Citigroup Inc saw several red flags in the dealings of Bernard Madoff's firm years before his multibillion-dollar fraud was exposed in late 2008, the firm's liquidator said in a newly unsealed lawsuit.
Irving Picard, a court-appointed trustee seeking to recover money for former Madoff clients, made the accusations in one of several complaints he has filed against big banks he says "enabled" the massive, decades-long Ponzi scheme by turning a blind eye to it.
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"Citi had access to and received information placing it on inquiry notice that Madoff's advisory business was potentially a fraud, and/or that Madoff was making hundreds of millions, if not billions, of dollars in avoidable transfers," said the complaint, filed Dec. 8 in U.S. Bankruptcy Court in New York and made public on Monday.
Portions of the court document were edited to conceal the names of bank personnel and others.
Citi said in a statement that the allegations in the lawsuit were false. "Citi will vigorously defend against these claims by the Trustee as they are entirely without merit and completely false," the statement said.
The lawsuit seeks about $425 million from the bank. Picard has also sued JPMorgan Chase & Co, Madoff's primary banker, for $6.4 billion.
Madoff, now 72, was arrested and charged in December 2008 and his firm, Bernard L. Madoff Investment Securities LLC, collapsed. A Ponzi scheme is one in which early investors are paid with the money of new clients and no actual trading in shares takes place.
Madoff pleaded guilty to criminal charges of running a fraud of as much as $50 billion. He is serving a 150-year prison sentence.
Picard's lawsuit said red flags should have been apparent to Citi as early as 2005. By September 2008, it said, Citigroup Global Markets Ltd (CGML) began making inquiries to other banks to take over its exposure to the Madoff firm. The other banks were not identified in the lawsuit.
It cited one email by a CGML trader that said: "We're needing to terminate our Madoff trade. Do you have appetite for that risk over there?"
The other bank responded, "don't think so, madoff is not very popular here either."
So far, Picard and his team of lawyers have recovered about $10 billion. The trustee estimates that investors lost principal totaling about $20 billion.
"By no later than June 2007, and likely several years earlier, Citi had knowledge of the possibility of Madoff's Ponzi scheme," Picard's complaint said.
It said Citigroup personnel had an opportunity to meet and befriend Harry Markopolos, a financial analyst who later became famous because his warnings to regulators about Madoff were ignored.
The case is Irving Picard, trustee for the liquidation of Bernard L. Madoff Investment Securities LLC v Citibank and Citigroup Global Markets Limited, U.S. Bankruptcy Court for the Southern District of New York, No. 10-05345.