Published November 17, 2014
Seven global banking institutions enabled disgraced financier Bernard Madoff's Ponzi scheme by "creating and offering derivative investment products linked to various Madoff feeder funds," a court-appointed trustee alleged Wednesday.
Trustee Irving Picard announced a lawsuit in federal bankruptcy court in Manhattan that seeks to recover more than $1 billion from Citibank, Natixis, Fortis, ABN AMRO, Banco Bilbao Vizcaya Argentaria, Merrill Lynch, and Nomura.
The suit alleges the banks received transfers of money from Madoff's business "through numerous feeder funds at times when they either knew or should have known of Madoff's fraud."
Picard said in a release the banks enabled the Madoff Ponzi scheme "by opening a spigot of new money into the Madoff feeder fund network, by creating and offering derivative investment products linked to various Madoff feeder funds, including the Fairfield Greenwich, Kingate and Tremont families of funds."
"With the derivative products promising returns based on the performance of the feeder funds, the financial institutions hedged their exposure to the derivative investors by purchasing shares of the feeder funds," Picard said in a statement.
Danielle Romero-Apsilos, director of public affairs for Citi Institutional Clients Group, said the company will defend itself against the claims and called them "without merit and entirely untrue."
"Citi did not know about nor in any way assist in the Madoff fraud," she said.
Telephone and e-mail messages requesting comment from a Merrill Lynch representative were not immediately returned.
Since pleading guilty to fraud charges in March 2009, the 72-year-old Madoff has been serving a 150-year prison sentence. Investigators say Madoff reported to investors in November 2008 that their original investment of about $20 billion had grown to more than $65 billion when he actually had only a few hundred million dollars left.
Meanwhile, earlier Wednesday Picard said his office filed papers in a London court seeking to recover at least $80 million from the international arm of Madoff's business.
Picard said the lawsuit was filed in United Kingdom's High Court of Justice Commercial Court to recover funds that flowed through Madoff Securities International Limited, including money used to buy luxury goods and services enjoyed by the Madoff family such as a yacht, a home in the south of France and an Aston Martin car.
Picard said defendants in the complaint include all of the former directors of Madoff's international wing, including his brother, Peter, and two sons, Mark and Andrew.
Martin Flumenbaum, an attorney representing Mark and Andrew Madoff, called Picard's claims baseless, saying the sons were outside directors with insignificant ownership interests in the international business office. "They had no knowledge of their father's crimes, including any fraudulent activity related to the London entity," he added.
A lawyer for Madoff's brother did not immediately return a message for comment.
Picard said in a statement that the London operation was part of "Madoff's global shell game."
"Funds stolen in the Ponzi scheme traveled around the world, but ultimately, ended up in the pockets of Madoff, his family, and confederates," Picard said.
He called the London office "a critical piece of the facade of legitimacy" that Madoff constructed to conceal his lack of trading activity.
He said Madoff told his customers that his investment business conducted trades on the over-the-counter market and after hours and he periodically transferred tens of millions of dollars to his London office to support his fraudulent misrepresentations. The money that was transferred was never used to buy securities, Picard added.
The court action in London was based on investigations by those seeking to recover assets for thousands of investors who lost billions of dollars in Madoff's massive fraud.
The fraud was exposed in December 2008 when Madoff revealed to his sons and later to the FBI that he had been running a Ponzi scheme for at least two decades in which he paid early investors with proceeds from later investors.
Madoff's London office, established in 1983, held a seat on the London International Financial Futures Exchange and conducted some legitimate trading activities at times, the Picard's statement said.
The statement said the London court papers accuse directors of the London office of breaching their duties by signing off on false documents and misrepresenting the true nature of transactions in the records of the business, thus assisting Madoff in his overall scheme.
David J. Sheehan, Picard's legal counsel, said: "All were experienced and sophisticated enough to understand what was happening. In addition, his staff included employees with accounting and trading experience, who clearly had the knowledge to see through the fraud. Yet, all complied with Madoff's schemes and deceptions."
Between 1983 and December 2008, at least $600 million flowed through the London office, with more than $310 million being falsely recorded as trading commissions from London, Picard alleged.