing to terminate our Madoff trade,” wrote the trader, whose name is redacted in the unsealed complaint, in 2008. “Do you have appetite for that risk over there?”
The recipient at the other bank responded, “Don’t think so, Madoff is not very popular here either”.
A Citigroup banker had apparently concluded in June 2007 that the returns reported by a Madoff fund were not realistic based on the strategy being used. Financial analyst Harry Markopolos had told the bank in an email“[w]e all know how Ponzi schemes turn out”, and had met the bank to discuss the situation.
In a statement, Citi said the allegations were false and that it would "vigorously defend against these claims".
Madoff, who turned himself in to authorities in 2008, is serving a 150 year sentence for fraud. He was charged with presiding over a near $20 billion fraud. Ponzi schemes are fraudulent investment scams that pay returns not from profit but from from money paid by subsequent investors.
Three weeks ago a $6.4 billion (£3.9 billion) complaint by Picard against JP Morgan Chase - a primary banker to Madoff - was unsealed, alleging that that bank had also ignored concerns. JP Morgan denies the charge.
JP Morgan staff warned one of the bank's chief risk officers in series of emails in 2007 that Madoff was performing suspicious transactions.
One JP Morgan employee is even detailed in the lawsuit as telling the risk officer that a simple search on Google would have shown the "well-known cloud" over Madoff. The risk officer allegedly wrote he had been told by a colleague “that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme".
The colleague "said if we google the guy we can see the articles for ourselves....I think we owe it to ourselves to investigate further". However, the risk officer then allegedly still signed off $250 million in structured products, the complaint said.
Other emails in the lawsuit contain comments that Madoff's business "doesn't look pretty" and that Madoff "will not allow us to conduct any due diligence on him".
Madoff, in a recent interview from jail with the New York Times, insisted the banks “had to know” of his fraud. "But the attitude was sort of, 'If you're doing something wrong, we don't want to know,” he claimed.
In separate lawsuits filed by Picard against other large financial institutions, the complaints question why the companies failed to question Madoff's alleged avoidance of real time statements for clients, even though the systems had entered into common use by that time.
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