WSH-Madoff-MLSMK v. JPM | Bernard Madoff | U.S. Securities And Exchange Commission

Howard Kleinhendler (HK 5712

)
Julian D. Schreibman (JS 1124)
Sara G. Spiegelman (SS 4352)
WACHTEL & MASYR, LLP
110 East 59
th
Street
New York, New York 10022
(212) 909-9500
Attorneys/or Plaintiff
UNITED STATES DISTRICT COURT
SOUTHERN OF NEW YORK
MLSMK INVESTMENTS COMPANY,
09 Civ.
------
Plaintiff,
-v-
JP MORGAN CHASE & CO. and JP MORGAN
CHASE BANK, NA,
Defendants.
COMPLAINT
JURY TRIAL DEMANDED
Plaintiff by its attorneys, Wachtel & Masyr, LLP, as and for its Complaint, hereby avers:
NATURE OF THE CASE
1. Plaintiff is a victiln of the notorious Ponzi schelne perpetrated by Bernard
Madoff ("Madoff'). Between October and Decenlber 2008, plaintiff deposited $12.8 nlillion in a
New York account at JP tviorgan Chase Bank, } ~ A ("Chase Bank") for credit to its account at
Bernard L. Madoff Investment Securities LLC ("BMIS"), Madoff's broker-dealer. Plaintiff
expected its funds to be used by Madoff to purchase and sell securities and to provide it with
steady positive annual returns. However, Madoff never invested plaintiff s money and instead
misappropriated its funds in what were the last gasps of a nearly twenty-year fraud.
2. But Madoff did not act alone. By September 2008, JP Morgan Chase & Co.
("Chase") unequivocally knew that Madoff s stated investnlent returns were false. Chase knew
this through its due diligence investigation into Madoff" s investment advisory business; its
dealing with Madoff through Bear Stearns's Inarket nlaking desk, which it acquired in March
2008; and, fronl the Madoff bank accounts it held. Upon acquiring this knowledge, Chase
entered into a conspiracy with Madoff and BMIS in violation of the federal Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. But for Chase's actions-
which kept Madoff s crinlinal enterprise in business through Deceinber 2008 the plaintiff
would not have lost $12.8 million.
3. In addition to conspiring with Madoff and BMIS, Chase also aided and abetted
Madoff s breach of the fiduciary duty that he owed to plaintiff, engaged in cOlnnlercial bad faith,
and acted negligently in light of its k.l1owledge of Madoffs criminal activity.
4. Chase provided IvIadoff with at least two essential services after it knew that
Madoff was a fraud. First, it continued to pernlit its brokers to trade with Madoff s nlarket
n1aking business thereby providing Madoff with legitilnate trading volunle which he used to
satisfy audits and inquiries froin the SEC and FINRA, as well as to fool the targets of his
fraudulent schelne. Second, it received and deposited cash frOln unsuspecting victin1s for
Madoffs benefit and permitted him to use those funds in any n1anner he pleased, including the
continued operation of his Ponzi schenle, as well as transfers to hiinself, his fmnily, and his close
associates.
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PARTIES
5. Plaintiff MLSMK Investments Company ("MLSMK") is a Florida partnership
with a principal place of business in Palm Bach, Florida. Each of MLSMK's partners is a
Florida citizen. Between October 6,2008 and December 5, 2008, MLSMK caused $12.8 million
to be transferred to BMIS by wiring the funds to BMIS' account at Chase Bank in New York
City.
6. Defendant JP Morgan Chase Bank, NA is a Delaware corporation with a principal
place of business at 1 Chase Manhattan Plaza, New York, New York. Chase Bank provides,
mnong other things, comInercial banking services.
7. Defendant JP Morgan Chase & Co. is a global financial serVIces firn1 and
provides investment banking services; financial services for consun1ers; sn1all business and
con1mercial banking; asset managelnent and private equity. Chase is traded on the New York
Stock Exchange and is a cOInponent of the Dow Jones Industrial Average. It is incorporated
under the laws of Delaware and n1aintains a principal place of business at 270 Park Avenue, New
York, New York.
8. Between 2000 and the present, Chase has filed consolidated financial statements
with the SEC which include revenues froln all of its operations, including revenues froln Chase
Bank. Chase controls the operations of Chase Bank and guides its activity through a single
corporate consciousness.
JURISDICTION AND VENUE
9. This court has both federal question and diversity jurisdiction over this case
pursuant to 28 U.S.C §§ 1331 and 1332(a)(1).
10. Venue lies in this district pursuant to 28 U.S.C. § 1391.
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FACTS
Madoff"s Criminal Enterprise
11. Until his arrest, and for the preceding forty years, Madoff owned and operated a
broker-dealer business based in Manhattan. Until 2000, Madoff operated under the nanle
Bernard L. Madoff Investnlent Securities, a sale proprietorship owned by Madoff. On or about
December 4, 2000, Madoff fonned BMIS, a New York lilnited liability conlpany with offices at
855 Third Avenue, New York, New York, which took over all of !vladoffs broker-dealer
activities. Between December 2000 and December 11, 2008, Madoff was the sale Inember and
nlanager of BMIS. Madoff also opened a branch of his broker-dealer business in London,
England which was incorporated under the name Madaff Securities International ("MSIL"),
which he principally owned and controlled.
12. From its fonl1ation, BMIS was a broker-dealer registered with the Securities and
Exchange Commission. BMIS purportedly engaged in three different operations, including
investment advisor services, ll1arket making services and proprietary trading. All of this activity
was conducted from I\1adoff s offices in I\1anhattan. By Decelnber 2008, BMIS elnployed
nearly 70 people.
13. A Market-Maker is a dealer who, with respect to a particular security, (i) regularly
publishes bona fide, conlpetitive bid and offer quotations in a recognized interdealer quotation
systeln; or (ii) furnishes bona fide conlpetitive bid and offer quotations on request; and (iii) is
ready, willing and able to effect transactions in reasonable quantities at its quoted prices vvith
other brokers or dealers.
14. BMIS was a self-clearing broker, meaning that it itself held title to shares of stock
it purchased as opposed to using a prinlary broker to hold its stock certificates. As a self-clearing
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broker, BMIS was able to execute trades with institutional counter-parties. For the most part,
those trades were cleared through the National Securities Clearing Corporation ("NSCC,,).I
15. BMIS engaged in the market making business and actively traded with various
institutional counter-parties, including Bear Stearns & Co. ("Bear Stearns"). Madoff was close
friends with Aldo Parcesepe, a senior nlanaging director and the head of Over-the-Counter and
NASDAQ Inarket maker trading at Bear Steams. Parcesepe's trading desk regularly traded with
BMIS. Between approximately 2005 and October 2008, Parcesepe served on the Board of the
National Stock Exchange, Inc. ("NSX") an electronic stock exchange for equities, futures,
options and foreign exchanges. Peter Madoff, Madoff s brother and BMIS' chief compliance
officer, served together with Parcesepe on NSX's board. Madoff, either directly or through
BMIS, owned 10% of NSX. Upon infornlation and belief, BMIS' and Bear Stearns' market
nlaking business regularly traded through NSX.
16. Under Parcesepe's guidance, Bear Stearns built a close business relationship with
l\1adoff. Brokers \vho traded at Bear Stearns used the firm's automated equity order systeln to
buy and sell stocks. The broker entered the stock synlbol and the amount of shares he wanted to
trade and the systelTI vias supposed to find the best counterpatiy trade from among the lnany
market maker broker-dealers that traded with Bear Stearns. However, for every trade for a
NASDAQ stock, the systenl autolnatically defaulted to BMIS as the 111arket nlaker. This was an
unusual acconl1110dation, and upon infoDllation and belief Madoff paid Bear Stearns substantial
fees for the default place111ent on the equity order systen1.
When two parties trade stock, a middleman assists by insuring that the money for the sale is properly
exchanged and the new stock ownership is properly recorded within three business days. This is called "clearing" a
trade. NSCC, a subsidiary of The Depository Trust & Clearing Corporation, is one ofthe leading clearing houses
for North American stock trading.
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17. From 2000 to 2008, Bear StealTIs' approxin1ately 400 brokers and traders all used
this Salne systen1 and all their trades defaulted to BMIS for securities listed on the NASDAQ.
This provided a huge source of revenue to BMIS, and upon infoffi1ation and belief, Bear Stearns
was BMIS' largest counter-patiy for Inarket making trades. Upon information and belief, this
systen1 relnained in place at Bear Stearns subsequent to its acquisition by Chase in March 2008,
and continued until BMIS' demise on December 11,2008.
18. Between 2000 and 2008, BMIS' market lnaking business produced steady
revenues of approxilnately $50 n1illion a year. Over 25 traders worked for the market n1aking
operations on the 19
th
Floor of BMIS' offices. The business had sufficient capital to support its
trading activity and banked at the Bank of New York. Although, upon infon11ation and belief,
the BMIS market Inaking traders were unaware of Madoff's Ponzi schelne, they were
unwittingly used by Madoff to support his crin1inal enterprise. As explained below, Madoff used
the legitin1ate n1arket making trading volun1e to disguise the lack of any trading on behalf of
:f\Aadoff s investlnent advisor "clients."
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pattern of racketeering activity, including but not limited to thousands of acts of mail and wire
fraud.
21. Starting as early as 1992 and continuing until Decenlber 11, 2008, Madoff
solicited cash frOln individuals, businesses, not-for-profit corporations and pension plans which
Madoff promised to invest on account for each particular custonler. Madoff explained to his
victims that he had a proprietary trading strategy which consisted of the purchase of a basket of
approximately 35-50 common stocks within the Standard & Poor's 100 Index while hedging
against the nlovement of these stocks tlu'ough the purchase and sale of option contracts.
22. Madoff pronlised his investors a steady return of up to 10-120/0 a year, and
bragged that he never had a losing qumier,
23. Madoff purported to keep nleticulous records of his victilns' fictional
investments. Every Inonth, each victim would receive a detailed account statement showing the
victinls'supposed stock and option trades during the Inonth together with a SUInnlary of the
annual return on his or her "investlnent." Madoff employed over a dozen people who assisted
hiln in creating these statelnents and in dealing with cllstolner cash deposits and withdrawals.
Frank DePasquale was one of Madoff" s long-tinle enlployees who had regular contact with
investors concenling their BMIS accounts and who knowingly assisted Madoff in creating the
false Inonthly account statelnents. All of this work was generated fronl the 1i
h
floor at BMIS'
Manhattan offices.
Chase's Close Relationship v/ith l\1adoff
24. Madoff cultivated 'a strong business relationship with Chase and, froln at least
1992, Madoff had all money received in the investnlent advisory business deposited into
accounts he held at Chase Bank in Manhattan and in a Chase· Bank branch in Delaware. As
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Madoffs business and reputation grew, and as the scope of his enormous fraud expanded the
deposits in the Chase accounts swelled. Upon infonnation and belief, by 2006, Madoff had
billions of dollars in cash on deposit in Chase Bank. These were demand deposits, Ineaning that
Chase had full use of the funds until Madoff withdrew them.
25. Each victim that opened an account with BMIS received an account nun1ber.
Madoff did not permit any of his victilns to transfer securities from another broker to BMIS.
Madoff only accepted cash investments which were directed to Account # 140081703 at Chase
Bank in Manhattan (the "Chase Account"). The Chase Account belonged to BMIS, although
deposits were ahnost invariably sent to the benefit of "Bernard L. Madoff." BMIS victin1s
deposited cash in two ways, either through wire transfer or by check. Wire transfers were sent
directly to the Chase Account with an advice that the funds were to be credited to Bernard L.
,
Madoff for the benefit to the account of a patiicular victim. Checks were deposited into the
Chase Account with the appropriate custolner account nUlnber indicated on the face of the check.
Either way, the fact that the 1110nies were 110t Madoffs or BMIS' but rather belonged to the
victin1 and were being received by BMIS as a fiduciary was plain on the face of the deposits.
26. BMIS victin1s included individuals, trusts, pensions, not-far-profit corporations
and IRA custodians. Chase Bank pern1itted all funds frOln putative investors to be con1mingled
in a single account and pern1itted Madoff to withdraw the funds as he saw fit, without lilnitation.
27. Upon information and belief, between 2006 and the n1iddle of 2008, the Chase
j\.ccount had an average balance of several billion dollars. However, as the financial 111arkets
began to sharply decline in 2008, the cash balance in the Chase Account began to drop
precipitously. Fron1 Septelnber 2008 until Decen1ber 11, 2008, the Chase Account balance often
dropped to near zero. In November 2008, the balance dropped close to zero several tin1es which
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forced Madoff to transfer at least $164 nlillion from MSIL's accounts in London to the Chase
Account. For the nl0nth of November 2008, $300 nlillion was deposited by victinls to the Chase
Account and Madoff withdrew $320 million.
Madorf Withstands Repeated Scrutiny From Regulators
28. As a broker-dealer registered with the SEC, BMIS was required to file alulual
reports about the business. Further, as a Inember of the Financial Industry Regulatory Authority,
Inc. ("FINRA"), BMIS was subject to annual audits. The SEC and FINRA audits were quite
regular, occurring about once a year. Officials fronl these organizations visited BMIS' offices
and for weeks at a time reviewed BMIS' books and records to verify a variety of conlpliance
issues ranging from whether trades were prolnptly executed, that stock quotes nlatched those on
public securities markets, and that payments were tinlely made. Investigators exanlined BMIS'
cash flows, statenlents froin clearing firnls that detailed which stocks BMIS bought and sold,
trade confinnations fronl counter-parties, banking records, and conlpliance with internal controls
and security.
29. The audits were Inanaged by Bernard Madoff and his brother Peter.
30. In 2006, the SEC spent weeks from May through August, poring over BMIS'
trades and account stateinents. In particular, the SEC wanted to insure that BMIS was not
engaged in"front rUIming." Front running is an illegal practice where a broker purchases a stock
for a custonler but does not inlmediately deliver the stock to the customer's account. By
delaying delivery, the broker n1ay hedge the Inarket at no risk. If the stock price increases, the
broker re-sells the stock and never processes the trade for the custoiner. If the stock price
declines, the broker then delivers the stock to the custoiner at the original purchase price.
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31. The SEC's 2006 investigation of BMIS also focused on BMIS' investment
advisory business. In particular, the SEC criticized Madoff for not registering with the
Comlnission as an investn1ent advisor. Madoff lied to the SEC, claiming that his investment
advisor business only had nine customers and thereby did not meet the threshold for SEC
registration. Nevertheless, the SEC delnanded Madoff s registration, and in the Fall of 2006, he
con1plied by registering as an investment advisor.
32. The SEC's 2006 audit of BMIS failed to uncover any wrongdoing because
Madoff was able to substantiate his legitilnacy through his n1arket making operations which
depended so heavily on business froln Bear Steams. By placing before SEC investigators reaIns
of infof1nation showing legitimate trading activity through the market n1aking division, the SEC
did not delve deeper into Madoff s investn1ent advisory business. Thus, Madoff used the Saine
Inirage that duped his victin1s to evade serious scrutiny from regulatory authorities.
Chase Learns that Madoff is a Fraud and Withdraws Its O'wn Capitai
33. In 2006, Chase developed a derivative product specifically for use with Madoff-
related investn1ents that was linked to the perfonnance of the funds owned and n1anaged by
Fairfield Greenwich Group ("Fairfield"), an asset Inanagement business based in COIU1ecticut
and run by Walter Noel.
34. Fairfield was a "feeder fund" that had directed clients to Madoff s investment
advisory business since 1995, and received hefty fees. In 2007, Fairfield repolied $250 n1illion
in revenue, $160 ll1illioll of which Caine frol11 Madoff.
35. In 2006, Fairfield had approxin1ately $14.5 billion under 111anagelnent. Of that,
$7.5 billion were in the Fairfield Sentry fund, the Greenwich Sentry fund and the Greenwich
Sentry Pminers fund (collectively the "Sentry Fund"). The Sentry Fund invested 95% of its cash
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with BMIS. Chase offered investors, predominantly based in Europe, a note that paid three times
the earnings of the Sentry Fund and matured in five years (the "Fairfield Notes"). To hedge
against its risk, Chase deposited three times the face amount of the notes directly into the Sentry
Fund. This way, if the Sentry Fund did well, Chase's returns would offset its obligations on the
notes.
36. By the SUInnler of 2008, Chase had deposited $250 Inillion with the Sentry Fund.
By that time, the financial meltdown on Wall Street and around the world was in full swing.
Most investment funds were down alnl0st 30%, yet the Sentry Fund reported gains of 5%, due to
the returns Madoff was showing on the nloney invested with BMIS. Chase, however, began to
grow suspicious of Madoff' s results and enlbarked on a due diligence investigation of Madoff' s
operations.
37. Upon information and belief, as part of its due diligence and according to standard
industry practice, Chase representatives met with Madoff to discuss his operations. They
inquired about his cash flow, what percentage of his pOlifolio was leveraged and with whom he
traded option contracts. Based on Madoff's c1ailn to be invested almost entirely in S&P 100
stocks while hedging with options, it was not plausible to Chase that Madoff could be generating
substantial positive returns at a time when the S&P was down 30% and option liquidity was
lilnited. However, as he did with all investors, Madoff would not disclose core infornlation that
fund managers typically discussed, such as percentages held in cash, and the amount of nloney
bon-owed against equity, or leveraged, in the account, and who were his option counter-paIiies.
38. Upon infoDllation and belief, the Chase due diligence investigative temn, which
was comprised of nlanagers froln the London office and their colleagues in New York, also had
access to Mr. Parcesepe's trading desk and to the people who regularly traded with Madoff. The
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Chase investigative team, upon information and belief, also consulted with traders to detennine
the number of trades executed by Chase through Madoff s market making business. They
learned that Madoff s trading volume with Bear Stearns (by then part of Chase), Madoff's largest
counter-party, could not possibly sustain a portfolio which was supposedly returning 10-12% a
year on what Chase knew had to exceed at least $7 billion in customer capital contributions.
39. The Chase team also had access to Madoff s account records at Chase Bank.
Those accounts showed consistent huge cash positions· until the middle of 2008 when the n1arket
began its downward freefall. Upon inforn1ation and belief, the Chase investigative tean1
accessed and reviewed Madoff s Chase account records.
40. As a result of its investigation, in or about September 2008, Chase quietly
liquidated its entire $250 n1i11ion cash position in the Sentry Fund while ren1aining liable on the
Fairfield Notes, even though at the tin1e, Chase's investment was showing a positive 5% return.
Notably, Chase did not withdraw its cash froln other funds that were linked to derivative notes
sin1ilar to the Fairfield Notes but not ultinlately invested vvith Madoff. Chase had unequivocally
concluded that Madoffs reported returns were false and illegitin1ate and that the only "ray to
protect its own capital - even in the face of the loss it could incur on the Fairfield Notes was to
liquidate the entirety of its Madoff-related investn1ents. In short, by Septen1ber 2008, Chase
knew that Madoffs business was a fraud. Indeed, in January 2009, Chase publicly adn1itted that
the withdrawal of its investn1ent was based on concerns and questions raised during the due
diligence investigation of I\1adoff.
41. By September 2008, Chase not only knew that BMIS' reported earnings were
false, but by viliue of the nature and volume of activity in the Chase Account, Chase knew that
Madoff was diverting custolner funds. Yet, Chase continued to trade with Madoff s market
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luaking business and continued to provide Madoffwith banking services. Madoff s account at
Chase was very having provided Chase for years with substantial earnings and fees
from the large cash balances in the account. Rather than protect other victims of Madoff s fraud
as it had already protected Chase chose not only to protect but to partner with him
in the fleecing of his by providing exactly the same range of for substantial
after leanling of his crinlinal as it had before its investigation.
42. despite being armed with the knowledge that BMIS business was a fraud
and that its purpolied investors were in fact crime Chase knowingly participated in
Madoff s continuing scheme to defraud investors. Chase did this in at least two ways. by
continuing to do business with BMIS' market l11aking business, Chase provided BMIS vlith the
volulue of trading necessary to create the illusion that BMIS investment advisory business was
generating a trading volunle consistent with having $7.2 billion under nlanagenlent. Further,
Chase continued to provide Madoff with banking services by accepting wired funds and
distributing the cash per Madoffs instruction, thereby facilitating Madoff s fraudulent enterprise
which continued to lure additional victinl including those of the plaintiff.
tlu'oughout the fall of Chase continued to work in partnership with Madoff despite being
privy to infornlation that the fraud was collapsing and therefore consunling luore and more of the
victinl proceeds stashed in the Chase account.
Plaintiff Deposits $12.8 Million in the Chase Account
43. During the SUll1mer of MLS11K received from B:t\1IS Inonthly statell1ents
through the ll1ail for account activity for June, August and September. These nlonthly
account stateluents indicated the trades in securities Madoff supposedly luade for each month on
behalf ofMLSMK's account and the year-to-date earnings which consistently showed a 10-12%
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Marlon"s Fraud is Publiclv Exposed
44. On Decenlber 11, 2008, Madoff was arrested by the FBI and charged with
securities fraud. On the sanle date, the SEC obtained a temporary restraining order from this
Court (Stanton, J.) freezing all the assets belonging to l\1adoff and BMIS. The Securities
Investor Protection Corporation ("SIPC") intervened in the SEC's civil action and lTIoved to
place BMIS into liquidation pursuant to the Securities Investor Protection Act ("SIPA"). On
December 15, 2008, the Couli ordered BMIS to be liquidated pursuant to SIPA and transfelTed
the case to the Bankruptcy Court (Lifland, J.)
45. On March 12, 2009, Bernard Madoff pleaded guilty to an II-count crinlinal
infornlation filed by the lTnited States AttOllley for the Southern District of New York adnlitting
that BMIS' investment advisory business was a Ponzi schenle (the "Infonnation"). According to
the Infonnation, by 2008, Madoff had 4,800 customer accounts and by November 30, 2008,
BMIS's customer Inonthly statenlents showed an aggregate of $64 billion under nlanagelTIent.
Plaintiff's BMIS account was one of the 4,800 refelTed to in the Infornlation. However, Madoff
never traded a single security on behalf of any custolner. He merely took nloney from victilns
v/hich he parked at Chase Bank until he had to provide earlier investors with cash redenlptions.
Madoff had also diverted vast sunlS to hilnself and his fmnily.
46. In his plea allocution, Madoff stated that he began the investnlent advisory
business in 1992 and never executed a single trade on behalf of any client. He adInitted that he
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deposited all victim cash in an account at Chase Bank and used the funds to pay "returns" to
earlier "investors."
47. Madoff is presently incarcerated and awaiting sentencing which is scheduled for
June 16, 2009.
FIRST CLAIM FOR RELIEF
Violation of 18 U.S.C. § 1962(d)
48. Plaintiff repeats all of the preceding Paragraphs.
49. From 2000 until December 11, 2008, Bernard Madoff, himself, and with the
assistance of Frank DePasquale and BMIS, did engage in a pattern of racketeering activity
tlu'ough an enterprise which functioned from offices at 885 Third Avenue, New York, New York
and which affected interstate con1merce.
50. The enterprise was cOlnprised of an association In fact of Ben1ard Madoff
individually, and through the association of Bernard Madoff with Frank DePasquale and BMIS
which engaged in a Ponzi schelne. Madoff solicited and accepted cash from individuals,
partnerships, corporations, trusts, and pension funds fr01l1 throughout the United States for the
stated purpose of investing in securities in order to provide the "investor" with a profit. Instead
of investing these funds, from at least 2001 through December 11, 2008, Madoff directed all
victin1 funds to be deposited in Chase Bank where they resided until Madoff transferred the
funds to pay third parties or misappropriated the funds to himself.
51. The racketeering acts through which Madoff and BlvlIS conducted the enterprise's
affairs consisted, among other things, of the sending through the United States mail to thousands
of Madoff victims each and every n10nth, between at least January 1, 2001 and December 11,
2008, monthly account statements which stated falsely that the victiln's money was invested in
various securities and that BMIS had transacted various stock and bond transactions on behalf of
15
the victim. The account statements purported to show detailed stock transactions such as the
date of the trade, the name of the security, the amount of the trade, and the proceeds credited to
the customer's account. Each statement also showed the ostensible year-to-date net earnings in
the account
52. The BMIS account statements were intended to cause, and did in fact cause,
victims to believe that their n10ney was earning a positive return which in turn caused then1 to
give more n10ney to Madoff. Further, Madoff's consistent "retU111S" earned hin1 a glowing
reputation among his victims who then recommended others to "invest" with Madoff.
53. All of the aforesaid account statelnents provided by Madoff were false. Madoff
never traded a single security for any of his victiIns. He used cash infusions from one victilTI to
pay offother victilns and to fund his luxurious personal lifestyle.
54. The association in fact between Madoff, DePasquale and BMIS was separate fron1
the racketeering activity described above. BMIS engaged in legitimate business activity through
its n1arket making operations. It regularly traded securities with legitilnate counterparties. Its
market making business was adequately capitalized and its trades were financed by funds on
deposit at the Bank of New York which were not commingled with the funds deposited in the
Chase Account. The traders working for the n1arket n1aking business were unaware of Madoff s
Ponzi schen1e and did not know that their trading activity was being used by Madoff to hide his
lack of trading on behalf of his investlnent advisory business custon1ers. The false n10nthly
account statements generated by fAadoff and sent to investors were not based 011 the market
n1aking trading nor were they prepared or n1ailed by any of the traders working for the market
lnaking business.
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55. Madoffs mailing of account statements to investors was part of a schelne to
defraud investors and obtain nloney or property greater than $1,000 by means of false pretenses,
by placing those documents in the United States mail in violation of the federal mail fraud
statute, 18 U.S.C. § 1341.
56. Madoff conducted the affairs of his criminal enterprise, a Ponzi scheme, through a
pattern of racketeering that ran fronl at least January 1, 2001 until Decenlber 11, 2008, in
violation of 18 U.S.C. § 1962(c).
57. Madoff s activities affected interstate commerce by defrauding investors of funds
that were transferred to the Chase Account in New York from accounts all over the United
States, including from Florida,
58. From at least on or about Septenlber 1, 2008 until Decenlber 11,2008, Chase and
Chase Bank knowingly and purposely conspired with Madoff and BMIS to violate 18 U.S.C. §
1962(c), and, pursuant to that conspiracy, participated in Madoff s racketeering enterprise.
59. As described above, Chase managing directors based in London who Inarketed
the Fairfield Notes had conducted an extensive due diligence investigation of Madoff s business
operations in July and August 2008 as a result of suspicions concenling the disparity between
Madoff s reported returns and the perfornlance of the S&P stock index that supposedly was the
core of Madoffs investlnent strategy. The executives in London, and upon information and
belief, with the assistance and patiicipation of colleagues in New York, conl1nunicated with
Madoff to understand the method in which he was operating and producing profits based on a
basket of S&P 100 stocks when the Inarket was down 30%. Specifically, upon information and
belief, they inquired about BMIS' liquidity, what atnount of leverage the finn was taking on, and
as to the identity of his counter-patiies to option transactions. However, Madoff would not
17
disclose this information. Madoff s refusal to disclose such information to the due diligence
teanl of a large institutional investor raised significant red flags to Chase.
60. The Chase executives charged with investigating Madoff also consulted, upon
information and belief, either with Mr. Parcesepe or those working at his trading desk to
determine the volume of business Bear Stearns (now Chase) was conducting with BMIS and
concluded that the BMIS market making business could not support Madoffs alleged $7 billion
investment advisory operation.
61. Upon infonnation and belief, these executives also had access to BMIS' account
records at Chase Bank which showed unusual activity during the sumnler of 2008 and low cash
balances \vhich \vas uncharacteristic of Madoff s ballJdng practices with Chase Ball]\: over the
pnor years.
62. No later than in or about Septelnber 2008, Chase concluded that Madoffs
reported earnings from BMIS' investment advisory business were false.
63. Chase kne\v that Madoff supplied his investors with 1110nthly statelnents
indicating their stock trading activity and year-to-date earnings. Chase knew this because,
tlu'oughout its long and close relationship with Madoff, Chase Bank's Private Client Banking
Group frequently lent n10ney to Madoff investors and routinely exanlined BMIS account
staten1ents to assess a borrower's financial status. By virtue of its investigation into Madoff,
Chase knew that these statenlents contained fictional inforn1ation.
64. Thus, by September 2008, based on its thorough investigation, Chase knev/ that
Madoff S luonthly account statenlents were false. Chase and Chase Bank knew at this tilue that
Madoff was not trading securities in the volume necessary to produce positive earnings on a $7
billion investment portfolio. Chase knew at the thue that market conditions did not generate
18
sufficient counter-party liquidity to sustain the option trades necessary for Madoff to successfully
execute his investment strategy for a ,$7 billion portfolio. Accordingly, Chase recognized that
Madoff s business was fictional and a scam.
65. Following its discovery that Madoffs enterprise was fraudulent, Chase continued
to honor and abide by its agreements with Madoff to provide the very services upon which the
survival of Madoffs fraud depended. Specifically, Chase, through Chase Bank, conspired and
agreed to participate in Madoff s racketeering enterprise by continuing to pennit Madoff victims
to deposit cash in the Chase Account and then transferring that n10ney to third parties at
Madoff s direction. These deposits were for the most part done by wire transfer with instruction
to credit the Chase Account for the benefit of a BMIS cnst0111er. Chase and Chase Bank knew at
the time that the victims had deposited these funds for investlnent by BMIS, which Chase knew
to be a fraud.
66. Chase and Chase Bank knew that the Chase Account was BMIS' business
operating account \vhich funded Madoff's trading for his investn1ent advisory clients. The
deposits to the Chase Account indicated that they were for the benefit of specific BMIS
customers and indicated the customer account l1u111ber on the transfer advice.
67. Chase and Chase Bank knowingly and purposely conspired to violate 18 U.S.C §
1962(c) by providing Madoff with banking services that were integral to the functioning of the
racketeering enterprise, and by engaging in predicate acts, including the translnission of
numerous interstate wire comn1unications. Chase and Chase BarJ<. \vere paid substantial fees and
had use of billions of dollars of stolen funds, which were derived entirely from Madoff s
racketeering enterprise.
19
68. Plaintiff was a victim of Madoffs crilninal enterprise after Chase entered into a
conspiracy with Madoff and BMIS. Specifically, during the summer of 2008, MLSMK received
from BMIS monthly statelnents through the mail reflecting alleged account activity for June,
July, August and September. These monthly account statements purported to indicate the trades
in securities Madoff nlade during that month on behalf of MLSMK's account and the year-to-
date earnings which showed a 10-12% atmualized positive return. Based on these statements, on
or about October 6,2008, MLSMK caused $1,100,000 to be transferred by interstate wire to the
Chase Account for credit to its account at BMIS. Chase Bank, by way of wire transmission,
comlnunicated to BMIS that $1.1 million had been received on behalf of MLSMK. Shortly after
that, MLSMK received in the nlail a wire confirmation fronl BMIS which indicated a credit of
$1.1 Inillion to MLSMK's account.
69. Sholily after MLSMK's deposit of funds in the Chase Account, at Madoff s
direction, Chase Bank transferred MLSMK' s money over interstate lines to third parties.
70. On October 31, 2008, based on the Madoff monthly statelnents showing a
consistent profitable return, I\1LSlvIK caused $8,478,283.66 to be transferred by interstate wire to
the Chase Account for credit to MLSMK's account at BMIS. Chase Bank, by way of vvire
transnlission, conlmunicated to BMIS that $8,478,283.66 had been received for the benefit of
MLSMK. Shortly after that, MLSMK received in the nlail a wire confinnation frOITI BMIS
which indicated a credit of $8,478,283.66 to MLSMK's account.
71. Shortly after J\1LSMK's deposit of funds in the Chase p.... ccount, at 1'-Aadoffs
direction, Chase Bank transfened MLSMK'snl0ney over interstate lines to third patiies.
72. In early Noveluber, MLSMK received its October stateluent fronl BMIS showing
continued positive returns on the account. Based on this statement, on Novelnber 6, 2008,
20
MLSMK caused $500,000 to be transferred by intestate wire to the Chase Account for credit to
its account at BMIS. Chase Bank, by way of wire transmission, communicated to BMIS that
$500,000 had been received for the benefit of MLSMK. Shortly after that, MLSMK received in
the mail a wire confirmation from BMIS which indicated a credit of $500,000 to MLSMK's
account.
73. Shortly after MLSMK's deposit of funds in the Chase Account, at Madoffs
direction, Chase Bank transferred MLSJ\1K's money over interstate lines to third parties.
74. Based on Madoffs continuing reports of positive returns, on Novelnber 15, 2008,
MLSMK caused $850,716.46 to be transferred by interstate wire to the Chase Account for credit
to its account at BMIS. Chase BarLk, by way of wire transrnission, comlnunicated to BMIS that
$850,716.46 had been received for the benefit of MLSMK. Shortly after that, MLSMK received
in the n1ai1 a confirmation from BMIS which indicated a credit of $850,716.46 to MLSMK's
account.
75. Shortly after :rv1LSMK's deposit of funds in the Chase Account, at Madoffs
direction, Chase Bank transfelTed IvfLSMK's Inoney over interstate lines to third parties.
76. Based on Madoffs continuing repolis of positive returns, on Novelnber 21,2008,
MLSMK caused $946,813.80 to be transferred by interstate wire to the Chase Account for credit
to its account at BMIS. Chase Bank, by way of wire transmission, comn1unicated to BMIS that
$946,813.80 had been received for the benefit of MLSMK. Shortly after that, MLSMK received
in the Inail a confirmation frOITI BMIS \vhich indicated a credit of $946,813.80 to MLSMK's
account.
77. Shortly after MLSMK's deposit of funds in the Chase Account, at Madoffs
direction, Chase Bank transfelTed MLSMK' s n10ney over interstate lines to third parties.
21
78. In early Decelnber 2008, MLSMK received its November account statement fron1
BMIS which showed continued positive returns. Based on that statelnent, on Decelnber 5, 2008,
MLSMK caused $950,000 to be transferred by interstate wire to the Chase Account for credit to
its account at BMIS. Chase Bank, by way of wire transmission, comlnunicated to BMIS that
$950,000 had been received for the benefit of MLSMK. Shortly after that, MLSMK received in
the Inail a confinnation fron1 BMIS which indicated a credit of$950,000 to MLSMK's account.
79. Chase Bank's use of the wires to infoffi1 Madoff of receipt of MLSMK's funds
and the transfer by wire of those funds out of the Chase Account over interstate lines and to third
parties throughout the United States were predicate acts committed in fUliherance of Madoffs
racketeering enterprise in violation of 18 U.S.C. § 1343.
80. Madoff could not obtain customer funds or use then1 to execute his Ponzi schen1e
without the aforesaid acts by Chase Bank. Madoff had no ability to accept wire or check
transfers and could not receive or Inove Inoney without the direct involvelnent and assistance of
Chase Bank. These acts by Chase Bank pennitted I\1adoff to steal MLSMK's funds to
MLSMK's detrilnent.
81. Chase further knowingly and purposely conspired and agreed to violate 18 U.S.C.
§ 1962(c), by continuing to actively trade with BMIS, using interstate wire comlnunications,
through the Bear Stearns trading desk headed by Aldo Parcesepe which Chase acquired in March
2008.
82. Bear Stearns vv'as BMIS' largest source of Inarket Inaking business. By
Septelnber 2008, Chase, however, knew that Madoff was cOlnn1itting fraud and that his stated
earnings were false. Yet, Chase continued to trade with BMIS which pennitted BMIS to
22
continue to generate huge trading volumes which Madoff used to legitimize his operations to
SEC and FINRA regulators and to both new and established victims.
83. Between Septelnber and Decenlber 2008, victims visited Madoff at his New York
offices and observed the bevy of activity on the trading floor by BMIS' market Inaking group.
This permitted Madoff to convince new victilns to deposit money in the Chase Account and
assured established victinls that their funds were being actively Inanaged. Without this
substantial trading volulne, Madoff could not have continued to operate his Ponzi scheme
because it either would have been uncovered by regulators, or investors \vould not have been
able to verify for thelnselves that his operations were actual and substantial and therefore would
not have invested.
84. Every day that trading was open on the U.S. financial nlarkets between Septelnber
1, 2008 and Decenlber 11, 2008, Chase executed, upon infonnation and belief, thousands of
trades with BMIS. Each trade involved the transmission of trading infornlation by electronic
111eans bet\veen Chase and BMIS, and upon infor1l1ation and belief, was conducted by Bear
Stearns traders from locations throughout the United States and crossed state lines. Each of the
foregoing wire translnissions were done in furtherance of a scheme to defraud BMIS victinls in
violation of 18 U.S.C. § 1343.
85. Plaintiff has been dmnaged by the aforesaid acts in an mnount to be deternlined at
trial but not less than $12.8 million.
SECOND CLAIlVI FOR RELIEF
(Aiding and Abetting Breach of Fiduciary Duty)
86. Plaintiff repeats all of the preceding Paragraphs.
23
87. As set forth above, by September 1, 2008, Chase and Chase Bank knew that
Madoff"s reported earnings from his investment advisory business were false and therefore that
he was engaged in a criminal enterprise.
88. Chase and Chase Bank knew that the plaintiff was a customer of BMIS and had
an account there. Every transfer of funds caused by MLSMK to the Chase Account stated that it
was for the benefit of MLSMK.
89. Chase and Chase Bank knew that the Chase Account was exclusively the
repository of monies deposited by investor clients of BMIS.
90. Chase and Chase Bank knew that Madoff was the sole owner of BMIS and, as a
broker-dealer, o\ved a fiduciary duty to the plaintiff.
91. Madoff breached his fiduciary duty to the plaintiff by failing to use its funds for
investn1ent purposes and instead n1isappropriating the funds for his own benefit, including
through the operation of a Ponzi schelne.
92. 1'Aadoff \vas able to perpetrate this schelne by sending his victin1s n10nthly
account staten1ents and trade confirmations which stated falsely that securities were being
purchased and sold on behalf of the plaintiff.
93. Chase and Chase Bank provided substantial assistance to Madoff by providing
hin1 with banking services which accon1plished illegal and fraudulent conveyances by Madoff to
hilnself and to third parties.
94. Chase also provided I\1adoff vv'ith substantial assistance by continuing to function
as BMIS' largest n1arket maker counterparty which provided Madoff with the volun1e of trades
needed to satisfy potential audits by financial regulators and which permitted the n1arket n1aking
24
group to continue to function and thereby enabling Madoff to provide victiIns with the
appearance that BMIS engaged in substantial securities trading.
95. Madoff could not have converted the funds entrusted to hin1 by the plaintiff
without the substantial assistance of Chase and Chase Bank· because BMIS was not a banking
institution and could not accept or process wires or check deposits. Plaintiff's injury was
proxin1ately caused by Chase and Chase Bank.
96. Plaintiff has been damaged in an amount to be detem1ined at trial but not less than
$12.8 million.
97. The aforesaid conduct by Chase and Chase Bank was purposeful and
contumacious. Even though Chase and Chase Bank ¥>J.l1eVI they \vere aiding and abetting a breach
of fiduciary duty, they continued to do so in order to preserve their valuable banking and trading
relationship with Madoff which provided then1 with substantial revenues and balance sheet
assets. Accordingly, punitive dmnages should be awarded to plaintiff in an mnount to be
detern1ined at trial.
THIRD CLAIM FOR RELIEF
(Commercial Bad Faith)
98. Plaintiff repeats all of the preceding Paragraphs.
99. As set forth above, Madoff and BMIS engaged in a schen1e to steal n10ney from
victilns by persuading theln to send lTIOney to the Chase Account on the pretext that it would be
invested by BMIS in securities and generate steady, positive returns under Madoff s
Inanagen1ent.
100. Chase Bank accepted deposits into the Chase Account by both check and wire
throughout its n1ulti-year relationship with Madoff.
25
101. Based on its familiarity with Madoff and BMIS' business, as well as fronl the face
of the deposits which invariably indicated that they were for the benefit of investment accounts
held in the s name with BMIS, Chase and Chase Bank had knowledge of the
purported nature of the Chase Account and the intended purpose of the deposits. That is, Chase
and Chase bank knew that the Chase Account was a repository of "investor" funds with respect
to which Madoff was a fiduciary.
102. Chase and Chase Bank permitted Madoff to dispose of the funds in any nlanner
to this end, routinely effected wire transfers out of the Chase Account to third parties at
Madoff s direction.
103. Prior to approxin1ately September 1, 2008, Chase and Chase Bank apparently
accepted these deposits and executed withdrawals at Madoff s direction in the belief that BMIS'
business was legitinlate.
104. As set forth In detail above, however, during the summer of 2008 Chase
conducted a detailed investigation of Madoff that led it to discover that Madoff was lying about
his investnlent returns and issuing false account statelnents. Chase and Chase Bank thus
obtained actual knowledge of Madoffs wrongdoing.
105. As a result of its actual knowledge of Madoff s Chase and Chase s
continued acceptance of hundreds of millions of victiIn dollars into the Chase Account, and
Chase Bank's continued dispersion ofthose victim funds at Madoffs direction, after on or about
September 1, 2008, w'ere lTIade in bad faith.
106. Specifically, Chase Bank's acceptance of Plaintiff s deposits of approxinlately
$12.8 nlillion into the Chase Account between October 6, 2008 and Decen1ber 5,2008, was done
in bad faith in light of Chase and Chase Bank's knowledge of Madoffs fraud.
26
107. Similarly, Chase Bank's dispersal of Plaintiffs money out of the Chase Account
at Madoff's direction was done in bad faith in light of Chase and Chase Bank's knowledge of
Madoff's fraud.
108. Through their knowledge of Madoff's unlawful conduct, Chase and Chase Bank
thereby themselves became participants in the underlying scheme to steal money fronl Madoff" s
victims.
109. Plaintiff has been datnaged by defendants' bad faith conduct in an amount to be
detennined at trial but not less than $12.8 IniUion.
110. The aforesaid conduct by Chase and Chase Bank was purposeful and
contunlaciolls. Even though Chase and Chase Bank knew they were facilitating Madofi's fraud,
they continued to do so in order to preserve their valuable banking and trading relationship with
Madoff which provided thelU with substantial revenues and balance sheet assets. Accordingly,
punitive damages should be awarded to plaintiff in an anlount to be deternlined at trial.
FOURTH CLAIM FOR RELIEF
(Negligence)
111. Plaintiff repeats all of the preceding Paragraphs.
112. Chase and Chase Bank provided banking services to Madoff and BMIS SInce
1992.
113. By the end of 2007; upon infor111ation and belief, Madoff had several billion
dollars in the Chase Account.
114. Chase and Chase Bank knew that Madoff directed his victitns to deposit funds in
the Chase Account and that the purpose of these deposits was to fund Madoff s investnlent
activity on behalf of these clistolners.
27
115. The WIre transfer advices from Madoff s custolners to the Chase Account
indicated that the wired funds were for the benefit of the particular customer's account and were
for the purpose of investing in BMIS.
116. Based on its familiarity with Madoff and BMIS' business, as well as from the face
of the deposits which invariably indicated that they were for the benefit of investnlent accounts
held in the victiln-depositor's name with BMIS, Chase had knowledge of the purported nature of
the Chase Account and the intended purpose of the deposits. That is, Chase knew that the Chase
Account was a repository of "investor" funds with respect to which Madoff was a fiduciary.
117. Beginning in 2006, in connection with its issuance of the Fairfield Notes, Chase
had beconle an investor in Madoff through its investment of $250 Inillion in the Sentry Fund.
During the summer of 2008, Chase recognized celiain red flags - including the fact that BMIS'
reported returns on investlnent based on its publicly stated strategy were apparently inconsistent
with Inarket conditions at the tilne - and decided to conduct a due diligence investigation. As a
result of that investigation, Chase learned that Madoff \vas engaged in a ll1assive fraud by lying
to investors about the returns he was reporting in his investment advisory business.
118. As a result of its knowledge that Madoff was engaged in fraud with respect to
victin1 funds on deposit in the Chase Account, for which Madoff was a fiduciary, Chase and
Chase Bank becanle duty-bound to protect the depositors from Madoff s lnalfeasance.
119. Chase and Chase Bank breached this duty by failing to take any action following
its investigation of Madoff other than the withdrawal of its oV/n assets froln 11adoff-related
investment vehicles. It continued to service the Chase Account, accepting new deposits and
disposing of the contents of the Chase Account as directed by Madoff fronl Septen1ber 1, 2008
through Decelnber 11, 2008.
28
120. Chase and Chase Bank's breach of their duty of care caused plaintiff to suffer
dmnages by pern1itting Madoff to convert its funds for his own use. But for Chase and Chase
Bank's breach, Madoffwould have been unable to obtain and convert plaintiffs funds.
121. Plaintiff has been damaged in an amount to be determined at trial, but not less
than $12.8 lnillion.
122. The aforesaid conduct by Chase and Chase Bank was purposeful m1d
contun1acious. Even though Chase and Chase Bank knew they were facilitating Madoffs fraud,
they continued to do so in order to preserve their valuable banking and trading relationship with
Madoffwhich provided then1 with substantial revenues and balance sheet assets. Accordingly,
p:unitive dmnages should be aVlarded to plaintiff in an amount to be detern1ined at trial.
FIFTH CLAIM FOR RELIEF
(Negligence)
123. Plaintiff repeats all of the preceding Paragraphs.
124. Chase and Chase Bank provided banking services to Madoff and BMIS since
1992.
125. By the end of 2007, upon information and belief, Madoff had several billion
dollars in the Chase Account.
126. Chase and Chase Bank knew that Madoff directed his victin1s to deposit funds in
the Chase Account and that the purpose of these deposits \vere to fund Madoff s investnlent
activity on behalf of these custonlers.
127. The wire transfer advices fron1 Madoffs custon1ers to the Chase Account
indicated that the wired funds were for the benefit of the particular custon1er's account and were
for the purpose ofinvesting in BMIS.
29
128. Based on its fmniliarity with Madoff and BMIS' business, as well as fronl the face
of the deposits which invariably indicated that they were for the benefit of investinent accounts
held in the victim-depositor's name with BMIS, Chase and Chase Bank had knowledge of the
purported nature of the Chase Account and the intended purpose of the deposits. That is, Chase
and Chase Bank knew that the Chase Account was a repository of "investor" funds with respect
to which Madoff was a fiduciary.
129. Between Septenlber 1, 2008 and Deceluber 11, 2008, the activity in the Chase
Account was extremely volatile and erratic and did not cOlnport with the banking patten1S
Madoff had deluonstrated for the prior decade. Upon infonuation and belief, in Septeluber and
October, 2008, hundred of millions of dollars were withdrawn fron1 the Chase Account. In
Noveluber 2008, the balance reached near zero requiring Madoff to transfer $164 nlillion froin
MLIS in London to the Chase Account. In Novenlber $300 Iuillion was transferred into the
Chase Account and $320 nlillion was transferred out to third pmiies.
130. Even \vithout Chase's discovery of ~ A a d o f r s fraud through its detailed due
diligence investigation in the sun1nler of 2008, the erratic signs of withdrawal activity and
transfers of money frOITI overseas iluposed a duty on Chase and Chase Bank to investigate
Madoff to ensure that Madoff was not diverting fiduciary funds and to take appropriate action
based upon that investigation, including to shut down the Chase Account. Chase and Chase
Bank breached that duty by taking no action whatsoever despite the gathering stornl of warning
signs in the Chase Account.
131. Chase and Chase's Bank breach of their duty of care caused plaintiff to suffer
damages by permitting Madoffto convert the funds MLSMK deposited between October 6,2008
and Decenlber 5, 2008, for his own use.
30
132. Plaintiff has been damaged in an amount to be determined at trial, but not less
than $12.8 million.
133. The aforesaid conduct by Chase and Chase Bank was purposeful and
contumacious. Even though Chase and Chase Bank knew they were facilitating Madoff"s fraud,
they continued to do so in order to preserve their valuable banking and trading relationship with
Madoff which provided them with substantial revenues and balance sheet assets. Accordingly,
punitive danlages should be awarded to plaintiff in an anlount to be determined at trial.
31
WHEREFORE, plaintiff demands judgment against Chase and Chase Bank,
jointly and severally, as follows:
a. On the First Claim for Relief, dmnages in an amount to be determined at
trial but not less than $12.8 million, plus treble damages and costs and attorneys' fees pursuant to
18 U.S.C. § 1964;
b. On the Second Claim for Relief, dmnages in an mnount to be detern1ined
at trial but not less than $12.8 n1illion, plus punitive damages in an amount to be determined at
trial;
c. On the Third Clain1 for Relief, dan1ages in an mnount to be determined at
trial but not less than $12.8 million, plus punitive damages in an alll0unt to be determined at
trial;
d. On the Fourth Clain1 for Relief, dan1ages in an amount to be detern1ined at
trial but not less than $12.8 n1illion, plus punitive damages in an mnount to be detern1ined at
e. On the Fifth ClaiIn for R e l i e t ~ dan1ages in an an10unt to be detern1ined at
trial but not less than $12.8 million, plus punitive dan1ages in an mnount to be detennined at
trial; and
32
f. For whatever further relief this Court deems necessary and proper.
Plaintiff den1ands a trial by jury.
Dated: New York, New York
April 23, 2009
33
d · ~
/ Howard Kleinhendler (HK 5712)
Julian D. Schreiblnan (JS 1124)
Sara G. Spiege1n1an (SS 4352)
WACHTEL & MASYR, LLP
110 East 59
th
Street
New York, New York 10022
(212) 909-9500
Attorneys for Plaintiff
MLSMK Investlnents Company

steady positive annual returns. However, Madoff never invested plaintiff s money and instead misappropriated its funds in what were the last gasps of a nearly twenty-year fraud. 2. But Madoff did not act alone. By September 2008, JP Morgan Chase & Co.

("Chase") unequivocally knew that Madoff s stated investnlent returns were false. Chase knew this through its due diligence investigation into Madoff" s investment advisory business; its dealing with Madoff through Bear Stearns's Inarket nlaking desk, which it acquired in March 2008; and, fronl the Madoff bank accounts it held. Upon acquiring this knowledge, Chase

entered into a conspiracy with Madoff and BMIS in violation of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. But for Chase's actionswhich kept Madoff s crinlinal enterprise in business through Deceinber 2008 would not have lost $12.8 million. 3. In addition to conspiring with Madoff and BMIS, Chase also aided and abetted the plaintiff

Madoff s breach of the fiduciary duty that he owed to plaintiff, engaged in cOlnnlercial bad faith, and acted negligently in light of its k.l1owledge of Madoff s criminal activity. 4. Chase provided IvIadoff with at least two essential services after it knew that

Madoff was a fraud. First, it continued to pernlit its brokers to trade with Madoff s nlarket n1aking business thereby providing Madoff with legitilnate trading volunle which he used to satisfy audits and inquiries froin the SEC and FINRA, as well as to fool the targets of his fraudulent schelne. Second, it received and deposited cash frOln unsuspecting victin1s for

Madoffs benefit and permitted him to use those funds in any n1anner he pleased, including the continued operation of his Ponzi schenle, as well as transfers to hiinself, his fmnily, and his close associates.

2

PARTIES

5.

Plaintiff MLSMK Investments Company ("MLSMK") is a Florida partnership

with a principal place of business in Palm Bach, Florida. Each of MLSMK's partners is a Florida citizen. Between October 6,2008 and December 5, 2008, MLSMK caused $12.8 million to be transferred to BMIS by wiring the funds to BMIS' account at Chase Bank in New York City. 6. Defendant JP Morgan Chase Bank, NA is a Delaware corporation with a principal

place of business at 1 Chase Manhattan Plaza, New York, New York. Chase Bank provides, mnong other things, comInercial banking services. 7. Defendant JP Morgan Chase & Co. is a global financial serVIces firn1 and

provides investment banking services; financial services for consun1ers; sn1all business and con1mercial banking; asset managelnent and private equity. Chase is traded on the New York Stock Exchange and is a cOInponent of the Dow Jones Industrial Average. It is incorporated under the laws of Delaware and n1aintains a principal place of business at 270 Park Avenue, New York, New York. 8. Between 2000 and the present, Chase has filed consolidated financial statements

with the SEC which include revenues froln all of its operations, including revenues froln Chase Bank. Chase controls the operations of Chase Bank and guides its activity through a single corporate consciousness. JURISDICTION AND VENUE 9. This court has both federal question and diversity jurisdiction over this case

pursuant to 28 U.S.C §§ 1331 and 1332(a)(1). 10. Venue lies in this district pursuant to 28 U.S.C. § 1391.

3

Madoff fonned BMIS. New York. which took over all of !vladoffs broker-dealer activities. BMIS purportedly engaged in three different operations. 2000. (i) regularly By Decelnber 2008. 13. New York. Madoff Investnlent Securities. and for the preceding forty years. As a self-clearing 4 . with respect to a particular security. meaning that it itself held title to shares of stock it purchased as opposed to using a prinlary broker to hold its stock certificates. BMIS elnployed publishes bona fide. Madoff owned and operated a Until 2000. and (iii) is ready. 14. including investment advisor services. Between December 2000 and December 11. BMIS was a broker-dealer registered with the Securities and Exchange Commission. nearly 70 people. BMIS was a self-clearing broker. Madoff was the sale Inember and nlanager of BMIS. On or about December 4. a sale proprietorship owned by Madoff.FACTS Madoff"s Criminal Enterprise 11. Madoff operated under the nanle broker-dealer business based in Manhattan. England which was incorporated under the name Madaff Securities International ("MSIL"). or (ii) furnishes bona fide conlpetitive bid and offer quotations on request. From its fonl1ation. Until his arrest. Madoff also opened a branch of his broker-dealer business in London. which he principally owned and controlled. willing and able to effect transactions in reasonable quantities at its quoted prices vvith other brokers or dealers. conlpetitive bid and offer quotations in a recognized interdealer quotation systeln. 12. a New York lilnited liability conlpany with offices at 855 Third Avenue. ll1arket making services and proprietary trading. Bernard L. All of this activity was conducted from I\1adoff s offices in I\1anhattan. 2008. A Market-Maker is a dealer who.

Madoff. Between approximately 2005 and October 2008.. BMIS' and Bear Stearns' market nlaking business regularly traded through NSX. 5 . The broker entered the stock synlbol and the amount of shares he wanted to trade and the systelTI vias supposed to find the best counterpatiy trade from among the lnany market maker broker-dealers that traded with Bear Stearns. ("Bear Stearns"). Under Parcesepe's guidance. a middleman assists by insuring that the money for the sale is properly exchanged and the new stock ownership is properly recorded within three business days. Madoff was close friends with Aldo Parcesepe. Bear Stearns built a close business relationship with l\1adoff. either directly or through BMIS. BMIS engaged in the market making business and actively traded with various institutional counter-parties. Parcesepe served on the Board of the National Stock Exchange. Inc. Madoff s brother and BMIS' chief compliance officer. Peter Madoff. BMIS was able to execute trades with institutional counter-parties. the systenl autolnatically defaulted to BMIS as the 111arket nlaker. those trades were cleared through the National Securities Clearing Corporation ("NSCC. options and foreign exchanges. Upon infornlation and belief. futures. ("NSX") an electronic stock exchange for equities. This was an unusual acconl1110dation. This is called "clearing" a trade. served together with Parcesepe on NSX's board. is one ofthe leading clearing houses for North American stock trading.broker. including Bear Stearns & Co. for every trade for a NASDAQ stock.I 15. Parcesepe's trading desk regularly traded with BMIS. For the most part. a subsidiary of The Depository Trust & Clearing Corporation. However. owned 10% of NSX. 16. a senior nlanaging director and the head of Over-the-Counter and NASDAQ Inarket maker trading at Bear Steams. Brokers \vho traded at Bear Stearns used the firm's automated equity order systeln to buy and sell stocks.). NSCC. When two parties trade stock. and upon infoDllation and belief Madoff paid Bear Stearns substantial fees for the default place111ent on the equity order systen1.

upon infon11ation and belief. From 2000 to 2008. The business had sufficient capital to support its trading activity and banked at the Bank of New York. and upon infoffi1ation and belief. Bear StealTIs' approxin1ately 400 brokers and traders all used this Salne systen1 and all their trades defaulted to BMIS for securities listed on the NASDAQ.17. 18." 6 . and continued until BMIS' demise on December 11. this systen1 relnained in place at Bear Stearns subsequent to its acquisition by Chase in March 2008. the BMIS market Inaking traders were unaware of Madoff's Ponzi schelne. they were unwittingly used by Madoff to support his crin1inal enterprise. Between 2000 and 2008.2008. Madoff used the legitin1ate n1arket making trading volun1e to disguise the lack of any trading on behalf of :f\Aadoff s investlnent advisor "clients. BMIS' market lnaking business produced steady revenues of approxilnately $50 n1illion a year. As explained below. This provided a huge source of revenue to BMIS. Over 25 traders worked for the market n1aking operations on the 19th Floor of BMIS' offices. Upon information and belief. Bear Stearns was BMIS' largest counter-patiy for Inarket making trades. Although.

Every Inonth. Madoff cultivated 'a strong business relationship with Chase and. Madoff purported to keep nleticulous records of his victilns' fictional investments. 2008. including but not limited to thousands of acts of mail and wire fraud. Madoff solicited cash frOln individuals.pattern of racketeering activity. Frank DePasquale was one of Madoff" s long-tinle enlployees who had regular contact with investors concenling their BMIS accounts and who knowingly assisted Madoff in creating the false Inonthly account statelnents. 22. each victim would receive a detailed account statement showing the victinls 'supposed stock and option trades during the Inonth together with a SUInnlary of the annual return on his or her "investlnent. Starting as early as 1992 and continuing until Decenlber 11. 23. 21. Madoff explained to his victims that he had a proprietary trading strategy which consisted of the purchase of a basket of approximately 35-50 common stocks within the Standard & Poor's 100 Index while hedging against the nlovement of these stocks tlu'ough the purchase and sale of option contracts. and bragged that he never had a losing qumier." Madoff employed over a dozen people who assisted hiln in creating these statelnents and in dealing with cllstolner cash deposits and withdrawals. Chase's Close Relationship v/ith l\1adoff h floor at BMIS' 24. Madoff pronlised his investors a steady return of up to 10-120/0 a year. All of this work was generated fronl the 1i Manhattan offices. businesses. froln at least 1992. As 7 . Madoff had all money received in the investnlent advisory business deposited into accounts he held at Chase Bank in Manhattan and in a Chase· Bank branch in Delaware. not-for-profit corporations and pension plans which Madoff promised to invest on account for each particular custonler.

the Chase j\.Madoffs business and reputation grew. . 26. the cash balance in the Chase Account began to drop precipitously. Madoff did not permit any of his victilns to transfer securities from another broker to BMIS. Upon infonnation and belief.ccount had an average balance of several billion dollars. 25. either through wire transfer or by check. Ineaning that Chase had full use of the funds until Madoff withdrew them. Fron1 Septelnber 2008 until Decen1ber 11. These were demand deposits. BMIS victin1s included individuals." BMIS victin1s deposited cash in two ways. Upon information and belief. Chase Bank pern1itted all funds frOln putative investors to be con1mingled in a single account and pern1itted Madoff to withdraw the funds as he saw fit. The Chase Account belonged to BMIS. by 2006. the balance dropped close to zero several tin1es which 8 . Madoff only accepted cash investments which were directed to Account # 140081703 at Chase Bank in Manhattan (the "Chase Account"). trusts. Madoff. the fact that the 1110nies were 110t Madoffs or BMIS' but rather belonged to the victin1 and were being received by BMIS as a fiduciary was plain on the face of the deposits. Madoff had billions of dollars in cash on deposit in Chase Bank. between 2006 and the n1iddle of 2008. In November 2008. 2008. Wire transfers were sent directly to the Chase Account with an advice that the funds were to be credited to Bernard L. and as the scope of his enormous fraud expanded the deposits in the Chase accounts swelled. as the financial 111arkets began to sharply decline in 2008. although deposits were ahnost invariably sent to the benefit of "Bernard L. However. 27. the Chase Account balance often dropped to near zero. pensions. without lilnitation. Each victim that opened an account with BMIS received an account nun1ber. Either way. Checks were deposited into the Chase Account with the appropriate custolner account nUlnber indicated on the face of the check. Madoff for the benefit to the account of a patiicular victim. not-far-profit corporations and IRA custodians.

The SEC and FINRA audits were quite regular. and that payments were tinlely made. If the stock price increases. 30. the broker re-sells the stock and never processes the trade for the custoiner. By delaying delivery. Inc. that stock quotes nlatched those on public securities markets. as a Inember of the Financial Industry Regulatory Authority. occurring about once a year. Investigators exanlined BMIS' cash flows. For the nl0nth of November 2008. engaged in "front rUIming. 9 . 29. the broker then delivers the stock to the custoiner at the original purchase price. BMIS was required to file alulual reports about the business. $300 nlillion was deposited by victinls to the Chase Account and Madoff withdrew $320 million. In 2006. the SEC wanted to insure that BMIS was not trades and account stateinents. poring over BMIS' In particular. Madorf Withstands Repeated Scrutiny From Regulators 28. the SEC spent weeks from May through August. As a broker-dealer registered with the SEC. the broker n1ay hedge the Inarket at no risk. BMIS was subject to annual audits. trade confinnations fronl counter-parties. If the stock price declines." Front running is an illegal practice where a broker purchases a stock for a custonler but does not inlmediately deliver the stock to the customer's account. statenlents froin clearing firnls that detailed which stocks BMIS bought and sold. and conlpliance with internal controls and security. Officials fronl these organizations visited BMIS' offices and for weeks at a time reviewed BMIS' books and records to verify a variety of conlpliance issues ranging from whether trades were prolnptly executed. The audits were Inanaged by Bernard Madoff and his brother Peter. Further. ("FINRA").forced Madoff to transfer at least $164 nlillion from MSIL's accounts in London to the Chase Account. banking records.

34. $7. Madoff used the Saine Inirage that duped his victin1s to evade serious scrutiny from regulatory authorities. The SEC's 2006 investigation of BMIS also focused on BMIS' investment In particular. Comlnission as an investn1ent advisor. The Sentry Fund invested 95% of its cash 10 . By placing before SEC investigators reaIns of infof1nation showing legitimate trading activity through the market n1aking division. The SEC's 2006 audit of BMIS failed to uncover any wrongdoing because Madoff was able to substantiate his legitilnacy through his n1arket making operations which depended so heavily on business froln Bear Steams. 32. In 2006.5 billion under 111anagelnent. the SEC criticized Madoff for not registering with the advisory business.5 billion were in the Fairfield Sentry fund. Chase Learns that Madoff is a Fraud and Withdraws Its O'wn Capitai 33. $160 ll1illioll of which Caine frol11 Madoff. Of that. the SEC delnanded Madoff s registration. an asset Inanagement business based in COIU1ecticut and run by Walter Noel. Nevertheless. Fairfield was a "feeder fund" that had directed clients to Madoff s investment advisory business since 1995. Thus. he con1plied by registering as an investment advisor. and received hefty fees. the SEC did not delve deeper into Madoff s investn1ent advisory business. Fairfield repolied $250 n1illion in revenue. and in the Fall of 2006.31. Chase developed a derivative product specifically for use with Madoff- related investn1ents that was linked to the perfonnance of the funds owned and n1anaged by Fairfield Greenwich Group ("Fairfield"). the Greenwich Sentry fund and the Greenwich Sentry Pminers fund (collectively the "Sentry Fund"). claiming that his investment advisor business only had nine customers and thereby did not meet the threshold for SEC registration. 35. Fairfield had approxin1ately $14. Madoff lied to the SEC. In 2007. In 2006.

yet the Sentry Fund reported gains of 5%. Parcesepe's trading desk and to the people who regularly traded with Madoff. Madoff would not disclose core infornlation that fund managers typically discussed. the Chase due diligence investigative temn. predominantly based in Europe. if the Sentry Fund did well. inquired about his cash flow. Chase. also had access to Mr. Based on Madoff's c1ailn to be invested almost entirely in S&P 100 stocks while hedging with options. 38. Upon infoDllation and belief. Upon information and belief. as he did with all investors. However. Most investment funds were down alnl0st 30%. such as percentages held in cash. it was not plausible to Chase that Madoff could be generating substantial positive returns at a time when the S&P was down 30% and option liquidity was lilnited. 36. This way. 37. Chase had deposited $250 Inillion with the Sentry Fund. which was comprised of nlanagers froln the London office and their colleagues in New York. began to grow suspicious of Madoff' s results and enlbarked on a due diligence investigation of Madoff' s operations. in the account. and who were his option counter-paIiies. due to the returns Madoff was showing on the nloney invested with BMIS. Chase offered investors. By the SUInnler of 2008.with BMIS. By that time. a note that paid three times the earnings of the Sentry Fund and matured in five years (the "Fairfield Notes"). as part of its due diligence and according to standard They industry practice. Chase representatives met with Madoff to discuss his operations. or leveraged. Chase deposited three times the face amount of the notes directly into the Sentry Fund. Chase's returns would offset its obligations on the notes. and the amount of nloney bon-owed against equity. however. what percentage of his pOlifolio was leveraged and with whom he traded option contracts. the financial meltdown on Wall Street and around the world was in full swing. To hedge against its risk. The 11 .

Yet. Chase not only knew that BMIS' reported earnings were false. Notably. also consulted with traders to detennine the number of trades executed by Chase through Madoff s market making business.Chase investigative team. but by viliue of the nature and volume of activity in the Chase Account. in January 2009. 41. could not possibly sustain a portfolio which was supposedly returning 10-12% a year on what Chase knew had to exceed at least $7 billion in customer capital contributions. Upon inforn1ation and belief. in or about September 2008. By September 2008. Chase knew that Madoff was diverting custolner funds. In short. Chase continued to trade with Madoff s market 12 . As a result of its investigation. the Chase investigative tean1 accessed and reviewed Madoff s Chase account records. Those accounts showed consistent huge cash positions· until the middle of 2008 when the n1arket began its downward freefall. Chase quietly liquidated its entire $250 n1i11ion cash position in the Sentry Fund while ren1aining liable on the Fairfield Notes. The Chase team also had access to Madoff s account records at Chase Bank. Madoff's largest counter-party. Chase publicly adn1itted that the withdrawal of its investn1ent was based on concerns and questions raised during the due diligence investigation of I\1adoff. Indeed. by Septen1ber 2008. Chase knew that Madoffs business was a fraud.even in the face of the loss it could incur on the Fairfield Notes was to liquidate the entirety of its Madoff-related investn1ents. 39. even though at the tin1e. Chase's investment was showing a positive 5% return. 40. They learned that Madoff s trading volume with Bear Stearns (by then part of Chase). Chase had unequivocally concluded that Madoffs reported returns were false and illegitin1ate and that the only "ray to protect its own capital . upon information and belief. Chase did not withdraw its cash froln other funds that were linked to derivative notes sin1ilar to the Fairfield Notes but not ultinlately invested vvith Madoff.

Indeed~ tlu'oughout the fall of 2008~ Chase continued to work in partnership with Madoff despite being privy to infornlation that the fraud was collapsing and therefore consunling luore and more of the victinl proceeds stashed in the Chase account. thereby facilitating Madoff s fraudulent enterprise which continued to lure additional victinl contributions~ including those of the plaintiff. Further. August and September.8 Million in the Chase Account 43. by continuing to do business with BMIS' market l11aking business. Plaintiff Deposits $12. despite being armed with the knowledge that BMIS ~ business was a fraud victims~ and that its purpolied investors were in fact crime Chase knowingly participated in First~ Madoff s continuing scheme to defraud investors. During the SUll1mer of 2008~ MLS11K received from B:t\1IS Inonthly statell1ents July~ through the ll1ail for account activity for June. Chase continued to provide Madoff with banking services by accepting wired funds and distributing the cash per Madoff s instruction. Madoff s account at Chase was very lucrative~ having provided Chase for years with substantial earnings and fees from the large cash balances in the account. Thus~ as it had before its investigation. Rather than protect other victims of Madoff s fraud as it had already protected in the fleecing of his fees~ itself~ Chase chose not only to protect Madoff~ but to partner with him for substantial victilus~ by providing exactly the same range of enterprise~ services~ after leanling of his crinlinal 42. Chase did this in at least two ways. These nlonthly account stateluents indicated the trades in securities Madoff supposedly luade for each month on behalf ofMLSMK's account and the year-to-date earnings which consistently showed a 10-12% 13 . Chase provided BMIS vlith the volulue of trading necessary to create the illusion that BMIS ~ investment advisory business was generating a trading volunle consistent with having $7.2 billion under nlanagenlent.luaking business and continued to provide Madoffwith banking services.

46. J. by 2008. The Securities Investor Protection Corporation ("SIPC") intervened in the SEC's civil action and lTIoved to place BMIS into liquidation pursuant to the Securities Investor Protection Act ("SIPA"). However. On Decenlber 11. On March 12. According to the Infonnation. Madoff stated that he began the investnlent advisory business in 1992 and never executed a single trade on behalf of any client. Madoff had also diverted vast sunlS to hilnself and his fmnily. On December 15. J.) 45. the SEC obtained a temporary restraining order from this Court (Stanton. 2008. BMIS's customer Inonthly statenlents showed an aggregate of $64 billion under nlanagelTIent. Madoff was arrested by the FBI and charged with securities fraud. Plaintiff's BMIS account was one of the 4. In his plea allocution. 2008. On the sanle date. Bernard Madoff pleaded guilty to an II-count crinlinal infornlation filed by the lTnited States AttOllley for the Southern District of New York adnlitting that BMIS' investment advisory business was a Ponzi schenle (the "Infonnation"). 2009. Madoff never traded a single security on behalf of any custolner. He adInitted that he 14 . He merely took nloney from victilns v/hich he parked at Chase Bank until he had to provide earlier investors with cash redenlptions.800 refelTed to in the Infornlation. the Couli ordered BMIS to be liquidated pursuant to SIPA and transfelTed the case to the Bankruptcy Court (Lifland.Marlon" s Fraud is Publiclv Exposed 44.800 customer accounts and by November 30. 2008. Madoff had 4.) freezing all the assets belonging to l\1adoff and BMIS.

trusts. June 16. Madoff directed all victin1 funds to be deposited in Chase Bank where they resided until Madoff transferred the funds to pay third parties or misappropriated the funds to himself.deposited all victim cash in an account at Chase Bank and used the funds to pay "returns" to earlier "investors. 2008. Madoff is presently incarcerated and awaiting sentencing which is scheduled for FIRST CLAIM FOR RELIEF Violation of 18 U. Plaintiff repeats all of the preceding Paragraphs. 50. did engage in a pattern of racketeering activity tlu'ough an enterprise which functioned from offices at 885 Third Avenue. and through the association of Bernard Madoff with Frank DePasquale and BMIS which engaged in a Ponzi schelne. The racketeering acts through which Madoff and BlvlIS conducted the enterprise's affairs consisted. 2009.C. and pension funds fr01l1 throughout the United States for the stated purpose of investing in securities in order to provide the "investor" with a profit. Bernard Madoff. 2008. 2001 and December 11.S. partnerships. New York." 47. and with the assistance of Frank DePasquale and BMIS. between at least January 1. From 2000 until December 11. 49. among other things. Instead of investing these funds. § 1962(d) 48. 2008. The enterprise was cOlnprised of an association In fact of Ben1ard Madoff individually. himself. New York and which affected interstate con1merce. of the sending through the United States mail to thousands of Madoff victims each and every n10nth. corporations. from at least 2001 through December 11. Madoff solicited and accepted cash from individuals. 51. monthly account statements which stated falsely that the victiln's money was invested in various securities and that BMIS had transacted various stock and bond transactions on behalf of 15 .

It regularly traded securities with legitilnate counterparties. victims to believe that their n10ney was earning a positive return which in turn caused then1 to give more n10ney to Madoff. and did in fact cause. the amount of the trade. The false n10nthly account statements generated by fAadoff and sent to investors were not based 011 the market n1aking trading nor were they prepared or n1ailed by any of the traders working for the market lnaking business. the name of the security. Each statement also showed the ostensible year-to-date net earnings in the account 52. 54. The account statements purported to show detailed stock transactions such as the date of the trade. He used cash infusions from one victilTI to pay offother victilns and to fund his luxurious personal lifestyle. DePasquale and BMIS was separate fron1 the racketeering activity described above.the victim. and the proceeds credited to the customer's account. The BMIS account statements were intended to cause. BMIS engaged in legitimate business activity through its n1arket making operations. Its market making business was adequately capitalized and its trades were financed by funds on deposit at the Bank of New York which were not commingled with the funds deposited in the Chase Account. Further. The traders working for the n1arket n1aking business were unaware of Madoff s Ponzi schen1e and did not know that their trading activity was being used by Madoff to hide his lack of trading on behalf of his investlnent advisory business custon1ers. Madoff's consistent "retU111S" earned hin1 a glowing reputation among his victims who then recommended others to "invest" with Madoff. Madoff never traded a single security for any of his victiIns. The association in fact between Madoff. 16 . 53. All of the aforesaid account statelnents provided by Madoff were false.

Chase and Chase Bank knowingly and purposely conspired with Madoff and BMIS to violate 18 U.S. through a pattern of racketeering that ran fronl at least January 1. Madoff s activities affected interstate commerce by defrauding investors of funds that were transferred to the Chase Account in New York from accounts all over the United States.S. conl1nunicated with Madoff to understand the method in which he was operating and producing profits based on a basket of S&P 100 stocks when the Inarket was down 30%. 56. and.C. in violation of 18 U.C.C. 57. and as to the identity of his counter-patiies to option transactions. what atnount of leverage the finn was taking on. 58. § 1962(c). 2001 until Decenlber 11. 59. 2008 until Decenlber 11. As described above. by placing those documents in the United States mail in violation of the federal mail fraud statute. with the assistance and patiicipation of colleagues in New York. pursuant to that conspiracy. Madoff conducted the affairs of his criminal enterprise. From at least on or about Septenlber 1. The executives in London. participated in Madoff s racketeering enterprise.55. including from Florida. and upon information and belief. 2008. a Ponzi scheme. Madoffs mailing of account statements to investors was part of a schelne to defraud investors and obtain nloney or property greater than $1. § 1341. 18 U. § 1962(c).000 by means of false pretenses. Madoff would not 17 . Chase managing directors based in London who Inarketed the Fairfield Notes had conducted an extensive due diligence investigation of Madoff s business operations in July and August 2008 as a result of suspicions concenling the disparity between Madoff s reported returns and the perfornlance of the S&P stock index that supposedly was the core of Madoffs investlnent strategy. they inquired about BMIS' liquidity. Specifically.2008.S. upon information and belief. However.

By virtue of its investigation into Madoff. Chase concluded that Madoffs reported earnings from BMIS' investment advisory business were false. The Chase executives charged with investigating Madoff also consulted. Chase knev/ that Madoff S luonthly account statenlents were false. Parcesepe or those working at his trading desk to determine the volume of business Bear Stearns (now Chase) was conducting with BMIS and concluded that the BMIS market making business could not support Madoffs alleged $7 billion investment advisory operation. tlu'oughout its long and close relationship with Madoff. 63.disclose this information. Chase Bank's Private Client Banking Group frequently lent n10ney to Madoff investors and routinely exanlined BMIS account staten1ents to assess a borrower's financial status. either with Mr. Madoff s refusal to disclose such information to the due diligence teanl of a large institutional investor raised significant red flags to Chase. indicating their stock trading activity and year-to-date earnings. upon information and belief. 60. 62. these executives also had access to BMIS' account records at Chase Bank which showed unusual activity during the sumnler of 2008 and low cash balances \vhich \vas uncharacteristic of Madoff s ballJdng practices with Chase Ball]\: over the pnor years. Chase and Chase Bank knew at this tilue that Madoff was not trading securities in the volume necessary to produce positive earnings on a $7 billion investment portfolio. 64. based on its thorough investigation. Thus. No later than in or about Septelnber 2008. Upon infonnation and belief. 61. by September 2008. Chase knew at the thue that market conditions did not generate 18 . Chase kne\v that Madoff supplied his investors with 1110nthly statelnents Chase knew this because. Chase knew that these statenlents contained fictional inforn1ation.

which Chase knew to be a fraud.$7 billion portfolio. \vere paid substantial fees and had use of billions of dollars of stolen funds. Chase and Chase Bank knew at the time that the victims had deposited these funds for investlnent by BMIS. Accordingly. Chase and Chase Bank knew that the Chase Account was BMIS' business The operating account \vhich funded Madoff's trading for his investn1ent advisory clients. Chase and Chase BarJ<. Following its discovery that Madoffs enterprise was fraudulent. Chase and Chase Bank knowingly and purposely conspired to violate 18 U. through Chase Bank. 67.S. 65. and by engaging in predicate acts. 19 . Chase recognized that Madoff s business was fictional and a scam. which were derived entirely from Madoff s racketeering enterprise.sufficient counter-party liquidity to sustain the option trades necessary for Madoff to successfully execute his investment strategy for a . including the translnission of numerous interstate wire comn1unications. These deposits were for the most part done by wire transfer with instruction to credit the Chase Account for the benefit of a BMIS cnst0111er. Chase. Specifically.C § 1962(c) by providing Madoff with banking services that were integral to the functioning of the racketeering enterprise. 66. conspired and agreed to participate in Madoff s racketeering enterprise by continuing to pennit Madoff victims to deposit cash in the Chase Account and then transferring that n10ney to third parties at Madoff s direction. Chase continued to honor and abide by its agreements with Madoff to provide the very services upon which the survival of Madoffs fraud depended. deposits to the Chase Account indicated that they were for the benefit of specific BMIS customers and indicated the customer account l1u111ber on the transfer advice.

. 2008. based on the Madoff monthly statelnents showing a consistent profitable return. I\1LSlvIK caused $8. 69. continued positive returns on the account. MLSMK received its October stateluent fronl BMIS showing Based on this statement. July. 20 . 2008. Shortly after that. during the summer of 2008. MLSMK received from BMIS monthly statelnents through the mail reflecting alleged account activity for June. These monthly account statements purported to indicate the trades in securities Madoff nlade during that month on behalf of MLSMK's account and the year-todate earnings which showed a 10-12% atmualized positive return. comlnunicated to BMIS that $1. on Novelnber 6. Plaintiff was a victim of Madoffs crilninal enterprise after Chase entered into a conspiracy with Madoff and BMIS. Chase Bank transfened MLSMK'snl0ney over interstate lines to third patiies.66 had been received for the benefit of MLSMK.283. Sholily after MLSMK's deposit of funds in the Chase Account. MLSMK caused $1.1 million had been received on behalf of MLSMK. . at 1'-Aadoffs direction. by way of wire transmission.2008. August and September. on or about October 6. Shortly after J\1LSMK's deposit of funds in the Chase p.66 to MLSMK's account.1 Inillion to MLSMK's account. by way of vvire transnlission. ccount. conlmunicated to BMIS that $8. On October 31. Chase Bank. Shortly after that. 72. 70.478.283. In early Noveluber.68. 71. Based on these statements.100. MLSMK received in the nlail a wire confirmation fronl BMIS which indicated a credit of $1. Chase Bank transferred MLSMK' s money over interstate lines to third parties.283.478. Specifically. Chase Bank.478.66 to be transferred by interstate wire to the Chase Account for credit to MLSMK's account at BMIS.000 to be transferred by interstate wire to the Chase Account for credit to its account at BMIS. MLSMK received in the nlail a wire confinnation frOITI BMIS which indicated a credit of $8. at Madoff s direction.

Based on Madoffs continuing reports of positive returns. by way of wire transrnission.46 to MLSMK's account.46 had been received for the benefit of MLSMK. Based on Madoffs continuing repolis of positive returns. MLSMK received in the mail a wire confirmation from BMIS which indicated a credit of $500.813.000 to be transferred by intestate wire to the Chase Account for credit to its account at BMIS.80 had been received for the benefit of MLSMK.716. 74. Shortly after that. at Madoffs direction. comlnunicated to BMIS that $850. 77.MLSMK caused $500.80 to be transferred by interstate wire to the Chase Account for credit to its account at BMIS. on Novelnber 21. by way of wire transmission.813. 73.000 had been received for the benefit of MLSMK. 76. Chase Bank transfelTed IvfLSMK's Inoney over interstate lines to third parties. comn1unicated to BMIS that $946. Shortly after MLSMK's deposit of funds in the Chase Account. MLSMK received in the n1ai1 a confirmation from BMIS which indicated a credit of $850. Chase Bank transfelTed MLSMK' s n10ney over interstate lines to third parties. 21 .813. Shortly after that. Chase BarLk. at Madoffs direction. 2008. Shortly after that. at Madoffs direction. communicated to BMIS that $500.000 to MLSMK's account. Shortly after MLSMK's deposit of funds in the Chase Account. MLSMK caused $946.2008.716. 75. Shortly after :rv1LSMK's deposit of funds in the Chase Account.80 to MLSMK's account. on Novelnber 15.46 to be transferred by interstate wire to the Chase Account for credit to its account at BMIS. MLSMK caused $850. Chase Bank. MLSMK received in the Inail a confirmation frOITI BMIS \vhich indicated a credit of $946.716. by way of wire transmission. Chase Bank. Chase Bank transferred MLSJ\1K's money over interstate lines to third parties.

however.C. 2008. 80. by way of wire transmission. 82. using interstate wire comlnunications. on Decelnber 5. By Septelnber 2008. MLSMK received in the Inail a confinnation fron1 BMIS which indicated a credit of$950.C. Based on that statelnent.000 to be transferred by interstate wire to the Chase Account for credit to its account at BMIS. Bear Stearns vv'as BMIS' largest source of Inarket Inaking business. Shortly after that. comlnunicated to BMIS that $950. knew that Madoff was cOlnn1itting fraud and that his stated earnings were false. Chase continued to trade with BMIS which pennitted BMIS to 22 . by continuing to actively trade with BMIS. In early Decelnber 2008.S. MLSMK received its November account statement fron1 BMIS which showed continued positive returns.78. Yet.S.000 to MLSMK's account. § 1962(c). 79. transfers and could not receive or Inove Inoney without the direct involvelnent and assistance of Chase Bank. MLSMK caused $950. Chase.000 had been received for the benefit of MLSMK. Chase Bank. § 1343. Chase further knowingly and purposely conspired and agreed to violate 18 U. through the Bear Stearns trading desk headed by Aldo Parcesepe which Chase acquired in March 2008. Madoff could not obtain customer funds or use then1 to execute his Ponzi schen1e Madoff had no ability to accept wire or check without the aforesaid acts by Chase Bank. Chase Bank's use of the wires to infoffi1 Madoff of receipt of MLSMK's funds and the transfer by wire of those funds out of the Chase Account over interstate lines and to third parties throughout the United States were predicate acts committed in fUliherance of Madoffs racketeering enterprise in violation of 18 U. These acts by Chase Bank pennitted I\1adoff to steal MLSMK's funds to MLSMK's detrilnent. 81.

and upon infor1l1ation and belief. Each trade involved the transmission of trading infornlation by electronic 111eans bet\veen Chase and BMIS. § 1343.continue to generate huge trading volumes which Madoff used to legitimize his operations to SEC and FINRA regulators and to both new and established victims. or investors \vould not have been able to verify for thelnselves that his operations were actual and substantial and therefore would not have invested. Plaintiff has been dmnaged by the aforesaid acts in an mnount to be deternlined at trial but not less than $12. Madoff could not have continued to operate his Ponzi scheme because it either would have been uncovered by regulators. Plaintiff repeats all of the preceding Paragraphs. Each of the foregoing wire translnissions were done in furtherance of a scheme to defraud BMIS victinls in violation of 18 U. 84.C.8 million. financial nlarkets between Septelnber 1. upon infonnation and belief. This permitted Madoff to convince new victilns to deposit money in the Chase Account and assured established victinls that their funds were being actively Inanaged. SECOND CLAIlVI FOR RELIEF (Aiding and Abetting Breach of Fiduciary Duty) 86. 23 . victims visited Madoff at his New York offices and observed the bevy of activity on the trading floor by BMIS' market Inaking group.S. thousands of trades with BMIS. 85. Without this substantial trading volulne. 2008 and Decenlber 11. 2008. Every day that trading was open on the U.S. 83. Chase executed. Between Septelnber and Decenlber 2008. was conducted by Bear Stearns traders from locations throughout the United States and crossed state lines.

Chase and Chase Bank provided substantial assistance to Madoff by providing hin1 with banking services which accon1plished illegal and fraudulent conveyances by Madoff to hilnself and to third parties. 93. 2008. Chase and Chase Bank knew that Madoff was the sole owner of BMIS and.87. 1'Aadoff \vas able to perpetrate this schelne by sending his victin1s n10nthly account staten1ents and trade confirmations which stated falsely that securities were being purchased and sold on behalf of the plaintiff. 91. as a broker-dealer. 89. Madoff breached his fiduciary duty to the plaintiff by failing to use its funds for investn1ent purposes and instead n1isappropriating the funds for his own benefit. o\ved a fiduciary duty to the plaintiff. including through the operation of a Ponzi schelne. Chase also provided I\1adoff vv'ith substantial assistance by continuing to function as BMIS' largest n1arket maker counterparty which provided Madoff with the volun1e of trades needed to satisfy potential audits by financial regulators and which permitted the n1arket n1aking 24 . Chase and Chase Bank knew that Madoff" s reported earnings from his investment advisory business were false and therefore that he was engaged in a criminal enterprise. Chase and Chase Bank knew that the plaintiff was a customer of BMIS and had an account there. 90. 94. As set forth above. 92. Every transfer of funds caused by MLSMK to the Chase Account stated that it was for the benefit of MLSMK. by September 1. 88. Chase and Chase Bank knew that the Chase Account was exclusively the repository of monies deposited by investor clients of BMIS.

8 million. Accordingly. positive returns under Madoff s Inanagen1ent.l1eVI they \vere aiding and abetting a breach of fiduciary duty. Madoff could not have converted the funds entrusted to hin1 by the plaintiff without the substantial assistance of Chase and Chase Bank· because BMIS was not a banking institution and could not accept or process wires or check deposits. As set forth above. $12. punitive dmnages should be awarded to plaintiff in an mnount to be detern1ined at trial. 95. Chase Bank accepted deposits into the Chase Account by both check and wire throughout its n1ulti-year relationship with Madoff. they continued to do so in order to preserve their valuable banking and trading relationship with Madoff which provided then1 with substantial revenues and balance sheet assets. THIRD CLAIM FOR RELIEF (Commercial Bad Faith) 98. Plaintiff repeats all of the preceding Paragraphs. 99. 25 .group to continue to function and thereby enabling Madoff to provide victiIns with the appearance that BMIS engaged in substantial securities trading. proxin1ately caused by Chase and Chase Bank. 96. The aforesaid conduct by Chase and Chase Bank was purposeful and Plaintiff has been damaged in an amount to be detem1ined at trial but not less than Plaintiff's injury was contumacious. Even though Chase and Chase Bank ¥>J. 97. Madoff and BMIS engaged in a schen1e to steal n10ney from victilns by persuading theln to send lTIOney to the Chase Account on the pretext that it would be invested by BMIS in securities and generate steady. 100.

however. Chase Bank's acceptance of Plaintiff s deposits of approxinlately $12. during the summer of 2008 Chase conducted a detailed investigation of Madoff that led it to discover that Madoff was lying about his investnlent returns and issuing false account statelnents.8 nlillion into the Chase Account between October 6. and Chase Bank's continued dispersion ofthose victim funds at Madoffs direction. Based on its familiarity with Madoff and BMIS' business. As a result of its actual knowledge of Madoff s schenle~ Chase and Chase Bank thus Chase and Chase Bank~ s continued acceptance of hundreds of millions of victiIn dollars into the Chase Account. 2008 and Decen1ber 5. and~ Chase and Chase Bank permitted Madoff to dispose of the funds in any nlanner to this end. 103. Specifically.101. routinely effected wire transfers out of the Chase Account to third parties at Madoff s direction.2008. Prior to approxin1ately September 1. Chase and Chase Bank had knowledge of the purported nature of the Chase Account and the intended purpose of the deposits. 26 . Chase and Chase Bank apparently accepted these deposits and executed withdrawals at Madoff s direction in the belief that BMIS' business was legitinlate. 2008. As set forth In detail above. 104. was done in bad faith in light of Chase and Chase Bank's knowledge of Madoffs fraud. 2008. 105. 106. 102. after on or about September 1. That is. Chase and Chase bank knew that the Chase Account was a repository of "investor" funds with respect to which Madoff was a fiduciary. obtained actual knowledge of Madoffs wrongdoing. as well as fronl the face of the deposits which invariably indicated that they were for the benefit of investment accounts held in the victim-depositor~s name with BMIS. w'ere lTIade in bad faith.

Madoff had several billion dollars in the Chase Account. Accordingly.107. upon infor111ation and belief. punitive damages should be awarded to plaintiff in an anlount to be deternlined at trial. 113. 1992. Chase and Chase Bank thereby themselves became participants in the underlying scheme to steal money fronl Madoff" s victims. Chase and Chase Bank knew that Madoff directed his victitns to deposit funds in the Chase Account and that the purpose of these deposits was to fund Madoff s investnlent activity on behalf of these clistolners. FOURTH CLAIM FOR RELIEF (N egligence) 111. Through their knowledge of Madoff's unlawful conduct. 109. Plaintiff repeats all of the preceding Paragraphs. 108. 114. Similarly. 110. Chase and Chase Bank provided banking services to Madoff and BMIS SInce By the end of 2007. Chase Bank's dispersal of Plaintiffs money out of the Chase Account at Madoff's direction was done in bad faith in light of Chase and Chase Bank's knowledge of Madoff's fraud. they continued to do so in order to preserve their valuable banking and trading relationship with Madoff which provided thelU with substantial revenues and balance sheet assets.8 IniUion. 27 . Even though Chase and Chase Bank knew they were facilitating Madofi's fraud. Plaintiff has been datnaged by defendants' bad faith conduct in an amount to be detennined at trial but not less than $12. The aforesaid conduct by Chase and Chase Bank was purposeful and contunlaciolls. 112.

As a result of its knowledge that Madoff was engaged in fraud with respect to victin1 funds on deposit in the Chase Account. Chase recognized celiain red flags . Chase had knowledge of the purported nature of the Chase Account and the intended purpose of the deposits. Chase knew that the Chase Account was a repository of "investor" funds with respect to which Madoff was a fiduciary. 117. The WIre transfer advices from Madoff s custolners to the Chase Account indicated that the wired funds were for the benefit of the particular customer's account and were for the purpose of investing in BMIS. 118.including the fact that BMIS' reported returns on investlnent based on its publicly stated strategy were apparently inconsistent with Inarket conditions at the tilne . That is.115. Chase learned that Madoff \vas engaged in a ll1assive fraud by lying to investors about the returns he was reporting in his investment advisory business. Based on its familiarity with Madoff and BMIS' business. 116. It continued to service the Chase Account. 119. for which Madoff was a fiduciary. Chase and Chase Bank breached this duty by failing to take any action following its investigation of Madoff other than the withdrawal of its oV/n assets froln 11adoff-related investment vehicles. as well as from the face of the deposits which invariably indicated that they were for the benefit of investnlent accounts held in the victiln-depositor's name with BMIS. Chase had beconle an investor in Madoff through its investment of $250 Inillion in the Sentry Fund. accepting new deposits and disposing of the contents of the Chase Account as directed by Madoff fronl Septen1ber 1. As a result of that investigation. 28 . 2008 through Decelnber 11. in connection with its issuance of the Fairfield Notes. 2008. Beginning in 2006. Chase and Chase Bank becanle duty-bound to protect the depositors from Madoff s lnalfeasance.and decided to conduct a due diligence investigation. During the summer of 2008.

8 lnillion. Plaintiff has been damaged in an amount to be determined at trial. Chase and Chase Bank's breach of their duty of care caused plaintiff to suffer dmnages by pern1itting Madoff to convert its funds for his own use. Accordingly. The wire transfer advices fron1 Madoffs custon1ers to the Chase Account indicated that the wired funds were for the benefit of the particular custon1er's account and were for the purpose ofinvesting in BMIS. 29 . Even though Chase and Chase Bank knew they were facilitating Madoffs fraud. but not less than $12. Madoffwould have been unable to obtain and convert plaintiffs funds. The aforesaid conduct by Chase and Chase Bank was purposeful m1d contun1acious. 126. 124. 122. they continued to do so in order to preserve their valuable banking and trading relationship with Madoffwhich provided then1 with substantial revenues and balance sheet assets. Chase and Chase Bank provided banking services to Madoff and BMIS since dollars in the Chase Account. Chase and Chase Bank knew that Madoff directed his victin1s to deposit funds in the Chase Account and that the purpose of these deposits \vere to fund Madoff s investnlent activity on behalf of these custonlers. FIFTH CLAIM FOR RELIEF (Negligence) 123. 1992. Madoff had several billion Plaintiff repeats all of the preceding Paragraphs. 127. upon information and belief. But for Chase and Chase Bank's breach. By the end of 2007.120. 125. p:unitive dmnages should be aVlarded to plaintiff in an amount to be detern1ined at trial. 121.

128. 2008 and Deceluber 11. Chase and Chase's Bank breach of their duty of care caused plaintiff to suffer damages by permitting Madoffto convert the funds MLSMK deposited between October 6. 131. That is. 130. 2008. Between Septenlber 1. the balance reached near zero requiring Madoff to transfer $164 nlillion froin MLIS in London to the Chase Account. 2008. Even \vithout Chase's discovery of ~Aadofrs fraud through its detailed due diligence investigation in the sun1nler of 2008. Chase and Chase Bank had knowledge of the purported nature of the Chase Account and the intended purpose of the deposits. the activity in the Chase Account was extremely volatile and erratic and did not cOlnport with the banking patten1S Madoff had deluonstrated for the prior decade. Upon infonuation and belief. hundred of millions of dollars were withdrawn fron1 the Chase Account. 2008.2008 and Decenlber 5. the erratic signs of withdrawal activity and transfers of money frOITI overseas iluposed a duty on Chase and Chase Bank to investigate Madoff to ensure that Madoff was not diverting fiduciary funds and to take appropriate action based upon that investigation. in Septeluber and October. Chase and Chase Bank breached that duty by taking no action whatsoever despite the gathering stornl of warning signs in the Chase Account. Chase and Chase Bank knew that the Chase Account was a repository of "investor" funds with respect to which Madoff was a fiduciary. In Noveluber 2008. as well as fronl the face of the deposits which invariably indicated that they were for the benefit of investinent accounts held in the victim-depositor's name with BMIS. Based on its fmniliarity with Madoff and BMIS' business. for his own use. including to shut down the Chase Account. 30 . In Novenlber $300 Iuillion was transferred into the Chase Account and $320 nlillion was transferred out to third pmiies. 129.

punitive danlages should be awarded to plaintiff in an anlount to be determined at trial.8 million.132. Even though Chase and Chase Bank knew they were facilitating Madoff" s fraud. 133. Plaintiff has been damaged in an amount to be determined at trial. Accordingly. The aforesaid conduct by Chase and Chase Bank was purposeful and contumacious. they continued to do so in order to preserve their valuable banking and trading relationship with Madoff which provided them with substantial revenues and balance sheet assets. but not less than $12. 31 .

d. plus punitive damages in an amount to be determined at trial. § 1964. jointly and severally. and 32 . dmnages in an mnount to be detern1ined at trial but not less than $12. b.WHEREFORE. plus punitive dan1ages in an mnount to be detennined at trial. dmnages in an amount to be determined at trial but not less than $12.C. plus punitive damages in an alll0unt to be determined at trial.8 n1illion. dan1ages in an amount to be detern1ined at trial but not less than $12.S.8 n1illion. c. plus punitive damages in an mnount to be detern1ined at e. as follows: a. plaintiff demands judgment against Chase and Chase Bank.8 million. On the Fifth ClaiIn for Reliet~ dan1ages in an an10unt to be detern1ined at trial but not less than $12. On the First Claim for Relief. On the Third Clain1 for Relief. dan1ages in an mnount to be determined at trial but not less than $12. On the Second Claim for Relief.8 million. On the Fourth Clain1 for Relief. plus treble damages and costs and attorneys' fees pursuant to 18 U.8 million.

2009 / Howard Kleinhendler (HK 5712) Julian D. LLP 110 East 59 th Street New York. For whatever further relief this Court deems necessary and proper. New York 10022 (212) 909-9500 Attorneys for Plaintiff MLSMK Investlnents Company d·~ 33 . Dated: New York.f. Plaintiff den1ands a trial by jury. New York April 23. Schreiblnan (JS 1124) Sara G. Spiege1n1an (SS 4352) WACHTEL & MASYR.

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