Madoff trustee sues HSBC for US$9b

HSBC prolonged disgraced financier Bernard Madoff's ability to burn investors by "engineering a labyrinth" of international sources of funding for his epic Ponzi scheme, a court-appointed trustee alleged Sunday.

Trustee Irving Picard announced a lawsuit in federal bankruptcy court in Manhattan that seeks to recover US$9 billion in illicit earnings and damages from the Britain-based bank.

The suit alleges that HSBC ignored warnings from its own accountants that Madoff's phenomenal investment record was suspect.

"Had HSBC and (its executives) reacted appropriately to such warnings and other obvious badges of fraud outlined in the complaint, the Madoff Ponzi scheme would have collapsed years, billions of dollars, and countless victims sooner," Picard said in a statement. "The defendants were wilfully and deliberately blind to the fraud, even after learning about numerous red flags surrounding Madoff."

A HSBC spokeswoman declined comment late Sunday.

Madoff, 72, is serving a 150-year sentence in a federal prison in North Carolina after admitting that he ran his scheme for at least two decades, using his secretive investment advisory service to cheat thousands of individuals, charities, celebrities and institutional investors. Losses are estimated in the tens of billions, making it the biggest investment fraud in US history.

The complaint against HSBC, affiliates and executives alleges they helped funnel more than US$8.9 billion to Madoff through a dozen so-called feeder funds based in Europe, the Caribbean and Central America.

"The defendants engineered a labyrinth of hedge funds, management companies and service providers that, to unsuspecting outsiders, seemed to compose a formidable system of checks and balances," said Oren Warshavsky, a lawyer for Picard. "Yet, the purpose of this complex architecture was just the opposite: the defendants wanted to provide different modes for directing money to Madoff in order to avoid scrutiny and generate more fees."

Picard, appointed in 2008 to unravel the fraud and help victims recover losses, has filed similar complaints in recent weeks demanding billions of dollars from UBS AG and JPMorgan Chase. Both deny any wrongdoing.

JPMorgan was "wilfully blind" and "thoroughly complicit" in the disgraced financier's epic fraud, lawyers working for a court-appointed trustee alleged last Thursday.

The suit, filed in federal bankruptcy court in Manhattan, seeks US$6.4 billion—US$5.4 billion in damages and US$1 billion in fees and profits—from JPMorgan and its affiliates.

JPMorgan Chase responded by counter-accusing trustee Irving Picard of "blatantly distorting" the bank's role.

The suit alleges that as Madoff's primary bank for 20 years, JPMorgan had to know that the unwavering double-digit returns Madoff reported to wealthy investors were too good to be true. The trustee cited bank documents showing questionable transactions by Madoff as evidence it was in on the scheme.

The bank "was wilfully blind to the fraud, even after learning about numerous red flags surrounding Madoff," said David J. Sheehan, an attorney working for Picard.

"While many financial institutions enabled Madoff's fraud, JPMC was at the very centre of that fraud, and thoroughly complicit in it. ... Madoff would not have been able to commit this massive Ponzi scheme without this bank."

In a statement, JPMorgan denied having any suspicions about Madoff. It said it followed all commercial banking regulations in its dealings with him.

Last month, the trustee filed a similar suit seeking to recover US$2 billion from UBS AG. The bank called the allegations "completely unfounded".

- AP