JPMorgan Accused of Complicity in Madoff Scheme

JPMorgan Chase (NYSE:JPM) has seen its stock price creep up slowly from just under $33 at the beginning of last week to about $34 currently. The improvement in investor sentiment with the positive developments in Europe is largely responsible for this movement for the bank, which topped rival Bank of America (NYSE:BAC) to become the country’s largest bank in terms of assets this quarter. However that positive sentiment could change today with trouble brewing for the bank on the legal front. Investors of the infamous Ponzi scheme run by Bernard L. Madoff Investment Securities LLC (BLMIS) are set to file a class-action suit against the global bank claiming that the bank was complicit in its role as BLIMS’s primary banker. ^[1]

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The Ponzi scheme orchestrated by Madoff for 20 years starting in 1986 siphoned off nearly $65 billion from investors. In the lawsuit, investors allege that all their money was channeled through a JPMorgan account referred to as “the 703 account,” and irregularities in this account should have been caught by the bank. The lawsuit also mentions that JPMorgan did not take action on numerous occasions when it should have questioned BLIMS’s role as an investment firm.

While the class-action suit would clearly lead to increased litigation charges for the bank, JPMorgan could also take a hit to its reputation if these allegations are shown to have merit.

We have a $46 price estimate for JPMorgan, which we are reviewing in light of the weak global economic conditions and the string of lawsuits concerning the bank.

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1. Hagens Berman LLP: Investors Accuse JPMorgan Chase & Co Of Complicity On Madoff Ponzi Scheme, PRNewswire, Nov 7 2011 [↩]