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UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA FORT MYERS DIVISION

DAVID ABEL; DONALD A. BENJAMIN; JOEL Case No.: 2:14-cv-184-FtM-29CM BUSEL REVOCABLE TRUST; SANDRA BUSEL REVOCABLE TRUST; FRANK & CAROL DIFAZIO AS TIC; RUSSELL DUSEK; MELVIN H. AND LEONA GALE JOINT REVOCABLE LIVING TRUST U/A/D 1/4/94; EDYNE GORDON AS EXECUTRIX OF THE ESTATE OF ALLEN GORDON; JEROME GOODMAN; BEN HELLER; WARREN M. HELLER; NORMA HILL; JABA ASSOCIATES, LP; CAROL KAMENSTEIN; DAVID KAMENSTEIN; PETER KAMENSTEIN; SLOAN KAMENSTEIN; TRACY KAMENSTEIN; EUGENE KISSINGER TRUST U/A/D 12/6/99; FREDERICK and SUSAN KONIGSBERG JTWROS; MARLENE KRAUSS; MARTIN LIFTON; PALMER FAMILY TRUST; PEERSTATE EQUITY FUND, LP; MARSHA PESHKIN; RAR ENTREPRENEURIAL FUND LTD.; JUDITH RECHLER; JOAN ROMAN; ROBERT ROMAN; SAGE ASSOCIATES; JEFFREY SHANKMAN; LORI SIROTKIN; STONY BROOK FOUNDATION; SYLVAN ASSOCIATES LIMITED PARTNERSHIP; WILENITZ TRUST U/ART FOURTH O/W/O ISRAEL WILENITZ; ROBERT YAFFE; YESOD TRUST,

Plaintiffs,

v.

JPMORGAN CHASE & CO.; JPMORGAN CHASE BANK, N.A.; J.P. MORGAN SECURITIES LLC; J.P. MORGAN SECURITIES, LTD.; JOHN HOGAN; and RICHARD CASSA,

Defendants. /

FIRST AMENDED COMPLAINT & DEMAND FOR JURY TRIAL

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TABLE OF CONTENTS

Page

NATURE OF ACTION ...... 2

PARTIES ...... 5

Plaintiffs ...... 5

Defendants ...... 7

JURISDICTION AND VENUE ...... 11

PROCEDURAL HISTORY...... 11

ALLEGATIONS COMMON TO ALL CLAIMS ...... 15

The Business of Madoff and of BLMIS ...... 15

JPMC’s Legal Obligations ...... 21

JPMC’s Corporate Culture of Thievery ...... 22

The Defendants’ Active Complicity in the Illegal Activity of Norman Levy and Madoff...... 26

Defendants’ Knowledge that BLMIS Filed False FOCUS Reports ...... 31

A. The Undisclosed $100 Million Loan ...... 31

B. The False Financial Information in the FOCUS Reports...... 34

Chase Abandoned its Credit Policies to Accommodate BLMIS ...... 37

JPMC Eagerly Became Madoff’s Co-Conspirator ...... 39

JPMC Knew the FOCUS Reports Were False...... 43

BLMIS’ Relationship with Bear Stearns ...... 46

JPMC’s Knowledge that Madoff was a Fiduciary ...... 47

JPMC’s Criminal Enterprise ...... 48

BLMIS Feeder Funds and Other Players ...... 52

JPMC’s Structured Products and Note Program ...... 53

Disturbing Questions About Madoff ...... 57

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The Proposed $1 Billion Investment in BLMIS Products ...... 60

The Investment Bank Ignored Clear Evidence of a Scam ...... 63

JPMC Quietly Removes All of Its Assets from the BLMIS Feeder Funds ...... 70

JPMC’s Active Complicity in Madoff’s and BLMIS’ Crimes ...... 72

JMPC’s History of Tolerating Fraudulent Conduct ...... 74

JPMC’s Ignored Madoff’s Dishonesty when Structuring Feeder Fund Investments ...... 75

JPMC’s Admitted Knowledge That Madoff Was a Thief ...... 76

History Revisited ...... 79

CLAIMS FOR RELIEF ...... 82

COUNT ONE: VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT...... 82

BLMIS’ Primary Violations of Section 10(b) ...... 82

Defendants Are Section 20(a) Control Persons ...... 84

COUNT TWO: VIOLATION OF FLORIDA SECURITIES & INVESTOR PROTECTION ACT (“FSIPA”) ...... 87

COUNT THREE: AIDING AND ABETTING EMBEZZLEMENT ...... 88

COUNT FOUR: AIDING AND ABETTING BREACH OF FIDUCIARY DUTY ...... 90

COUNT FIVE: UNJUST ENRICHMENT ...... 92

COUNT SIX: BREACH OF FIDUCIARY DUTY ...... 94

COUNT SEVEN: COMMERCIAL BAD FAITH ...... 95

COUNT EIGHT: GROSS NEGLIGENCE ...... 95

COUNT NINE: FEDERAL RICO...... 96

COUNT TEN: FLORIDA RICO ACT ...... 100

PRAYER FOR RELIEF ...... 104

JURY DEMAND ...... 105

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Plaintiffs David Abel, Donald A. Benjamin, Joel Busel Revocable Trust, Sandra Busel

Revocable Trust, Frank & Carol DiFazio as TIC, Russell Dusek, Melvin H. and Leona Gale Joint

Revocable Living Trust U/A/D 1/4/94, Edyne Gordon as Executrix of the Estate of Allen

Gordon, Jerome Goodman, Ben Heller, Warren M. Heller, Norma Hill, JABA Associates, LP,

Carol Kamenstein, David Kamenstein, Peter Kamenstein, Sloan Kamenstein, Tracy Kamenstein,

Eugene Kissinger Trust U/A/D 12/6/99, Frederick and Susan Konigsberg JTWROS, Marlene

Krauss, Martin Lifton, Palmer Family Trust, Peerstate Equity Fund, LP, Marsha Peshkin, RAR

Entrepreneurial Fund Ltd., Judith Rechler, Joan Roman, Robert Roman, Sage Associates, Jeffrey

Shankman, Lori Sirotkin, Stony Brook Foundation, Sylvan Associates Limited Partnership,

Wilenitz Trust U/Art Fourth o/w/o Israel Wilenitz, Robert Yaffe, and Yesod Trust (collectively

“Plaintiffs”) file this complaint against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A.,

J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd., John Hogan, and Richard Cassa

(collectively, “JPMC” or “Defendants”).

Plaintiffs’ factual allegations are based upon (a) the January 6, 2014 Deferred

Prosecution Agreement between the United States of America and the Defendants (Ex. A hereto); (b) the January 6, 2014 Criminal Information against the Defendants (Ex. B hereto); (c) the January 6, 2014 Statement of Facts admitted by the Defendants (Ex. C hereto); (d) the facts set forth in the Amended Complaint (Unredacted) in Picard v. JPMorgan Chase & Co., filed in

Case No. 1:11-cv-00913 (CM) (MHO), following the investigation by Irving H. Picard, Trustee

(the “Trustee”), of the relationship between the Defendants and Bernard L. Madoff and his company, Bernard L. Madoff Investment Securities LLC (“BLMIS”); (e) the investigation made by the attorneys for the plaintiffs and the facts set forth in the consolidated amended complaint in

Hill v. JPMorgan Chase & Co., 11 Civ. 7961 (CM) and Shapiro v. JPMorgan Chase & Co., 11

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Civ. 8331 (CM) (the “Consolidated Class Action”); (f) upon Plaintiffs’ personal knowledge of their dealings with Madoff, BLMIS, and Defendants; and (g) upon the Defendants’ filings with the Securities and Exchange Commission (“SEC”). All of the facts contained in the aforesaid exhibits are incorporated herein as part of Plaintiffs’ factual allegations.

NATURE OF ACTION

1. This is an action by customers of Madoff and of BLMIS seeking compensatory and punitive damages against the Defendants for violations of the Federal and Florida securities laws and, alternatively under the common law, arising out of the Defendants’ active complicity in the illegal conduct of Madoff and BLMIS, as well as treble damages for violations of the

Federal RICO Act and the Florida RICO Act.

2. Plaintiffs entered into investment advisory agreements with Madoff and, after

December 4, 2000, with BLMIS, pursuant to which they granted Madoff and BLMIS complete discretion to invest their money without consulting with Plaintiffs.

3. As demonstrated by the facts set forth below and in the exhibits hereto, Madoff and BLMIS did not use Plaintiffs’ money to purchase any securities allocated to their accounts but, instead, under Madoff’s direction and with the Defendants’ knowledge and participation,

Madoff and BLMIS embezzled the Plaintiffs' funds. Innocent people lost $64.8 billion as a result of that scheme.

4. Madoff could not have operated his embezzlement scheme for at least 20 years without the active cooperation and complicity of the Defendants. Madoff needed the facilities, cover, and protection of a major financial institution and the Defendants knowingly, willingly, and for their own enrichment provided all of these.

5. Of BLMIS’ 200 employees, only 12 knew about the embezzlement scheme. In the entire world no one, outside of those 12 people, knew of the embezzlement scheme -- except

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for the Defendants. The Defendants had a unique window into the scheme and watched it play out as tens of billions of dollars were embezzled from innocent people. The Defendants knew that Madoff and, after January 11, 2001, BLMIS, had deposited tens of billions of dollars of money belonging to pension funds, charities, foundations, and individuals into the “703

Account” at JPMorgan Chase & Co. (the “703 Account”). The Defendants knew that the money was sent by customers believing their money was used to purchase securities for their accounts.

The Defendants knew that the money was not used to purchase securities for their accounts.

Instead, as Defendants knew, the money was embezzled by Madoff and by Madoff’s co- conspirators.

6. To enrich themselves, the Defendants turned a blind eye to the crimes that they facilitated. Defendants provided an array of essential banking services to Madoff and to BLMIS with knowledge that they were enabling Madoff and BLMIS to commit crimes and embezzle customers’ money.

7. Defendants’ knowledge was based, inter alia, upon their daily observation of the activities in Madoff‘s and BLMIS’ accounts, upon Defendants’ meetings with Madoff and one of his co-conspirators, Norman Levy, in which Madoff and Levy could not give a legitimate explanation for their activities, and upon Defendants’ review of BLMIS’ quarterly reports to the

SEC, which Defendants knew were false.

8. Defendants knew that their banking services were essential for Madoff’s and

BLMIS’ continued operations. Defendants knew that the information they had could not possibly be uncovered by the public, or by Madoff’s, or BLMIS’ customers in their due diligence reviews. Defendants knew that they were required by federal law to disclose this information to law enforcement authorities. Yet, to preserve their own profitable participation in Madoff’s and

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BLMIS’ illegal activities -- from which Defendants received fees and other payments of half a billion dollars or more as well as the use of billions of dollars of deposited funds -- the

Defendants knowingly concealed Madoff’s and BLMIS' criminal activities for 18 years until, in late 2008, they had no choice but to make a disclosure to British banking authorities. However, even at that point, they continued to allow BLMIS to operate through JMPC in the United States and continued to conceal BLMIS' criminal activities from United States authorities.

9. Defendants had the power, which they exercised, to control the general affairs of

Madoff and of BLMIS during the relevant time periods and the power, which they exercised, to directly or indirectly control or influence the specific transactions of Madoff and BLMIS which resulted in their primary violations of federal securities law. Defendants also had the duty to stop Madoff’s and BLMIS’ crimes, yet they refused to do so because Defendants’ officers were more interested in enriching themselves and the Defendants, even if it meant furthering Madoff’s and BLMIS’ crimes and allowing Madoff to cause massive financial losses to thousands of innocent people, many of whom were Defendants’ customers.

10. Plaintiffs invested with Madoff and with BLMIS with knowledge that JPMC was

Madoff’s and BLMIS' bank. Plaintiffs maintained their accounts with Madoff and BLMIS after

JPMC knew that Madoff and BLMIS were involved in criminal conduct. But for JPMC's complicity in the fraud, Madoff and BLMIS would have been forced out of business and

Plaintiffs would not have lost their investments and would not have lost the appreciation on their money over a period of approximately 18 years.

11. By this complaint, Plaintiffs bring federal and state securities law claims for

JPMC’s actual knowledge of, and active participation in, Madoff’s and BLMIS’ crimes, for

JPMC’s failure to exert the power and control they had over Madoff and BLMIS to prevent

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further criminal conduct and, alternatively for aiding and abetting embezzlement, aiding and abetting breach of fiduciary duty, breach of fiduciary duty to those of the Plaintiffs who maintained accounts at JPMC, commercial bad faith, unjust enrichment, gross negligence, and for violations of the Federal RICO Act and the Florida RICO Act.

PARTIES

Plaintiffs

12. Each of the Plaintiffs was a customer of Madoff and then BLMIS, and each suffered damages as a direct result of the Defendants’ conduct in failing to exert their power over

Madoff and BLMIS to stop their fraudulent and illegal conduct. But for the Defendants’ conduct, the Plaintiffs would not have entered into investment advisory agreements with Madoff and with BLMIS and would have terminated any such agreements in the early 1990’s. These

Plaintiffs have suffered injury-in-fact damages in the amount of the value, on the date of the filing of this amended complaint, of the securities listed on their November 30, 2008 BLMIS account statements (the “November 2008 Statements”), plus other damages as permitted by lawThe following table lists the Plaintiffs and their state of residence

PLAINTIFF ADDRESS Abel, David 30 Jericho Executive Plaza, 300 C Jericho, NY 11753 Benjamin, Donald A. 152 Darters Lane Manhasset, NY 11030 Busel, Joel Revocable Trust 1400 South Ocean Boulevard, Apt. 1506N Boca Raton, Florida 33432 Busel, Sandra Revocable Trust 1400 South Ocean Boulevard, Apt. 1506N Boca Raton, Florida 33432 DiFazio, Frank & Carol as TIC 81 St. Marks Lane Islip, NY 11751 Dusek, Russell 1840 Les Chateaux Blvd. #104, Pelican Marsh Naples, FL 34109 Gale, Melvin H. and Leona Gale Joint 17630 Bocaire Way Revocable Living Trust Boca Raton, FL 33487-1108

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PLAINTIFF ADDRESS Gordon, Edyne as Executrix of the P.O. Box 517 Estate of Allen Gordon Tesuque, NM 87574 Goodman, Jerome c/o Kevin Goodman 59 Valley View Road Great Neck, NY 11021 Heller, Ben 14 Weber Road Sharon, CT 06069 Heller, Warren M. 1080 Fifth Avenue, Apt. 2B 10025 New York, NY Hill, Norma 9 Wampus Close Armonk, NY 10504-1941 JABA Associates, LP c/o Bruce Goodman 666 Fifth Avenue New York, NY 10103 Kamenstein, Carol 1314 Breakers West Blvd. West Palm Beach, FL 33411 Kamenstein, David 1314 Breakers West Blvd. West Palm Beach, FL 33411 Kamenstein, Peter 665 Titicus Road P.O. Box 3004 North Salem, NY 10560 Kamenstein, Sloan 1314 Breakers West Blvd. West Palm Beach, FL 33411 Kamenstein, Tracy 1314 Breakers West Blvd. West Palm Beach, FL 33411 Kissinger, Eugene Trust U/A/D 12/6/99 c/o WBK Associates 200 Broad Hollow Road, Suite 402 Melville, NY 11747 Konigsberg, Frederick and Susan, 1 Herricks Road JTWROS Garden City Park, NY 11040 Krauss, Marlene c/o KBL Healthcare 52 East 72nd Street New York, NY 10021 Lifton, Martin 4251 N.W. 65th Road Boca Raton, FL 33496 Palmer Family Trust c/o Christine Murray, Trustee 4721 109th Avenue Clear Lake, MN 55319 Peerstate Equity Fund, LP c/o Robert N. Getz, LLC 279 Canterbury Dr. W. Palm Beach Gardens, FL 33418-7178 Peshkin, Marsha 1416 Harbour Point Drive North Palm Beach, FL 33410

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PLAINTIFF ADDRESS RAR Entrepreneurial Fund Ltd. c/o Russ Oasis 4840 SW 80 Street Miami, FL 33143 Rechler, Judith c/o Rechler Equity LLC 85 South Service Rd Plainview, NY 11803 Roman, Joan 2444 N.W. 59th Street, #1301 Boca Raton, FL 33496 Roman, Robert 2444 N.W. 59th Street, #1301 Boca Raton, FL 33496 Sage Associates c/o Malcolm Sage 45 Christopher Street, Apt. 14B 10014 New York, NY Shankman, Jeffrey 300 E. 56th Street, Apt. 19C New York, NY 10022 Sirotkin, Lori 590 New Crane Terrace Boca Raton, FL 33432 Stony Brook Foundation c/o Jason Hsueh, Comptroller Stony Brook University 230 Administration Bldg. Stony Brook, NY 11794-1188 Sylvan Associates Limited Partnership 39 Sylvan Lane Weston, MA 02493 Wilenitz Trust U/Art Fourth o/w/o c/o Evelyn Berezin Israel Wilenitz 136 Waverly Place, Apt. 16C New York, NY 10014 Yaffe, Robert 30 Jericho Executive Plaza, 300 C Jericho, NY 11753 Yesod Trust c/o Nancy L. Montmarquet Chadbourne & Parke LLP 30 Rockefeller Plaza New York, NY 10112

13. The Plaintiffs are entitled to compensatory damages in the amount of the value, on the date of the filing of this amended complaint, of the securities listed on their November

2008 Statements, plus other damages as permitted by law.

Defendants

14. Defendant JPMorgan Chase is a financial holding company incorporated under

Delaware law with its principal place of business at 270 Park Avenue, New York, New York

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10017. JPMorgan Chase is one of the financial institutions in the United States that is considered ”too big to fail.” JPMorgan Chase is registered to do business in Florida and has offices and branches in Florida. JPMorgan Chase was legally required to, and did, create and implement anti-money laundering policies and practices that governed how the Defendants monitored the activity in the 703 Account. As a result of those activities, JPMorgan Chase recognized that the activity in the 703 Account was not consistent with BLMIS’ purported business and not consistent with reports that BLMIS delivered to the SEC. Further, JPMorgan

Chase was involved in the products that Defendants structured and issued relating to the BLMIS feeder funds and was repeatedly referenced in the term sheets for those products.

15. Defendant JPMorgan Chase Bank, N.A. (“Chase”) is one of JPMorgan Chase’s main bank subsidiaries and is organized under the laws of the United States with its principal place of business at 111 Polaris Parkway, Columbus, Ohio 43240. Chase is a national banking association in the United States with locations in 23 states, including Florida. Chase is registered to do business in Florida and has many offices and branches in Florida. Chase also acted as guarantor and common depository for products Chase structured and issued related to BLMIS feeder funds. The Risk Management Division of the Investment Bank operates at least in part under the legal entity Chase. Chase also acted as guarantor and common depository for products

JPMC structured and issued for investment in the BLMIS investment advisory business.

16. Defendant J.P. Morgan Securities LLC (“JPM Securities (US)”) is the principal non-bank subsidiary of JPMorgan Chase and is organized under the laws of Delaware. One of

JPM Securities (US)’s offices is in Palm Beach Gardens, Florida. JPM Securities (US) is registered to do business in Florida. JPM Securities (US) is JPMorgan Chase’s United States

Investment Banking arm through which it conducts securities underwriting, dealing and

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brokerage activities in the United States. JPM Securities (US) is an SEC-registered broker/dealer and investment adviser, a member of the Securities Investor Protection Corporation ("SIPC"), and a member of the Financial Industry Regulatory Authority.

17. Defendant JPMorgan Chase’s Financial Institutions Group and Broker/Dealer

Group operate at least in part under the legal entity JPM Securities (US).

18. Defendant J.P. Morgan Securities Ltd. (“JPM Securities (UK)”) is organized under the laws of England with its registered office at 25 Bank Street, Canary Wharf, London,

E14 5JP. JPM Securities (UK) is JPMorgan Chase’s United Kingdom Investment Banking arm, through which it conducts securities underwriting, securities dealing and brokerage activities.

JPM Securities (UK) is an indirect subsidiary of Chase and JPMorgan Chase.

19. Defendant John Hogan was, for many years, the Chief Risk Officer for Chase’s

Investment Bank. In that capacity, Hogan met several times with Madoff to discuss the illegal activities between Madoff and Norman Levy during the period from 1991 - 2001. According to

Madoff, Hogan directed Madoff and Levy to structure their illegal transactions in a manner that they would be less noticeable to bank regulators. It was not until early 2002 that Hogan told

Madoff that the illegal transactions would have to stop. In January 2012, Hogan was named

Chief Risk Officer for all of JPMC.

20. Defendant Richard Cassa was the sponsor or Client Relationship Manager in the

Chase Broker/Dealer Group responsible for the 703 Account and for Madoff’s and BLMIS’ accounts and credit requests during the entire period from the mid-1990’s until March 2008, when he retired. He received financial statements from Madoff and from BLMIS on a regular basis, including FOCUS Reports, as early as October 2001. Those reports revealed irregularities

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and misrepresentations that alerted Cassa to Madoff’s dishonesty. Cassa also fielded requests from other divisions of JPMC to set up meetings with Madoff.

21. JPMorgan Chase’s Equity Exotics & Hybrids Desk (“Equity Exotics”) and the

Equity Derivatives Group operate at least in part under the legal entity JPM Securities (UK).

JPM Securities (UK) also played an integral role in structuring and issuing products related to

BLMIS.

22. JPMorgan Chase operates six business segments: Investment Banking,

Commercial Banking, Treasury & Security Services, Asset Management, Retail Financial

Services and Card Services. Within or alongside these various business segments, JPMorgan

Chase’s activities are further divided among numerous divisions and groups.

23. JPMorgan Chase does not operate its various business segments, divisions and groups within the confines of separate legal entities. Rather, it operates through many legal entities under the enormous umbrella that is the financial holding company, JPMorgan Chase.

24. Matt Zames, head of the Interest Rate Trading, Global Foreign Exchange, Public

Finance, Global Mortgages, Tax-Oriented Investments and Global Fixed Income, explained the significance of JPMorgan Chase’s legal entities as “not relevant to how we run our business.”

Zames used himself as an example: “I guess I’m still an employee of [JPM Securities (US)].

Having said that, people that report to me are under [Chase] as well.”

25. Plaintiffs bring this action against all Defendants because each Defendant, individually and culpably participated in, promoted, and aided and abetted the fraud of Madoff and BLMIS. In addition, all of the Defendants operated as a single indivisible entity. Therefore, each of the Defendants is liable for the actions of the other Defendants.

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JURISDICTION AND VENUE

26. The claims asserted herein arise under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b), 78t(a), and under Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5, (the “Section 20(a) Claim”); the Federal

Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §§ 1961-1968 (the “Federal

RICO Claim”); Florida Civil Remedies for Criminal Practices Act, Chapter 772 of the Fla. Stat.

(the “FLRICO Claim”); and applicable common law.

27. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 15 U.S.C. § 78aa; the Federal RICO Act, 18 U.S.C. § 1964, and principles of supplemental jurisdiction.

28. Personal jurisdiction is proper in respect of Plaintiffs’ state and common law claims because, inter alia, Florida residents, particularly wealthy retirees, were among Madoff’s primary targets. Madoff himself maintained a home in Palm Beach, as did some of his principal co-conspirators, most notably Jeffry Picower. A significant percentage of the individual customers of Madoff and, after 2000, of BLMIS, were residents of Florida.

29. Venue is proper in this district under Section 27 of Exchange Act, 15 U.S.C. §

78aa(a), 18 U.S.C. § 1965(a), and 28 U.S.C. §1391(b). Defendants and their agents can be found in this district and they transact business and affairs in this district. Defendants further submitted

themselves to the jurisdiction of this Court by regularly doing or soliciting business and engaging

in a persistent course of business in this district and by deriving substantial revenue from

business conducted in this district.

PROCEDURAL HISTORY

30. Madoff confessed his crimes and BLMIS was closed on December 11, 2008. At that time, BLMIS had approximately 4,900 active customer accounts with combined last

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statement values, as of November 30, 2008, of $64.8 billion. Immediately thereafter, the Trustee was appointed for the substantively consolidated liquidation of BLMIS under the Securities

Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”) and the bankruptcy estate of

Madoff.

31. In late January 2009, the Trustee convened a first meeting of BLMIS’ creditors at which he announced that he would not recognize any claim under SIPA for appreciation or what he called “fictitious profits.” Thus, someone who entrusted $100,000 to Madoff in 1968, never took any money out of his account, and used other sources of fund to pay income taxes each year for 40 years on the appreciation in the account at short-term capital gains rates, would have an allowed claim for $100,000. The Trustee referred to BLMIS customers who had a positive net investment, exclusive of appreciation, as “net losers.” The Trustee referred to BLMIS customers who had a negative net investment, exclusive of appreciation, as “net winners.” Of the 4,900 customer accounts, approximately 2,300 were “net losers” and 2,600 were “net winners.”

32. On April 6, 2009, the Internal Revenue Service (the “IRS”) issued Revenue

Procedure Ruling 2009-20, which recognized the appreciation in BLMIS customers’ accounts on which they had paid taxes, i.e., through December 31, 2007, and provided for tax refunds to

BLMIS customers. Thus, the IRS did not distinguish between “net losers” and “net winners” for purposes of obtaining tax refunds for taxes paid on fictitious profits.

33. On March 8, 2010, the Bankruptcy Court for the Southern District of New York issued an opinion holding that the Trustee had the right under SIPA to disallow claims for appreciation and to allow SIPA claims only of net losers and only in the amount of their net investment (the “Net Equity Decision”). The Net Equity Decision was affirmed by the United

States Court of Appeals for the Second Circuit on August 16, 2012, which held that a trustee

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under SIPA has the discretion to ignore profits allegedly earned by customers of an SEC- regulated broker who conducts a Ponzi scheme.

34. On June 24, 2011, the Trustee filed a complaint captioned Picard v. JPMorgan

Chase & Co. asserting both bankruptcy and common law claims in which certain material facts were redacted. On November 1, 2011, the United States District Court for the Southern District of New York (the “SDNY”) dismissed the common-law claims on the ground that the Trustee was in pari delicto with Madoff and, thus, lacked standing to bring those claims. On April 14,

2012, the Trustee filed an unredacted version of the complaint. On June 20, 2013, the United

States Court of Appeals for Second Circuit affirmed the dismissal of the Trustee’s common-law

claims against JPMC, holding that only customers of BLMIS could assert these claims. Picard

v. JPMorgan Chase & Co. (In re Bernard L. Madoff Investment Securities LLC), 721 F.3d 54 (2d

Cir. 2013).

35. Shortly after the Trustee’s common-law claims were dismissed, the Hill and

Shapiro class-action complaints were filed in the SDNY. Both actions asserted common-law claims against JPMC relating to its knowledge of, and acquiescence in, Madoff’s and BLMIS’ illegal activities. Even though the “net winner” and “net loser” terminology had been common parlance in the BLMIS case since January 2009, the Hill Class Action defined the proposed class

as “all persons or entities who, directly, had capital invested with [BLMIS] as of December 12,

2008.” (Compl. ¶ 59, Hill Class Action, ECF No. 1) (emphasis added). Similarly, the Shapiro

Class Action defined the class as “all customers who directly had capital invested with BLMIS

as of December 12, 2008 and suffered damages.” (Compl. ¶ 2, Shapiro Class Action, ECF No.

1) (emphasis added). Thus, any BLMIS customer reading the complaints would reasonably

conclude that the proposed class included both “net winners” and “net losers.”

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36. On December 5, 2012, the Hill and Shapiro Class Actions were consolidated and, on January 20, 2012, the Consolidated Class Action Complaint was filed. (2012-12-05 Order ¶

1, Hill Class Action, ECF No. 3-4.) The Consolidated Class Action Complaint alleged various common law claims against JPMC and defined the class as “all persons or entities who, directly,

had capital invested with [BLMIS], as of December 12, 2008.” (Compl. ¶ 289, Hill Class

Action, ECF No. 4) (emphasis added). Thus, again, despite the common use of the terms “net winner” and “net loser” in the BLMIS case, the class was consistently defined to include all

BLMIS customers as of December 12, 2008.

37. As a result of a settlement of the Consolidated Class Action solely on behalf of

“net losers,” the attorneys for the plaintiffs in the Consolidated Class Action sought and obtained an order from the SDNY, dated March 21, 2014, which re-defined the class as consisting only of

BLMIS customers who were “net losers,” that is, customers who, over the life of their account, some spanning decades, had a positive net investment. The “net winners,” i.e., those BLMIS customers, who over the life of their account, some spanning decades, had taken more money out of their account than had been invested, were excluded from the settling class in the

Consolidated Class Action. At the same time, the SDNY approved the settlement of the

Consolidated Class Action. Thus, after the class was re-defined and the settlement was approved, BLIMIS customers with a positive net investment over the life of their account (“net losers”) were permitted to participate in the settlement, but customers with a negative net investment (“net winners”) were not.

38. Plaintiffs all directly had capital invested in BLIMIS and they are are all “net winners.” In the Consolidated Class Action, Judge Colleen McMahon ruled that “net winners”

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had no standing to opt out of the class because the Court had defined the class to include only

“net losers.”

39. Judge McMahon stated on March 21, 2014, that “net winners” could file their own complaint and it would be determined by the court having jurisdiction of that complaint whether their claims relate back to the date of the filing of the Hill and Shapiro complaints pursuant to Am. Pipe & Const. Co. v. Utah, 414 U.S. 538, 554 (1974) (the “commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.”). Judge

McMahon also stated:

The law is pretty clear that the statute of limitations on absent class members tolls with the filing of a complaint. If the definition of a class member is broad enough in the complaint to include you, you certainly have a very good argument to make to whatever judge gets that case that it relates back, and that you're not time-barred.

Hill v. JPMorgan Chase, 11 CV 8331 (CM)(MHD) (SDNY) March 21, 2014 Tr. at 10.

40. The limitations periods on Plaintiffs’ claims were tolled by virtue of the filing of the Hill and Shapiro actions, pursuant to American Pipe, supra.

ALLEGATIONS COMMON TO ALL CLAIMS

The Business of Madoff and of BLMIS

41. Madoff is a former Chairman of the Board of Directors of the NASDAQ stock exchange.

42. From 1959 until December 4, 2000, Madoff operated as a sole proprietorship under the name of Benard L. Madoff Investment Securities. On January 12, 2001, Madoff formed BLMIS as a New York limited liability company of which he was the sole member,

Chairman, and Chief Executive Officer.

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43. From its formation in 2000, BLMIS was a broker/dealer registered with the

Securities and Exchange Commission (the "SEC") as a securities broker/dealer under § 15(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(b). By that registration, BLMIS became a member of SIPC.

44. Madoff did not register BLMIS as an Investment Adviser, pursuant to 15 U.S.C. §

80b-3, until August 2006, when the SEC required him to do so. In or about January 2008,

BLMIS filed with the SEC an Amended Uniform Application for Investment Adviser

Registration. The application represented, among other things, that BLMIS had 23 customer accounts and assets under management of approximately $17.1 billion. In actuality, according to the final customer statements issued by BLMIS for the month ending November 30, 2008,

BLMIS had approximately 4,900 active customer accounts and purported assets under management of $64.8 billion.

45. Madoff opened a branch of his broker/dealer business in London, England, which was incorporated under the name Madoff Securities International (“MSIL”), which he principally owned and controlled.

46. BLMIS had three business units: (i) market making (ii) proprietary trading

(together, the “Trading Business”), and (iii) investment advisory (the “IA Business”). The

Trading Business was a legitimate business which was financed, substantially, by funds invested by customers of the IA Business.

47. For the period from the early 1990’s on, the IA Business was operated as a fraudulent scheme. The money received from customers was used, in part, to make requested distributions to other customers and, in part, to purchase securities for the Trading Business.

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48. By December 2008, BLMIS employed approximately 200 people, of whom only

12 worked in the IA Business; the balance worked in the Trading Business.

49. BLMIS was a self-clearing broker, i.e., it held title to shares of stock it purchased as opposed to using a primary broker to hold its stock certificates. As a self-clearing broker,

BLMIS was able to execute trades with institutional counter-parties. For the most part, those trades were cleared through the National Securities Clearing Corporation (“NSCC”). 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

(“DTC”), is one of the leading clearing houses for North American stock trading.

50. As part of the Trading Business, Madoff/BLMIS engaged in market-making and actively traded with various institutional counterparties, including Bear Stearns & Co. (“Bear

Stearns”). A market-maker is a dealer who, with respect to a particular security: (i) regularly publishes bona fide competitive bid and offer quotations in a recognized interdealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing and able to effect transactions in reasonable quantities at its quoted prices with other brokers or dealers.

51. Between 2000 and 2008, BLMIS’ market-making business produced steady revenues of approximately $50 million a year. The business had sufficient capital to support its trading activity and banked at the Bank of New York. Although the BLMIS market-making traders were unaware of Madoff’s illegal activities, they were unwittingly used by Madoff to support his criminal enterprise. Madoff used the legitimate market-making trading volume to disguise the lack of any trading on behalf of Madoff’s investment advisor “clients.”

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52. Further, the market-making business was often the backdrop to meetings Madoff held with potential IA Business customers. From his conference room on the 19th floor, Madoff met with potential “customers” and established “customers” who would view the activity on the trading floor and gain confidence that Madoff’s operations were legitimate and could support the steady positive returns he reported.

53. Over the course of years, Madoff/BLMIS solicited approximately $17 billion from customers for his fraudulent IA Business. Initially, he told customers he would invest their funds pursuant to an arbitrage strategy. Later in the decade, Madoff purportedly changed his investment strategy to the “split strike conversion” strategy (the “SSC Strategy”). Madoff represented to customers that his strategy was to invest customer funds in a subset or “basket” of the common stocks that comprised the Standard & Poor’s 100 Index (“S&P 100”), a collection of the 100 largest publicly traded companies. Madoff claimed that the baskets of stocks would mimic the movement of the S&P 100. He also asserted that he would carefully time purchases and sales to maximize value. Several times a year, customer funds would purportedly move

“into the market,” which consisted of allegedly purchasing a basket of stocks and corresponding option hedges. Then customer funds were moved completely “out of the market” to purported investments in United States Treasury Bills (“T-bills”) or in mutual funds holding T-bills until the next presumed trading opportunity arose. At the end of most quarters, the baskets were purportedly sold and the proceeds invested in T-bills or other money market funds.

54. As part of the SSC Strategy, Madoff also concocted a fictitious hedging strategy for the baskets of stocks. He purported to purchase and sell S&P 100 option contracts correlated to the stocks in the baskets, thereby limiting both the downside risk associated with possible adverse price changes in the baskets of stocks and the profits associated with increases in

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underlying stock prices. Madoff purported to use proceeds from the sale of S&P 100 call options to finance the cost of purchasing S&P 100 put options.

55. Madoff and BLMIS functioned as an investment adviser to their customers and a custodian of their securities. The precise date on which Madoff began offering investment advisory services has not been established, but it appears that Madoff was offering such services as far back as the 1960’s.

56. Although clients of the IA Business received monthly or quarterly statements purportedly showing the securities that were held in – or had been traded through – their accounts, as well as the growth of and profit from those accounts over time, the trades reported on these statements never actually occurred in the customers’ names and were a complete fabrication. The security purchases and sales depicted in the account statements virtually never occurred and the profits reported were fictitious.

57. At his plea hearing, Madoff admitted that he never purchased any of the securities he claimed to have purchased for the IA Business’s customer accounts. Although customer funds were used to purchase securities – and often the very same securities that were shown on their statements -- the securities purchased were credited to customers in the Trading Business of

Madoff/BLMIS, not in the IA Business. At least from 1992 on, Madoff/BLMIS never allocated purchases and sales with the IA Business customers’ money to the IA Business customers through the DTC, the clearing house for such transactions, or any other trading platform on which Madoff/BLMIS could have reasonably traded securities.

58. Madoff generally assured customers and regulators that he purchased and sold the put and call options over the counter (“OTC”) rather than through an exchange. Yet, the Options

Clearing Corporation, which clears all exchange-traded option contracts based upon the stock of

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S&P 100 companies, has no record of the IA Business having bought or sold any exchange-listed options on behalf of the IA Business customers.

59. Madoff periodically wired hundreds of millions of dollars from the 703 Account to BLMIS’ London affiliate, MSIL. There is no record that MSIL ever used the wired funds to purchase securities for the accounts of the IA Business clients. In fact, MSIL wired hundreds of millions of dollars of customers’ money back into the bank accounts of BLMIS’ Trading

Business which were used to purchase securities that were sold in the Trading Business.

60. Madoff/BLMIS honored all requests for withdrawals by customers of the IA

Business until such time as the requests for withdrawals in December 2008, overwhelmed the flow of new investments and caused the scheme’s inevitable collapse.

61. At a plea hearing on March 12, 2009, in the case captioned United States v.

Madoff, Case No. 09-CR-213 (DC), Madoff pled guilty to an 11-count Criminal Information filed against him by the United States Attorney’s Office for the Southern District of New York.

Madoff admitted that he “operated a Ponzi scheme through the investment advisory side of

[BLMIS].” (Plea Allocution of Bernard L. Madoff at 23, United States v. Madoff, No. 09-CR213

(DC) (S.D.N.Y. March 12, 2009) (Dkt. No. 50). Additionally, Madoff asserted: “[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed criminal.” (Id.; emphasis added.)

Madoff was sentenced on June 29, 2009, to 150 years in prison.

62. On August 11, 2009, a former BLMIS employee, Frank DiPascali, pled guilty to participating in and conspiring to perpetuate the scheme. At a plea hearing on August 11, 2009, in the case, entitled United States v. DiPascali, Case No. 09-CR-764 (RJS), DiPascali pled guilty to a 10-count Criminal Information. DiPascali admitted, among other things, that Madoff had

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been operating a Ponzi scheme since at least the 1980s. (Plea Allocution of Frank DiPascali at

46, United States v. DiPascali, No. 09-CR-764 (KIS) (S.D.N.Y. Aug. 11, 2009) (Dkt. No. 11)).

JPMC’s Legal Obligations

63. As a federally-insured financial institution, Defendants have strict obligations under the Currency and Foreign Transactions Reporting Act of 1970 a/k/a the Bank Secrecy Act

(the “BSA”) to monitor customer transactions and report any suspicious activities to law enforcement authorities See 31 U.S.C. § 5311; 12 C.F.R. § 208.63. The USA Patriot Act of

2001 (the “Patriot Act”), reinforced this obligation and underscored the importance of implementing robust internal banking systems to detect and report money laundering and other suspicious activities. The regulations promulgated pursuant to the Patriot Act require financial institutions to institute an anti money-laudering (“AML”) program that includes four pillars: (i) designating an individual or individuals responsible for managing BSA compliance; (ii) a system of policies, procedures, and internal controls to ensure ongoing compliance; (iii) training for appropriate personnel; and (iv) independent testing of compliance. 12 C.F.R. § 208.63.

64. For financial institutions to comply with these obligations, the institutions must fully understand their customer’s business and they have a legal obligation to do so. This “know your customer” (“KYC”) duty is imposed pursuant to 12 C.F.R. § 208.62. Institutions viewing account activity need a baseline against which to distinguish account activity that may be normal for a particular industry from account activity that might suggest an illegal enterprise. The KYC duty pre-dated the Patriot Act. Not only was it suggested by such guidelines as the Federal

Reserve’s BSA Examination Manual of 1995 and Supervisory Letter on Private Banking

Activities, SR 97-19 (SUP), but it was standard industry practice.

65. Many financial institutions have entire departments devoted to this one task and to making sure KYC is performed thoroughly and is constantly monitored and recorded. JPMC has

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a KYC department for each of its lines of business. Yet, as set forth herein, JPMC deliberately turned a blind eye to Madoff’s and BLMIS’ crimes and, instead of shutting Madoff down in the early 1990’s, JPMC made the institutional decision, for its own enrichment, to join in Madoff’s crimes.

JPMC’s Corporate Culture of Thievery

66. JPMC has a corporate culture that encourages officers and employees to generate profits at all costs, even if it is necessary to violate the law and/or to violate duties of integrity and honesty owed to customers and to the public at large. This culture is illustrated by looking at the amounts in fines, penalties, damages and settlements the Defendants have paid, just in the last four years, when they have been caught in dishonest activities.

67. In June 2010, JPMC paid $48.6 million in fines to Great Britain's financial regulator to settle charges that its London unit failed to maintain required separation between clients' accounts and JPMorgan funds.

68. In July 2010, JPMC paid $25 million to settle allegations that it sold unregistered securities to a state-run municipal money-market fund that suffered a run on deposits because it held defaulted debt.

69. In April 2011, JPMC paid $56 million to settle claims that it overcharged active- duty service members on their mortgages. The agreement included $27 million in cash to approximately 6,000 military personnel, lower interest rates on soldiers' home loans and the return of homes taken in improper foreclosures.

70. In June 2011, JPMC paid $153.6 million in penalties to the SEC to settle allegations that it misled investors about a collateralized debt obligation it marketed without telling them a hedge fund had chosen the underlying collateral and made investment bets it would fail.

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71. In July 2011, JPMC paid $228 million to settle SEC allegations that it fraudulently rigged at least 93 municipal bond transactions in 31 states, generating millions of dollars in illegal profits.

72. In August 2011, JPMC paid $88.3 million in fines to settle allegations by the

Treasury Department's Office of Foreign Assets Control that JPMC improperly processed transactions involving Cuba, Iran and Sudan.

73. In February 2012, JPMC agreed to pay $110 million to settle consumer litigation accusing it of charging excessive overdraft fees.

74. In March 2012, JPMC agreed to pay $150 million to settle a lawsuit by pension funds and other investors accusing it of imprudently investing their cash in a risky debt vehicle that collapsed in 2008.

75. In March 2012, JPMC paid the Office of the Comptroller of the Currency $45 million to settle a lawsuit alleging that it had charged veterans hidden fees in mortgage refinancings.

76. In April 2012, JPMC paid $20 million to settle allegations by the Commodity

Futures Trading Commission that it had improperly extended credit to Lehman Brothers based in part on customer funds that were required to be kept segregated.

77. In August 2012, JPMC paid $1.2 billion as its share of a settlement of a class action lawsuit alleging that it, along with other banks, Visa and Mastercard improperly conspired to set the price of credit and debit card interchange fees.

78. In August 2012, JPMC paid $100 million to settle claims arising out of JPMC’s decision in late 2008 and 2009 to boost minimum monthly payments for thousands of cardholders to 5 percent of account balances from 2 percent.

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79. In November 2012, JPMC agreed to pay $296.9 million to settle SEC allegations that the bank misstated information about the delinquency status of mortgages that served as financial collateral for a securities offering underwritten by JPMC on which JPMC received more than $2.7 million in fees while investors sustained at least $37 million in losses.

80. In February 2012, and January 2013, JPMC entered into two agreements in which it joined with other major banks in a nationwide settlement of allegations that the banks had improperly carried out home foreclosures after the 2008 financial collapse. JPMorgan paid $1.8 billion in settlement and also agreed to provide $3.7 billion for financially troubled homeowners and $540 million in refinancing.

81. In July 2013, JPMC paid $410 million in penalties and repayments to resolve

Federal Energy Regulatory Commission findings of bidding manipulation of California and

Midwest electricity markets from September 2010 to November 2012.

82. In September 2013, JPMC agreed to pay $920 million to the Federal Reserve

Bank, the SEC, the Office of the Comptroller of the Currency (the “OCC”) and the United

Kingdom's Financial Conduct Authority to settle claims about management and oversight of traders involved in the "London Whale" disaster. JPMC admitted wrongdoing in the trading episode which caused approximately $6 billion in losses.

83. In September 2013, JPMC paid $80 million in fines and $309 million in refunds after regulators charged that more than 2.1 million consumers were harmed by unfair billing practices that charged for credit monitoring services they did not receive. The settlement also covered allegations that consumers were harmed by mistakes in thousands of debt-collection lawsuits.

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84. In October 2013, JPMC reached a settlement with the Commodity Futures

Trading Commission whereby it agreed to pay a $100 million fine and admit to reckless conduct and market manipulation in connection with its 2012 "London Whale" trading debacle.

85. In December 2013, JPMC agreed to pay $22 million to settle a proposed class actin accusing it of imposing expensive and unnecessary flood insurance on homeowners whose mortgages it serviced.

86. In January 2014, JPMC entered into a deferred criminal prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York in which it paid $1.7 billion for its failure to maintain an adequate anti-money laundering program and failure to file a suspicious activity report in the United States in October 2008, with respect to BLMIS, in violation of the BSA.

87. In January 2014, JPMC agreed to pay $350 million to the OCC in connection with various BSA / Anti-Money Laundering deficiencies, including in relation to BLMIS.

88. In January 2014, JPMC agreed to pay a $461 million Civil Money Penalty imposed by the Financial Crimes Enforcement Network (“FinCEN”) for failure to detect and adequately report suspicious transactions relating to BLMIS. (The FinCEN penalty, but not the

OCC penalty, has been deemed satisfied by the forfeiture payment to the U.S. Attorney.) In

January 2014, JPMC paid $325 million to settle claims brought by the Trustee.

89. In January 2014, JPMC paid $218 million to settle claims brought by “net losers” in the BLMIS liquidation.

90. In January 2014, JPMC paid $4.5 billion to settle claims asserted by the trustees for mortgage-backed securities issued by JPMC and Bear Stearns, and agreed to implement certain servicing changes with respect to mortgage loans serviced by JPMC.

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91. In January 2014, JPMC agreed to pay a $2 billion civil monetary penalty imposed by the Federal Housing Financing Agency (“FHFA”) and to pay $7 billion in compensatory damages to homeowers who were injured by JPMC’s mortgage-lending practices (including $4 billion to resolve the FHFA litigation) and made a commitment to provide $4 billion in borrower relief before the end of 2017.

92. In January 2014, JPMC agreed to pay $1.1 billion to settle the FHFA claims arising out of repurchase obligations of Fannie Mae and Freddie Mac with respect to loans purchased from 2000 to 2008.

93. In February 2014, JPMC agreed to pay $614 million to settle claims brought by the U.S. Attorney’s Office for the Southern District of New York relating to JPMC’s participation in federal mortgage insurance programs overseen by FHA, HUD and VA. Under the settlement, JPMC undertook to enhance its quality control program for loans that are submitted in the future to FHA’s Direct Endorsement Lender program.

94. Altogether, just during the four year period beginning June 2011, JPMC used shareholder money to pay $31.48 billion in fines and penalties for the defalcations and violations of law of its officers and employees.

The Defendants’ Active Complicity in the Illegal Activity of Norman Levy and Madoff

95. At all relevant times, Madoff and BLMIS used JPMC or its predecessors as their primary bank and deposited the embezzled funds with JPMC in the 703 Account. Madoff and

BLMIS embezzled tens of billions of dollars representing Plaintiffs’ and other customers’ money through the 703 Account until December 2008, when Madoff confessed and was arrested.

96. The Defendants’ employees and officers had access to the information as to precisely how many customers there were for the IA Business because all deposits from IA

Business customers were paid directly into the 703 Account. Thus, Defendants’ employees were

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the only people, outside of the 12 BLMIS employees who handed the IA Business, who knew how many IA Business customers there were, knew their identities, and knew the dollar volume of their deposits. But just like BLMIS’ 12 employees, the Defendants concealed this information in order to allow BLMIS’ fraud to continue.

97. JPMC oversaw not only the criminal activities of Madoff and BLMIS but also the criminal activities of its favored customer, Norman Levy. Levy had close business relationships with senior executives at JPMC’s predecessor banks, including John McGillicuddy, former

Chairman and Chief Executive Officer of Manufacturers Hanover and Chemical Bank, Walter

Shipley, Chief Executive Officer from 1996 to 1999, and his successor, William Harrison

(succeeded by Jamie Dimon). Not only was Levy friendly with numerous senior officers of

JPMC, he was provided his own office at the JMPC Private Bank.

98. JPMC knew that Madoff had increased Levy’s wealth from $180 million in 1986, to $1.5 billion in 1998. Certainly, they had to have observed the manner in which that occurred as JPMC had access to the financial records of Madoff and Levy’s statements from Madoff.

99. For a period of almost 12 years, from 1990 through 2001, Defendants, constituting one of the largest, most powerful financial institutions in the world, closely watched as BLMIS and Levy illegally transferred through the Defendants over $100 billion, knowing that

Levy and Madoff were engaged in illegal “round-trip transactions.”

100. The total round-trip transactions each year were as follows:

Transfers from Transfers from Madoff Securities Norman Levy to to Norman Levy Madoff Securities 1992 $1,108,364,660 $994,048,201 1993 $1,387,358,368 $1,517,903,726 1994 $2,279,645,611 $2,128,805,955 1995 $3,542,773,369 $3,453,047,453

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Transfers from Transfers from Madoff Securities Norman Levy to to Norman Levy Madoff Securities 1996 $5,372,928,546 $5,471,231,206 1997 $7,067,467,981 $7,377,869,833 1998 $10,102,787,010 $10,039,234,425 1999 $15,316,343,975 $15,227,808,969 2000 $23,044,584,696 $23,103,627,635 2001 $35,095,634,103 $35,154,090,159 TOTAL: $104,317,888,319 $104,467,667,562

101. The round-trip transactions were eight times greater than the combined transfers of all other Madoff/BLMIS customers during this period and there was no legitimate explanation for this activity.

102. The majority of the round-trip transactions with the 703 Account were conducted by check. For example, in December 2001 alone, Levy transferred to the 703 Account on a daily basis checks in the amount of $90 million each—a pattern of activity which, as JPMC recognized, could have no legitimate purpose.

103. Finally, at the end of 2001, according to Madoff, Hogan informed Madoff and

Levy – after over ten years of illegal round-trip transactions – that the practice “had to stop.”

And Madoff and Levy obeyed Hogan because Madoff could not ignore commands from officers of JPMC. They had the ability, at any moment in time, to shut him down completely.

104. During 2002, BLMIS initiated 318 separate transfers totaling $313,643,718 from its account at Chase to Levy’s account at Chase in the precise amount of $986,301. That constitutes more than one transfer per day that Chase was open for business, all in the amount of

$986,301.

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105. From December 2001, to March 2003, the total monthly dollar amounts coming into the 703 Account from Levy were almost always equal to the total monthly dollar amounts going out of the 703 Account to Levy. There was no clear economic purpose for such repetitive transactions that had no net impact on Levy’s account at BLMIS.

106. There was a huge spike in activity between Levy and the 703 Account in

December 2001. In that month alone, Madoff engaged in approximately $6.8 billion worth of transactions with Levy. Shortly thereafter, Levy’s activity with the 703 Account decreased dramatically.

107. JPMC knew that the activity between the Levy and Madoff/BLMIS accounts was illegal. Its senior personnel, including Richard Tasser, Walter Shipley, and John Hogan, then head of Risk Management for the Investment Bank that housed Madoff’s and Levy’s accounts, repeatedly met with Madoff and Levy during the period following 1990 to question the illegal activity between the 703 Account and Levy’s personal accounts. Yet, JPMC never took any steps to shut Madoff out as a customer or to expose the illegal activities to law enforcement authorities.

108. The reason, of course, was that JPMC profited not only from having the 703

Account, but also from its relationships with Levy, including the revenue it realized on Levy’s private banking accounts with JPMC. No matter how inexplicable the transaction, JPMC executed every single one of them, and profited on a daily basis from the criminal conduct.

Madoff was maintaining account balances in the range of $4 billion, and JPMC did not have the moral fiber to turn down a customer that could offer the profits JPMC could generate from those

$4 billion bank balances.

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109. Interestingly, another major bank had closed the accounts of Madoff and Levy.

As of 1996, Madoff had maintained an account at Bankers Trust Company (“BTC”), through which some of the round trip transactions had been conducted. Personnel at BTC demanded an explanation from Madoff of these transactions. Madoff failed to provide BTC with a satisfactory explanation and BTC terminated Madoff’s and Levy’s accounts and filed a written Suspicious

Activity Report (“SAR”) with the United States Government. BTC notified JPMC that it had closed Madoff’s and Levy’s accounts. However, JPMC did not take any action; instead, it allowed the round trip transactions to continue and vastly increase in volume. JPMC waited until after Madoff confessed on December 11, 2008, to file a SAR with the United States Government.

110. In addition to allowing Levy and Madoff/BLMIS to engage in the round-trip transactions, the Defendants openly financed both Levy and Madoff/BLMIS. For example, in

1996, the same year Chemical Bank acquired Chase, Levy had $188 million in outstanding loans, which he used to fund his Madoff investments.

111. Chase referred to these investments as “special deals.” Indeed, these deals were special for everyone involved: (a) Levy enjoyed Madoff’s inflated returns; (b) Madoff enjoyed the benefits of large amounts of cash to perpetuate his fraud without being subject to Chase’s due diligence processes; and (c) Chase earned fees on the loan amounts and watched the “special deals” from afar, escaping responsibility for any due diligence on Madoff’s operation.

112. Chase had to have been monitoring transactions from the perspective of certain

Chase private banking customers like Levy that were also Madoff customers. Private banking has long been considered a high risk activity because private bank accounts generate lucrative fees, which provide an incentive for private bankers to ignore client activity that is illegal or

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violates internal bank policy. Private banking has frequently served as a vehicle for money laundering, and particularly money laundering involving cross-border wire transfers.

113. Once suspicious activity is identified, a bank must further investigate to determine whether there could be a legitimate explanation for the activity or, rather, if it is indicative of illegal activity.

114. Yet, in the face of repeated indications of suspicious transaction activity in the

703 Account, as well as comments from individuals within Chase regarding the legitimacy of

Madoff’s operations, Chase never reported its concerns to any regulatory or law enforcement authority in the United States.

Defendants’ Knowledge that BLMIS Filed False FOCUS Reports

115. As a registered broker/dealer, BLMIS was required by SEC Rule 17a-5 to file with the SEC quarterly Financial and Operational Combined Uniform Single (“FOCUS”) reports. These reports are basic financial and operational reports that set forth, among other information, assets, liabilities, revenues, expenses and loans of the company.

116. Beginning in October 2001, Defendants received copies of BLMIS’ FOCUS reports. The activities in the 703 Account were inconsistent with and contradictory of the representations BLMIS made to the SEC in the FOCUS reports. Moreover, Defendants had

Levy’s brokerage statements from Madoff which were also inconsistent with and contradictory of the FOCUS reports. Thus, from at least October 2001, Chase knew that BLMIS was defrauding, among others, the SEC.

A. The Undisclosed $100 Million Loan

117. An entity filing a FOCUS Report must report “Bank loans payable.” JPMC made a loan to BLMIS of $95 million in November 2005 that was not repaid until June 2006. Yet the

FOCUS Report for the period ending December 2005, a report in JPMC’s possession, reflected

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that BLMIS had no bank loans outstanding. Based on its own information, JPMC knew this was false.

118. Similarly, Madoff underreported BLMIS’ loan collateral, a fact also visible and known to JPMC. The FOCUS Report must include “Securities and spot commodities owned at market value – U.S. and Canadian government obligations” and “encumbered securities.”

JPMC’s November 2005 $95 million loan to BLMIS was collateralized by a $100 million

Federal Home Loan Bank Bond borrowed from Carl Shapiro. Madoff should have reported the bond as “Securities and spot commodities owned at market value – U.S. and Canadian government obligations.” The amount reported on the December 2005 FOCUS Report,

$72,232,950, was less than the $100 million of the value of the bond that JPMC knew BLMIS to be holding. Moreover, the December 2005 FOCUS Report should have listed the bond under

“encumbered securities” which was left blank. Again, on the basis of its own information, JPMC could determine that Madoff was falsely reporting BLMIS’ financial information.

119. The transaction that Madoff failed to disclose was the following: In November

2005, Chase requested approval for a fully collateralized $100 million broker loan for BLMIS.

Shortly thereafter, BLMIS borrowed $95 million from Chase which was illegally omitted from the BLMIS FOCUS Reports.

120. Enrica Cotellessa-Pitz, a Controller for BLMIS, requested the initial $95 million on BLMIS’ behalf in a letter sent to Chase on November 14, 2005. Prior to receiving the letter,

Daniel Bonventre, BLMIS’ Head of Operations, had spoken with Evadney Sandiford in Chase’s

Broker/Dealer Group regarding BLMIS’ large loan request.

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121. Cotellessa-Pitz requested that Chase credit the 703 Account with the $95 million, and use a bond in another account that BLMIS held with Chase as collateral (the

“Geoserve Account”).

122. The Geoserve Account contained a Federal Home Loan Bank Bond in the principal amount of $100 million, due April 8, 2009. According to Chase’s records, the $100 million bond was “receive[d] free” from Carl Shapiro on November 4, 2005.

123. The value of the Federal Home Loan Bank Bond was credited to a number of

BLMIS IA Business accounts held by Carl Shapiro’s family members. BLMIS paid Carl

Shapiro approximately 30% interest on the bond. BLMIS paid the interest quarterly, depositing the payments into various accounts at Chase held by Carl Shapiro’s family members.

124. Chase credited $95 million to the 703 Account on November 14, 2005—the same day Cotellessa-Pitz requested the funds. Chase immediately began to earn interest on the loan, collecting $198,081.60 in interest for November 2005, and $374,062.50 in interest for December

2005.

125. In a letter to Chase dated January 18, 2006, Bonventre requested an additional

$50 million. Similar to BLMIS’ prior loan request, Bonventre directed Chase to credit the 703

Account with the funds, using the bonds held in the Geoserve Account as collateral.

126. That same day, on January 18, 2006, Bonventre sent an additional letter requesting Chase to accept two more Federal Home Loan Bank Bonds into the Geoserve

Account. One bond was worth $9 million and the other was worth $45 million, together totaling

$54 million. As before, Chase’s records indicate that BLMIS received these bonds “free” from

Carl Shapiro and BLMIS paid an annual interest rate of approximately 30% to various Carl

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Shapiro family customer accounts at Chase. In accordance with Bonventre’s requests, Chase credited the 703 Account with $50 million on January 23, 2006.

127. With the loan to BLMIS now increased by $50 million, Chase began to collect even greater amounts in interest. Chase collected $443,689.23 for January 2006; $552,057.30 for February 2006; $620,781.25 for March 2006; $625,564.23 for April 2006; and $668,862.85 for May 2006.

128. Having collected over $3.4 million in interest since BLMIS’ initial loan request on November 14, 2005, Chase lost this source of profits on June 1, 2006, when Madoff requested that Chase debit the 703 Account for $145 million to pay off the loan.

129. Nowhere in the FOCUS Reports were these transactions reported by BLMIS.

B. The False Financial Information in the FOCUS Reports

130. Both the FOCUS Reports and the Annual Audited Reports that BLMIS was required to file under SEC Rule 17a-5(d) require broker/dealers to list the amount of cash on hand at the broker/dealer, as well as all of its other assets and liabilities. BLMIS’ FOCUS

Reports often did not show assets and liabilities that JPMC knew should have been reported including: (i) cash held in JPMC accounts; (ii) loans provided to BLMIS by JPMC; and (iii) related collateral on the loans JPMC extended to BLMIS.

131. BLMIS consistently underreported the amount of cash it held on its FOCUS

Reports – a fact that JPMC knew by virtue of its maintenance of the 703 Account. On an almost nightly basis, JPMC swept funds from the 703 Account into overnight deposits. For reporting purposes, the funds in the 703 Account and the overnight deposits are considered “cash” and were visible to JPMC. JPMC knew that the cash in the 703 Account and the overnight deposits often exceeded the “cash” reported by BLMIS in its FOCUS Reports and Annual Audited

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Reports. Yet, JPMC took no action to disclose these inconsistencies to law enforcement authorities.

132. For example, the December 2006 FOCUS Report listed $4,882,332 as the amount of cash on hand. As of December 31, 2006, the ending balance of the 703 Account was

$394,700 and the amount in overnight deposits was $295 million, totaling $295,394,700 of cash on hand. From JPMC’s view, there was thus a $290,512,368 difference between the amount of cash BLMIS purported to have and the cash balances known to JPMC. It thus was readily apparent to JPMC that BLMIS was not reporting the full amount of cash it had on hand. JPMC was uniquely positioned to discover and investigate this false statement by BLMIS because it – and no one else -- had access to the precise dollar amounts held in the 703 Account and overnight deposits.

133. BLMIS’ underreporting of its cash position was not isolated to the December

2006 FOCUS Report. In nearly every reporting period after December 31, 2006, BLMIS’

FOCUS Reports and Annual Audited Reports significantly underreported the amount of cash

BLMIS purported to hold, as compared to the amount BLMIS actually held in the 703 Account and in overnight deposits. JPMC was in possession of at least eight FOCUS Reports and two

Audited Annual Reports between December 2006, and September 2008, providing it with numerous opportunities to discover that Madoff was underreporting BLMIS’ cash position and making fraudulent statements to the SEC.

134. The FOCUS Reports and Annual Audited Reports revealed glaring inconsistencies with the business in which BLMIS was purportedly engaged – a business that

JPMC was required to know as part of its KYC obligations. As the broker to its investment adviser accounts, BLMIS was expected to report commission revenue. Before September 2006,

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Madoff did not report any commission revenue on the FOCUS Report “Commissions” revenue line. Nor did Madoff report commission revenue on BLMIS’ Annual Audited Reports before

October 2006. JPMC possessed at least seven FOCUS Reports and Annual Audited Reports filed before September 30, 2006, none of which listed any commission revenue. Even a cursory review of the FOCUS Reports and Annual Audited Reports should have prompted an investigation by JPMC.

135. BLMIS registered with the SEC as an Investment Adviser, for the first time, in

August 2006. The FOCUS Reports and Annual Audited Reports filed by BLMIS after that time included amounts listed for “Commissions.” JPMC possessed at least nine FOCUS Reports and

Annual Audited Reports filed for periods including or after September 2006. Comparing the revenue reported in the Annual Audited Reports for the fiscal years immediately before and after

BLMIS registered as an investment adviser demonstrates the significance of the newly reported commission revenue. For the fiscal year ended 2005, Madoff reported no commission revenue at all. By contrast, for the fiscal year ended 2007, Madoff reported $103,174,848 of commission revenue, which represented over 60% of total BLMIS revenues for the year. The sudden shift by

Madoff to begin reporting commission revenue should have raised questions as to the change in the business and prompted further investigation by JPMC as part of its ongoing KYC duties.

Instead, JPMC ignored blatant misrepresentations in the FOCUS Reports in violation of its duties to monitor and understand the business of its customers. In the December 2006 FOCUS Report,

Madoff reported $23,921,497 as the amount of commissions on transactions in exchange-listed securities executed on an exchange. Other than commissions on transactions in exchange-listed securities, Madoff disclosed no other commission revenue on the December 2006 FOCUS

Report. Madoff reported no commission revenue for: (i) “Commissions on transactions in

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exchange listed equity securities executed over-the-counter,” (ii) “Commissions on listed options transactions,” and (iii) “All other securities commissions.” Because BLMIS’ well-known trading strategy, of which JPMC was familiar based, at a minimum, on the 2006 investigation by Equity

Exotics, consisted of trading S&P 100 equities and options, JPMC should have expected Madoff to report commissions relating to options (whether they were listed or OTC), which he did not.

136. All of these blatant misrepresentations were known to JPMC and should have caused them to shut Madoff and BLMIS out as a JPMC customer.

Chase Abandoned its Credit Policies to Accommodate BLMIS

137. Chase failed to perform an adequate credit review process prior to extending loans to BLMIS.

138. For instance, in a November 2005 credit memo that Chase prepared requesting approval for a fully collateralized $100 million loan for BLMIS, Chase relied solely on BLMIS’ historical performance and Madoff’s reputation in the community in concluding that BLMIS would be able to repay the loan.

139. Moreover, in summarizing BLMIS’ supposed financial stability, Chase credit officer Raffale Cardone wrote that BLMIS’ assets “are comprised primarily of broker-dealer receivables and securities inventory.” Cardone reached this conclusion by referencing BLMIS’ unaudited financial statements prepared by Friehling & Horowitz (“Freihling”), an accounting firm of three employees, one of whom was semi-retired, with offices located in a strip mall in

Rockland County, New York.

140. James Coffman worked at the Investment Bank in the Credit Risk Management

Subdivision of the Risk Management Division, which managed the creditworthiness of transaction counterparties. Coffman knew that “a quick check found that they [Friehling] are not registerred [sic] with the Public Company Accounting Oversight Board, nor are they subject to

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peer reviews from the American Institute of Certified Public Accountants. Additionally, they have no website to provide background on their organization.”

141. In violation of its own policies, Chase relied on BLMIS’ unaudited financial statements in its April 2006 credit memo, stating: “As expected, [BLMIS’] revenues were nearly entirely driven by trading income.”

142. Chase’s credit staff made no site visits to observe BLMIS’ operations. Site visits are a requisite part of a sound credit review process, designed to ensure that the lending institution has an adequate understanding of the borrower’s business operations.

143. Chase had access to vast amounts of financial information about BLMIS, including information no one else had. The bizarre activity in the 703 Account revealed that

Madoff was not using the account to operate a legitimate business. Yet, Chase allowed Madoff to move billions of dollars of stolen property in and out of the 703 Account for 17 years. At the same time, Chase was collecting an estimated $500 million in fee and interest payments as well as having the free use of the $4 billion average account balances for loans and other income generating purposes.

144. Chase’s own files contained the following information proving that Madoff was operating a criminal scheme: (a) false statements in financial reports regarding cash positions, commissions and other material financial disclosures; (b) inexplicably suspicious activity in the

703 Account, especially between BLMIS and Levy; (c) suspicious loan activity and extraordinary interest paid in connection with the Carl Shapiro transactions; (d) financial statements prepared by an unrecognized accounting firm.

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145. Chase’s view of Madoff as seen through historical and current account activity and other financial information available about BLMIS revealed that Madoff could not have been operating a legitimate business.

146. The activity in Madoff’s account did not look like a normal broker-dealer account: customer funds were never segregated or transferred to separate sub-accounts; and the account would not show massive outflows to purchase securities or massive inflows when those securities were sold.

147. The unusual activity in the 703 Account should have triggered an investigation by the banker in charge of the account, and it should also have triggered Chase’s AML monitoring system.

JPMC Eagerly Became Madoff’s Co-Conspirator

148. To run his illegal scheme, Madoff needed a banking relationship (a) to provide a depository for all of his customers’ funds and (b) to provide his customers with a sense that he was operating a legitimate investment-advisory business. Having such a banking relationship would allow Madoff/BLMIS to receive customer investments and then transfer that money out of his account to perpetuate the scheme.

149. What Madoff/BLMIS also needed was a bank that would be hospitable to fraudsters, that is, a bank that – for a price – was willing to overlook his suspicious activity, ignore the anomalous account activity, and ignore its own obligations under federal law.

150. JPMC was the perfect bank for Madoff because JPMC’s corporate culture values profits, not legitimate profits.

151. In addition to the FOCUS reports that Defendants saw, they were also provided with BLMIS’ Annual Audited Reports, which contained information about income, cash flows,

changes in stockholders’, partners’, or sole proprietors’ equity, and changes in liabilities. Annual

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Audited Reports are public, except where the statement of financial condition is bound separately from the balance of the Annual Audited Report, in which case the balance is deemed confidential.

152. Chase ignored the fact that the activity in BLMIS’ 703 Account could not have been linked to a legitimate business, a fact that should have been identified by both Chase personnel and its automated monitoring system.

153. Chase was aware that BLMIS was operating at least two businesses: a Trading

Business and the IA Business. But the activity in the 703 Account did not match up with either business.

154. If Chase had believed that Madoff was using the 703 Account for market making,

Chase would have likely seen regular transactions with other brokerage firms with which Madoff was trading. If Madoff had been using the 703 Account for the IA Business, Chase would have seen billions of dollars leaving the 703 Account and going to purchase stocks and equities, and corresponding multi-billion dollar inflows as Madoff sold those securities. In the interim, Chase should have seen tens of billions of dollars—nearly all of the IA Business’s assets under management—moved into T-bills, as that was part of BLMIS’ purported investment strategy.

155. Instead, what Chase saw was massive outflows of money that were in no way linked to customer accounts or stock and options trading. Money came into the 703 Account as customers invested additional funds with Madoff and later BLMIS. A large amount of money then went directly back out to customers in the form of redemptions. Any balance remaining in the 703 Account was invested in short-term securities such as overnight sweeps, commercial paper, and certificates of deposit.

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156. Chase also saw regular account activity that would have been suspicious regardless of the type of business Chase thought Madoff was running. The 2000 OCC

BSA/AML Handbook identified numerous “red flags” that financial institutions needed to consider as part of their transaction monitoring procedures, including: (a) unexplained repetitive or unusual patterns of activity; (b) frequent large dollar transactions without corresponding explanations as to how those funds would be utilized; (c) spikes in customer activity with little or no explanation; and (d) wire activity with offshore banking centers or financial secrecy havens.

157. The 703 Account repeatedly exhibited these textbook “red flags” and high risk activities. For example, Madoff frequently engaged in repeated transactions with the same parties, often on the same days, with no obvious purpose.

158. The 703 Account reflected a pattern of large dollar transactions. Between 1998 and 2008, Madoff transferred nearly $84 billion out of the 703 Account to just four customers.

These transactions represented over 75% of the wires and checks that flowed out of the 703

Account to BLMIS customers. It also was typical for Madoff, through the 703 Account, to enter into individual transactions with the BLMIS feeder funds for hundreds of millions of dollars.

159. In addition, much of this account activity was facially illegal, such as the Norman

Levy round-trip transactions, which were not disclosed in the FOCUS reports.

160. The 703 Account showed occasional spikes in overall activity, which should have prompted further investigation by Chase. Not only did JPMC deliberately conceal from law enforcement authorities the illegal $100 billion of round-trip transactions between Norman Levy and Madoff but, shortly before the beginning of the credit crisis, over the period beginning in the first quarter of 2006, and ending in the first quarter of 2007, there was a significant increase in the total dollar amount transacted in the 703 Account. This increase in activity included a

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significant increase not only in third-party wires but also in book transfer activity. During this period, the average dollar amount of each transaction increased by over $60 million, from $17 million to $78 million.

161. Through the 703 Account, Madoff frequently engaged in transactions with high- risk, offshore entities. For example, between 2004 and 2008, the 703 Account’s international wire transfers with high- and medium-risk jurisdictions accounted for 83% of the total dollar value of international wire transfers.

162. There was also a downward spike in activity between the 703 Account and Levy’s account at the Private Bank after December 2001. In December 2001 alone, BLMIS engaged in approximately $6.8 billion worth of transactions with Levy. Shortly thereafter, Levy’s activity with the 703 Account decreased dramatically (presumably because of the enactment of the

Patriot Act which imposed additional monitoring policies on banks).

163. Incredible spikes in the 703 Account’s overall activity were accompanied by incredible spikes in offshore activity as well. Between 2004 and 2008, the dollar amount and volume of the 703 Account’s international wire transfers with high and medium risk jurisdictions increased 83% and 67%, respectively.

164. Many transactions in the 703 Account involved hand-written checks totaling hundreds of millions of dollars in a single day. This is not only unusual on its face, but it is particularly unusual given that BLMIS would issue multiple checks on the same day to the same customer. The counterparties to many of these checks were both BLMIS customers and JPMC private banking customers. While private banking generates lucrative fees for JPMC, it is a high-risk activity requiring strict scrutiny by JPMC because private banking has frequently served as a vehicle for money laundering. Thus, when JPMC saw billions of dollars of transfers

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between the 703 Account and accounts of other JPMC Private Bank customers, JPMC was in a unique position to monitor, investigate, and expose any criminal conduct. Yet it did nothing.

165. This activity should have prompted a check-kiting investigation, which undoubtedly would have revealed more suspicious behavior.

JPMC Knew the FOCUS Reports Were False.

166. JPMC was able, by observing the activity in the 703 Account, to know that it was inconsistent with the IA Business. JPMC handled the tens of billions of dollars of checks from

Madoff and BLMIS customers that were deposited into the 703 Account. JPMC knew that the

IA Business was purportedly purchasing securities for its customers. Yet, JPMC knew that the funds were not being used to purchase securities.

167. Furthermore, in 2006, when Equity Exotics began working with Richard Cassa and the Broker/Dealer Group to conduct due diligence on Madoff and BLMIS feeder funds,

Equity Exotics requested BLMIS FOCUS Reports as part of the due diligence they conducted.

168. James Coffman specifically suggested that his team review the FOCUS Reports, stating in February 2006 that Chase “should assess quality and detail of regulatory FOCUS reports from the firm. They are not necessarily audited, but we derive comfort knowing that regulatory reports are presented to and reviewed by SEC and exchanges, and firms can be penalized significantly if statements prove to be fraudulent or inaccurate.”

169. In March 2006, Coffman stated again that Chase should scan the FOCUS Reports to ensure that BLMIS was not “another possible Refco” [a 2005 Ponzi scheme].

170. The BLMIS FOCUS reports in Chase’s possession revealed numerous inconsistencies and irregularities that alerted Chase to Madoff’s fraud, including: (1) failure to disclose the Norman Levy transactions; (2) substantial under-reported cash positions in BLMIS’ accounts at Chase; (3) failure to disclose a $95 million loan from Chase to BLMIS and the

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collateral for the loan; (4) failure to report collateral for the $95 million Chase loan; (5) failure to list any commission revenue for BLMIS prior to September 2006, which was suspicious given that BLMIS was supposedly the broker on its investment adviser accounts; (6) absence of activity that would be expected of a broker of investment adviser accounts; and (7) failure to report financial information demonstrating customer activity such as receivables from customers or payables to customers.

171. The FOCUS Reports and Annual Audited Reports in Chase’s possession did not reflect activity that would be expected of a broker to its investment adviser accounts. BLMIS’

FOCUS Reports and Annual Audited Reports did not include: (a) customer receivables, such as margin accounts; (b) customer payables, such as positive cash balances held by BLMIS on behalf of customers; or (c) a computation for reserve requirements for customer activity as required by the SEC under Rule 15c3-3, all of which would be reported by a broker/dealer with managed investment accounts. The fact that BLMIS’ financial reporting was entirely inconsistent with the business in which it was purportedly engaged was readily apparent to Chase as a result of the FOCUS Reports, and should have been reviewed and investigated by Chase as part of its ongoing KYC duties.

172. For example, the December 2005 FOCUS Report had no amounts recorded under the captions “Receivables from customers” and “Payable to customers.” In addition, the credit and debit balance amounts in customer security accounts that form the basis for the computation for the Rule 15c3-3 reserve requirement were left blank.

173. The failure to report financial information demonstrating customer activity was not isolated to the December 2005 FOCUS Report. None of the FOCUS Reports and Annual

Audited Reports in Chase’s possession—at least 15 in total—included customer receivables or

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customer payables, and none included customer account balances in their computations for reserve requirements.

174. The FOCUS Reports were glaringly misleading – a fact even obvious to others reviewing them who did not have the benefit of Chase’s inside information about BLMIS. For example, shortly after Madoff’s arrest, Robert Rosenkranz of Acorn Partners (“Acorn”), a fund of funds manager and an investment adviser to high net worth individuals, reflected in an email that Acorn had performed due diligence on Madoff and concluded “that fraudulent activity was highly likely.” Specifically, the email stated that Acorn “reviewed the [BLMIS] audit report . . . which showed no evidence of customer activity whatsoever, neither accounts payables to or accounts receivables from customers.”

175. Acorn succinctly described the indicia of fraud that led it to conclude years prior that Madoff was a fraud.

We had considered investing in a Madoff managed account, and decided to pass for reasons that give a useful insight into our due diligence process.

First, we ascertained that the description of the strategy (purchase of large cap stocks versus sale of out of the money calls) appeared to be inconsistent with the pattern of returns in the track record, which showed no monthly losses.

Second, we persuaded a Madoff investor to share with us several months of his account statements with Madoff. These revealed a pattern of purchases at or close to daily lows and sales at or close to daily highs, which is virtually impossible to achieve. Moreover, the trading volumes reflected in the account (projected to reflect his account’s share [of] Madoffs purported assets under management at the time) were vastly in excess of actually reported trading volumes.

Third, we noted that Madoff operated through managed accounts, rather than by setting up a hedge fund of his own. That was suspicious inasmuch as hedge fund fees are typically much higher than the brokerage commissions Madoff was meant to be charging.

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We suspected the requirement for annual hedge fund audits was the reason he wanted to avoid that approach. We knew that when his clients are audited, their auditors simply look at the account statements and transaction reports generated by the brokerage firm; they don’t investigate the books of the brokerage firm itself.

Fourth, although brokerage firms are required to provide annual audit reports, the investor appeared not to have received any. With considerable perseverance, we obtained audit reports filed with the SEC, which were prepared by an utterly obscure accounting firm located in Rockland County New York.

Fifth, we reviewed the audit report itself, which showed no evidence of customer activity whatsoever, neither accounts payables to or accounts receivable from customers. They appeared to be the reports of a market maker, not of a firm that at the time was meant to have some $20 billion of customer accounts.

Taken together, these were not merely warning lights, but a smoking gun. The only plausible explanation we could conceive was that the account statements and trade confirmations were not bona fide but were generated as part of some sort of fraudulent or improper activity.

176. All the information flagged by Acorn was known by or available to Chase through proper, independent, and reasonable due diligence. Moreover, Chase had access to

additional information not known to Acorn.

177. Defendants ignored all of this information in order to enrich themselves at the expense of innocent investors.

BLMIS’ Relationship with Bear Stearns

178. Madoff was close friends with Aldo Parcesepe, a senior managing director and the head of Over-the-Counter and NASDAQ market maker trading at Bear Stearns. Parcesepe’s trading desk regularly traded with BLMIS. 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 BLMIS’ Chief Compliance Officer, served together with Parcesepe on NSX’s Board.

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Madoff, either directly or through BLMIS, owned 10% of NSX. BLMIS’ and Bear Stearns’ market-making business regularly traded through NSX.

179. Under Parcesepe’s guidance, Bear Stearns built a close business relationship with

Madoff. Brokers who traded at Bear Stearns used the firm’s automated equity order system to buy and sell stocks. The broker entered the stock symbol and the amount of shares he wanted to trade and the system was supposed to find the best counterparty trade from among the many market maker broker/dealers that traded with Bear Stearns. For every trade for a NASDAQ stock, however, the system automatically defaulted to BLMIS as the market maker. This was an unusual accommodation and Madoff paid Bear Stearns substantial fees for the default placement on the equity order system.

180. From 2000 to 2008, Bear Stearns’ approximately 400 brokers and traders all used this same system and all their trades defaulted to BLMIS for securities listed on the NASDAQ.

This provided a huge source of revenue to BLMIS, and Bear Stearns was BLMIS’ largest counter-party for market making trades. This system remained in place at Bear Stearns after

JPMC acquired it in March 2008, and continued until BLMIS’ demise on December 11, 2008.

JPMC’s Knowledge that Madoff was a Fiduciary

181. Madoff opened the 703 Account at Chemical Bank in 1986. Chemical Bank went through a series of mergers and acquisitions, and ultimately became Chase. As the bank went through these transitions, Madoff’s accounts stayed with it.

182. At all relevant times, JPMC knew that the 703 Account held the money of customers who had entrusted it to Madoff/BLMIS as a fiduciary, holding funds impressed with a trust, and that Madoff/BLMIS owed fiduciary obligations to the BLMIS customers.

183. At all relevant times, JPMC knew that Madoff/BLMIS were breaching their fiduciary obligations to their customers.

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184. At all relevant times, JPMC knew that the money in the 703 Account was held for investment advisory clients who were beneficiaries of a relationship of high trust and confidence owed to them by Madoff directly. Many of these customers were trustees and fiduciaries in their own right, who delegated their own duties to Madoff by entrusting money to him to manage in his full discretion. The Defendants knew this because the checks deposited into the 703 Account were often drawn on the accounts of trustees and fiduciaries, including foundations and charities.

Indeed, it was a matter of public record that Madoff served as a trustee for retirement accounts, pension plans and trusts. (See Internal Revenue Bulletin, 2005-37, List of Nonbank Trustees and

Custodians, Sep. 12, 2004, available at http://www.irs.gov/irb/2005-37 IRB/ar15.html.). As

Defendants’ officers and employees knew, in addition to his discretionary IA usiness, one of

Madoff’s primary business activities, which he provided for expressly and at length in BLMIS’

operating agreement, was the exercise of fiduciary powers as a trustee or custodian for retirement

plans, and that hundreds of trusts, retirement and pension plans, foundations, partnerships and

estates entrusted their money to the 703 Account.

185. From at least 1990 on, Madoff had all money received from IA Business customers deposited into accounts he held at Chase in Manhattan and in a Chase branch in

Delaware. As Madoff’s business and reputation grew, and as the scope of his embezzlement scheme expanded, the deposits in the Chase accounts swelled. By 2006, BLMIS had billions of dollars in cash on deposit at JPMC. These were demand deposits, meaning that JPMC had full use of the funds until Madoff withdrew them.

JPMC’s Criminal Enterprise

186. JPMorgan Chase operates six business segments: Investment Banking,

Commercial Banking, Treasury & Security Services, Asset Management, Retail Financial

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Services and Card Services. At least two of these six business segments, Investment Banking and Asset Management, played a role in JPMC’s relationship with Madoff and BLMIS.

187. Investment Banking. JPMC’s Investment Bank services corporations, financial institutions, governments and institutional customers in the areas of corporate strategy and structuring, capital-raising, risk management, market making, prime brokerage and research. The

Investment Bank was integral to fostering the relationship between JPMC and BLMIS. Multiple divisions within the Investment Bank were responsible for servicing and maintaining the 703

Account, structuring and issuing products related to BLMIS feeder funds, and assessing both the market risk and credit risks associated with BLMIS and BLMIS feeder funds.

188. Asset Management. Asset Management provides wealth management services to institutions, high net worth individuals and retail customers. JPMC’s Private Bank operates through the Asset Management business segment. Some of the Plaintiffs were clients of Assest

Management during the period of their BLMIS investments.

189. Equity Exotics & Hybrids Desk. The Equity Exotics & Hybrids Desk was the division within JPMC’s Investment Bank that was primarily responsible for structuring and issuing products related to BLMIS feeder funds. An “exotic” is any investment that is more complicated than simply buying a basket of stocks. Equity Exotics operates primarily out of

JPMC’s London office and its members are employed by JPM Securities (UK).

190. Jonathan “Bobby” Magee ran Equity Exotics during 2007 and 2008, when the group was structuring and issuing products related to BLMIS feeder funds. Andrea De Zordo,

Neil McCormick and Dimitrios Nikolakopoulos all worked at Equity Exotics under Magee’s leadership.

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191. Financial Institutions Group and Broker/Dealer Group. JPMC’s Financial

Institutions Group (“FIG”) is a division of the Investment Bank responsible for servicing banks, insurance companies, financial companies and broker/dealers. The Broker/Dealer Group is a subdivision of FIG that works out of JPMC’s New York City offices and is responsible for managing the Investment Bank’s relationship with clients that are broker/dealers. The

Broker/Dealer Group was responsible for managing the 703 Account and for providing credit to

BLMIS.

192. Jane Buyers-Russo was head of the Broker/Dealer Group until her departure from

JPMC in 2010.

193. Equity Derivatives Group. JPMC’s Equity Derivatives Group (“EDG”) provides equity financing and structured financing for its customers, including loans, exchange- traded funds, swaps, synthetic futures and OTC options. EDG is part of the Investment Bank.

194. Luke Dixon, a former JPMC employee, was an Executive Director in EDG and worked out of JPMC’s London office. Scott Palmer worked alongside Dixon in EDG in London.

Dixon and Palmer conducted due diligence on the BLMIS feeder funds in 2008.

195. Risk Management Division. The Risk Management Division consists of approximately 940 individuals that manage both market risk and credit risk at the Investment

Bank. The market risk subdivision assesses the riskiness of certain fund strategies, financial products and securities, and assures that JPMC’s financial exposures stay within internal risk guidelines. The Risk Management Division, headed by John Hogan, managed the creditworthiness of transaction counterparties.

196. Brian Sankey was Chief Credit Officer and Deputy Chief Risk Officer, responsible for all Credit Risk Management activities. Sankey reported directly to Hogan.

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Marco Bischof and James Coffman also worked in Credit Risk Management. Andrew Cox worked out of London in Global Credit Risk and Client Operations for Europe, the Middle East and Africa.

197. Richard Wise and Chen Yang worked in Market Risk Management in New York

City. Wise was the Head of Market Risk in the Equity Division, and Yang reported to Wise.

198. These individuals, along with Hogan, reviewed and approved JPMC’s structured products related to the BLMIS feeder funds.

199. Other key individuals at JPMC included Matt Zames, who headed Interest Rate

Trading, Global Foreign Exchange, Public Finance, Global Mortgages, Tax-Oriented

Investments and Global Fixed Income at JPMC’s Investment Bank. Zames worked in JPMC’s

New York City offices. In 2007, Zames told Hogan that Madoff was rumored to be operating a

Ponzi scheme.

200. Carlos Hernandez was the Head of Global Equities at JPMC’s Investment Bank.

Hernandez worked in JPMC’s New York City offices, but ran JPMC’s equity divisions in a number of different countries. Hernandez was involved in reviewing and approving the proposal regarding JPMC’s structured products related to BLMIS feeder funds.

201. Alain Krueger worked in the Structured Investments Distribution Marketing division of JPMC’s Investment Bank. Krueger worked out of JPMC’s London office. He was the JPMC representative who spoke to Aurelia Finance regarding JPMC’s decision to redeem from the BLMIS feeder funds.

202. Michael Cembalest was a Chief Investment Officer at J.P. Morgan Global Wealth

Management, which is part of the Private Bank. Cembalest worked out of JPMC’s New York

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City offices. Cembalest’s group conducted due diligence on BLMIS and, after seeing all of the red flags, chose not to invest with any BLMIS feeder funds.

203. Hedge Fund Underwriting Committee. The Hedge Fund Underwriting

Committee (“HFUC”) was a committee at JPMC comprised of senior business heads and bankers, including individuals such as the Chief Risk Officer and the Heads of Equities,

Syndicated Leveraged Finance, Sales, and Hedge Funds. The purpose of the HFUC was to ensure all senior officers who dealt with hedge funds were comfortable with proposals relating to hedge funds. The HFUC was presented with Equity Exotic’s proposal to structure and issue products around the BLMIS feeder funds. The HFUC has since dissolved.

204. Investment Bank Risk Committee. JPMC’s Investment Bank Risk Committee

(“IBRC”) met weekly to discuss the universe of risk within the Investment Bank. The IBRC discussed activity in the markets, policy issues, operational issues, legal issues, and the

Investment Bank’s reputation. IBRC also received and reviewed the proposal by Equity Exotics.

BLMIS Feeder Funds and Other Players

205. Rafale Partners. Rafale Partners, Inc. (“Rafale Partners”) was a sub-feeder fund that invested in BLMIS. Equity Exotics’s proposal included an investment in Rafale Partners, but that investment was never approved.

206. Fairfield Sentry and Fairfield Sigma. Both Fairfield Sentry Limited (“Fairfield

Sentry”) and Fairfield Sigma Limited (“Fairfield Sigma”) were funds run by the Fairfield

Greenwich Group (“FGG”). Fairfield Sentry was among BLMIS’ largest feeder funds. Fairfield

Sigma invested all of its funds in Fairfield Sentry. JPMC invested in both of these funds in

hedging its structured product exposure and redeemed its interest in both funds in the month

before Madoff was arrested.

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207. Herald. Herald Fund s.p.c. (“Herald”) was a BLMIS feeder fund managed by

Herald Asset Management. Day-to-day management was delegated under a service agreement to

Bank Medici AG (“Bank Medici”). The founder and majority shareholder of Bank Medici was

Sonja Kohn, who was a longtime friend of Madoff. JPMC purchased an interest in Herald as part of its hedging strategy and redeemed that interest before Madoff’s arrest.

208. Lagoon. Lagoon Trust Limited (“Lagoon”) was another fund that fed money to

BLMIS. Hermes Asset Management Limited (“Hermes”) managed Lagoon. JPMC also invested in Lagoon to hedge its exposure to the fund’s returns.

209. Aurelia. Aurelia Fund Management Limited (“Aurelia Fund”) is a company incorporated in Bermuda that owned 25% of Hermes and provided Hermes with necessary office facilities, equipment and personnel to enable Hermes to carry out its investment management function. Aurelia Finance, the Swiss company that purchased and distributed JPMC’s structured products, is Aurelia Fund’s parent company (collectively “Aurelia”).

210. Rye Funds and Tremont. Rye Select Broad Market Portfolio Limited and Rye

Select Broad Market Fund (together the “Rye Funds”) were two funds that fed money to BLMIS and were managed by Rye Investment Management, a division of Tremont Partners Inc.

(“Tremont”). Equity Exotics requested approval for issuing hundreds of millions of dollars’ worth of products structured around the Rye Funds. That transaction was never approved.

211. Thema. Thema International Fund plc (“Thema”) was a BLMIS feeder fund

managed by Bank Medici. Equity Exotics’s proposal included an investment in Thema, but the

investment was not approved.

JPMC’s Structured Products and Note Program

212. Despite its observation of the illegal activities of Levy and Madoff from the early

1990’s on, in 2006, JPMC began considering various BLMIS feeder funds for the purpose of

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structuring and issuing its own financial products so that it could make money based on those funds.

213. In the course of structuring these products, JPMC performed due diligence on

BLMIS using information it obtained from those responsible at JPMC for the 703 Account, as

well as information provided by various BLMIS feeder funds. Thus, in addition to its knowledge

of the illegal activities of Levy and Madoff, at some point between 2006 and 2007, if not before,

JPMC unquestionably knew that:

™ BLMIS’ returns were consistently too good to be true; Madoff would not allow

transparency into his strategy;

™ JPMC, one of the world’s leading and most knowledgeable derivatives dealers,

could not identify, and Madoff refused to provide information on, his purported

OTC counterparties;

™ BLMIS’ auditor was a small, unknown firm; Madoff and/or BLMIS had a conflict

of interest by acting as the clearing broker, sub-custodian and sub-investment

adviser; feeder-fund administrators could not reconcile the daily position numbers

they got from Madoff with any third-party source to confirm their accuracy; and

™ there was public speculation that Madoff operated illegally.

214. JPMC started by gathering information on Fairfield Sentry and Lagoon. By

February of 2006, JPMC had already visited FGG in connection with due diligence. After the visit, Chen Yang wrote:

I do have a few concerns and questions: 1) All trades are generated by Madoff’s black box trading model and executed by Madoff, It’s not clear whether [FGG] has any discretion or control over the autopilot trading program…. 2) Is it possible to get some clarification as to how the fund made money during times of market distress?... how did they manage to get better than 3M T-

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Bill returns?... For example, from April to September 2002, the S&P 100 Index is down 30%, cash yielded 1%, and the Fund was able to generate over 6% returns.

215. Yang was told during the same due diligence visit that FGG would not provide a copy of Fairfield Sentry’s trading agreement with BLMIS. Yang therefore relied solely on an oral description of the investment guidelines and restrictions FGG had agreed upon contractually with BLMIS.

216. Andrea De Zordo and Marco Bischof noted similar concerns with respect to

Lagoon, Hermes and Aurelia. Bischof was surprised by the absence of a proper legal relationship between BLMIS and Hermes, and wrote to De Zordo on November 11, 2006: “What continues to surprise me is the fact that after their 14 years in the business and $1.5bn AUM

[$1.5 billion in assets under management], we seem to be the first ‘investor’ spotting this lack of documentation around Lagoon and it’s [sic] upstream/downstream relationships.” De Zordo responded that the key question was whether JPMC as a firm should even be doing business with

Hermes and Aurelia.

217. About a week later, Bischof followed up with De Zordo after a call with Aurelia.

He wrote: “They have position level transparency once a month with 1 week delay, but don’t run risk analysis and don’t have the know-how of how to do this….It doesn’t look pretty.”

218. JPMC already knew the identity of BLMIS’ auditor, Friehling, and had known the identity of the auditor for years. But it was not until early 2006 that JPMC performed even minimal due diligence on Friehling. Coffman noted that “a quick check found that they

[Friehling] are not registerred [sic] with the Public Company Accounting Oversight Board, nor are they subject to peer reviews from the American Institute of Certified Public Accountants.

Additionally, they have no website to provide background on their organization.”

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219. Despite their suspicions, by early 2007, JPMC was exploring deals with other

BLMIS feeder funds – the Rye Funds and Thema.

220. Indeed, JPMC was eager to begin issuing structured products on BLMIS feeder funds. Anxious to make a quick buck, after conducting only preliminary due diligence on these funds and documenting concerns and red flags related to BLMIS and the Rye Funds and Thema,

JPMC started structuring and issuing products tied to those feeder funds’ returns.

221. By February 2007, JPMC already had over $65 million in BLMIS-related products in the pipeline. These products included a €5 million trade on Fairfield Sigma, two $25 million trades tied to Fairfield Sentry, and a $10 million trade on Thema.

222. These products were developed by Equity Exotics. The majority of these products were structured to allow customers to collect returns tied to the returns of the BLMIS feeder funds. Customers typically leveraged their investments to reap greater rewards from a smaller investment. For example, in February 2007, JPMC was in the process of structuring a three-times leveraged certificate on Fairfield Sigma that would use borrowed funds to increase the amount invested. An investor who purchased a three-times leveraged certificate would effectively invest $100, and then JPMC would lend an additional $200 and invest the entire $300 in the agreed-upon BLMIS feeder fund. This allowed the individual customers to earn returns as if they had actually invested $300, despite only providing $100 of their own money.

223. JPMC continued to structure additional BLMIS-related products during the

Spring of 2007. In March 2007, JPMC personnel were determining terms for deals on Fairfield

Sentry, Fairfield Sigma, Herald, the Rye Funds and Thema.

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224. On March 9, 2007, the BLMIS deals JPMC had in its pipeline totaled almost $100 million. And by March 19, 2007, JPMC was considering another deal with the Rye Funds that would have increased the value of JPMC’s BLMIS-related products by $200 - $300 million.

Disturbing Questions About Madoff

225. In 2007, with hundreds of millions of dollars in deals ready to close, JPMC needed to get more comfortable with its exposure to Madoff. JPMC needed to conduct additional due diligence on each of these BLMIS feeder funds and, most importantly, on BLMIS directly. On February 15, 2007, James Coffman wrote, “I would classify [BLMIS feeder funds] as a single fund, and therefore assume it falls under the $100mm limit …. Without actually getting to do due diligence on Madoff, I don’t think we should consider going above that limit.”

226. Equity Exotics started by looking within its own company. Madoff and his family had maintained numerous accounts at JPMC or its predecessors since as far back as 1986. As

Equity Exotics was in the midst of structuring hundreds of millions of dollars of BLMIS-related products, it contacted BLMIS’ Client Relationship Manager in the Broker/Dealer Group,

Defendant Richard Cassa. Cassa offered to arrange a conference call between representatives of the Investment Bank and Madoff. On March 30, 2007, Cassa and members of JPMC’s Risk

Management Division spoke with Madoff.

227. Even though the products JPMC was structuring would have led to increased investments in the BLMIS feeder funds, and therefore increased investments through BLMIS,

Madoff explained that he disliked banks structuring products on his strategyIn particular, he made clear that he was not willing to engage in “full due diligence.”

228. Having learned relatively little from speaking to Madoff, Equity Exotics reached out to the BLMIS feeder funds themselves to obtain additional information about the funds and

BLMIS.

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229. JPMC began its investigation with Tremont. On April 11, 2007, representatives of JPMC met with Tremont’s Chief Executive Officer, Bob Schulman, to discuss the Rye Funds and BLMIS. Shortly after the meeting, JPMC sent Tremont a list of additional questions regarding BLMIS. A number of these questions related to the counterparties to BLMIS’ OTC options trading. JPMC asked whether BLMIS entered into the trading agreements on behalf of

Tremont or in BLMIS’ own name, and whether Tremont knew who the counterparties were.

JPMC received a response that required more due diligence. Tremont responded that, even though Tremont was the party entering into these agreements with the options counterparties, it did not know who the counterparties were. JPMC never verified any of Tremont’s responses with third parties, or questioned the source of Tremont’s information about the counterparties.

230. Despite the limited information obtained from Tremont, Equity Exotics put together a “Transaction Approval Package.” In addition to seeking approval for a number of different transactions involving the Rye Funds, the proposal summarized JPMC’s due diligence.

“We will be receiving full transparency on the program via trade statements from BLM, albeit on a delayed basis, and will be able to verify our risk analysis on an ongoing basis,” Equity Exotics claimed, and “[t]he liquidity of the underlying portfolio, even assuming close to $15 billion in

‘AUM’ [assets under management] at Madoff, should be adequate to fully unwind the program without catastrophic slippage.” The risk involved was noted and quickly dismissed based on nothing more than Madoff s reputation:

Although SIPC, SEC and NASD [National Association of Securities Dealers] regulation on segregated customer accounts should protect us from financial distress at BLM, it would not necessarily protect us from wholesale malfeasance or fraud. That said, BLM has had a successful operating history for nearly 50 years and Bernie Madoff is [a] well regarded figure in this industry.

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231. JPMC received similar responses to questions posed to Herald regarding counterparties: (i) the trades were between the fund and the counterparty, not between BLMIS and the counterparty; (ii) the fund received collateral from all counterparties “except from very few high quality parties”; and (iii) “the fund trades with say 10+names at any moment in time,” but Madoff was not willing to disclose the actual names of the counterparties.

232. The responses of Tremont and Herald were particularly alarming in view of the fact that Madoff was purportedly entering into OTC agreements with the options counterparties on behalf of the funds. Tremont and Herald, and all of the other BLMIS feeder funds, thus were supposedly entering into contracts with third parties whom they could not even identify, much less assess counterparty creditworthiness.

233. Again, despite alarming answers from Herald, Equity Exotics put together another

“Transaction Approval Package” entitled “Bank Medici AG – an access provider into the Bernie

Madoff strategy.” As key transaction strengths, Equity Exotics listed: “multiple layers of oversight – although relying solely on Madoff for position level information, independent weekly and monthly valuations are carried out by Bank Medici and the third party

Administrator,” and “[p]ersonal relationship with Sonja Kohn,” “[a]ccess to as secretive a business as Madoff’s, and the loyalty he presumably he [sic] feels towards her adds significant

comfort.” Key transaction weaknesses included that “customers, sub-Custodians, auditors etc.

rely solely on Madoff produced statements and have no real way of verifying positions at Madoff

itself,” and “[f]raud – given the significant reliance on BLM for verification of assets held, and

no real way to confirm those valuations, fraud presents a material risk.”

234. JPMC representatives also visited Rafale Partners and Bank Medici and were able to review BLMIS feeder funds’ customer, option and trading agreements. Through that review,

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JPMC learned that only certain feeder funds had agreements that explained BLMIS’ trading strategy. JPMC suggested that the BLMIS feeder funds may be hesitant to press for more details because they did “not want to upset the relationship with Madoff.”

235. JPMC did not put its securities activities on hold to conduct due diligence on the funds. Rather, at the same time it was conducting these investigations, Equity Exotics was structuring additional BLMIS-related products with little to no regard for the disturbing information learned through its due diligence.

236. Furthermore, despite these indicia of criminal conduct, in June 2007, JPMC proceeded to prepare a $600 million proposal for additional investments in the Rye Funds and a

$225 million proposal for investments in Herald.

237. Following these proposals, Coffman was anticipating “a major head on collision with the business that wants to do an infinite amount of this activity with much less oversight.”

A full “collision” did not seem to occur. Concerns about potential misconduct at BLMIS tempered only the amount that JPMC was willing to risk with BLMIS feeder funds, but not the underlying decision to invest in those funds.

The Proposed $1 Billion Investment in BLMIS Products

238. Undeterred by the results of its cursory due diligence inquiries, in June 2007,

Equity Exotics requested approval from the HFUC of “an overall BLM Strategy risk limit” that would carry a maximum potential exposure of $1.32 billion. This proposal included products ranging from $33 million to $667 million with eight different BLMIS feeder funds and sub- feeder funds, including the Rye Funds, Thema, Herald, Fairfield Sentry, Fairfield Sigma,

Lagoon, and Rafale Partners. The majority of the products were anticipated to come from transactions associated with the Rye Funds. Despite asking to structure $667 million worth of products around the Rye Funds, Equity Exotics explained in the proposal that Tremont had “no

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internal risk system in place to aggregate positions daily.” Equity Exotics also stated “we were unable to validate how this manual process [of checking trades] is performed, but feel reasonably confident that it is effective in terms of capturing major discrepancies.”

239. Equity Exotics was not seeking approval to begin issuing products on BLMIS

feeder funds. Equity Exotics was asking for permission to continue issuing these products in

ever larger amounts. By the time Equity Exotics submitted this proposal, it had already executed

over $130 million in trades with Fairfield Sentry, Fairfield Sigma, and Lagoon. With the June

2007 proposal, Equity Exotics was requesting approval to issue an additional billion dollars of

structured products, an amount the group acknowledged was in “significant excess of both

individual as well as aggregate single manager limits” for hedge fund investments at JPMC.

240. The proposal was submitted with a certain sense of urgency. At the time it was submitted, Equity Exotics had already arranged for $540 million worth of transactions to close at the end of June 2007.

241. On June 15, 2007, the HFUC met to consider the proposal. On the very same day,

Hogan shared with his colleagues what he had learned from Zames, that it was well-known that

Madoff was operating a Ponzi scheme: “For whatever its worth, I am sitting at lunch with Matt

Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme– he said if we Google the guy we can see the articles for ourselves – Pls do that and let us know what you find.”

242. Hogan who, of course, knew from the early 1990’s that Madoff was a crook, warned “you will recall that Refco was also regulated by the same crowd [SEC, NYSE, NASD] and there was noise about them for years before it was discovered to be rotten to the core.

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Hopefully this is not the case here but given Matt’s view, I think we owe it to ourselves to investigate further.”

243. Nevertheless, Equity Exotics seemed eager to receive approval and the further research on Madoff appears to have been limited to a Google search with no follow-up. Buyers-

Russo asked one of her colleagues to “please have one of the juniors look into this rumor about

Madoff that Hogan refers to below.” The analyst forwarded an article about a proposed change in SEC regulations that would eliminate a loophole in the regulations governing broker/dealers.

He speculated the loophole allowed broker/dealers to run “a ‘[P]onzi’ scheme of sorts.” But

Zames told Hernandez that he believed his recollection was of a Wall Street Journal article from

2002 and therefore eliminated the possibility that the analyst’s explanation based on a recently- proposed regulatory change was correct.

244. Again, Hogan cautioned “Mr. Madoff will not allow us to conduct any due diligence on him directly and we are forced to rely on the diligence of third parties…. I told

Bobby [Magee] and Neil [McCormick] we don’t do $1 bio ‘trust me’ deals and we need to do our own due diligence on Madoff or this wasn’t going to happen.” But the only further

“diligence” that appears to have been done was a phone call between Hogan and Madoff, which reassured Hogan enough to permit $250 million worth of “trust me” deals.

245. When asked how he made the decision to approve $250 million of exposure to

BLMIS, Hogan explained that, in essence, he simply closed his eyes and guessed:

[T]here’s no math or magic around it – you know, a lot of what we do is more art than science, so I would like to tell you that I have prepared a model that told me 250 is the optimum number, but – you know, that’s not the way it works in reality, and so I just use my best judgment to come up with that number.

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The Investment Bank Ignored Clear Evidence of a Scam

246. For the remainder of 2007, Equity Exotics’s enthusiasm for BLMIS-related transactions remained strong despite uncovering additional evidence about Madoff, BLMIS, and

BLMIS feeder funds.

247. In August 2007, while analyzing information provided by Herald, De Zordo noted that despite T-bills rallying, “the move does not justify the magnitude of the gain that Bank

Medici is claiming.”

248. Equity Exotics also expressed skepticism about the information provided by

Fairfield, Lagoon, and Herald. In November 2007, De Zordo and Nikolakopoulos were organizing quarterly calls to funds to which JPMC had substantial exposure. These funds included Fairfield, Lagoon, and Herald. When arranging meetings with these funds’ managers,

Nikolakopoulos emphasized that they needed to meet with managers from all three funds in order to “assess what the returns where [sic] driven from and ensure we get a consistent answer from all three.”

249. Despite these concerns, JPMC remained committed to doing business with

Madoff –the potential upside reward for investing through Madoff was simply too good to pass up despite JPMC’s concerns of a Ponzi scheme and other misconduct.

250. In March 2008, Bear Steams’ share price began to drop precipitously and the company began suffering from an extreme liquidity crunch. Unable to borrow enough funds to save itself, Bear Stearns started looking for outside options. On March 13, 2008, Bear Stearns’

CEO contacted JPMC President, Jamie Dimon. By March 16, JPMC had entered into an agreement to purchase Bear Stearns. JPMC started integrating the two businesses almost immediately.

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251. The integration involved combining business units and risk exposures across

JPMC and Bear Stearns. In acquiring Bear Stearns, JPMC had significantly increased its hedge fund exposure. To bring hedge-fund exposure back within its internal limits, JPMC began to look for places to make cuts. This reduction process prompted JPMC to revisit and reconsider certain hedge-fund transactions, including its transactions involving BLMIS feeder funds.

252. By June 2008, JPMC had approximately $150 million invested in Herald. These were direct investments by JPMC in the fund, presumably to hedge the bank’s exposure on its structured products tied to Herald’s returns. When JPMC learned that its main contact at Bank

Medici, Andreas Pirkner, was departing, JPMC scheduled a meeting with Pirkner, his replacement, Andreas Schindler, and a handful of other individuals from Bank Medici. This meeting was crucial given JPMC’s ongoing struggle to get information from Bank Medici even with an established contact. The JPMC team, which included Scott Palmer and Luke Dixon, was sent to Vienna on July 7, 2008, to perform a “very thorough refresh” of its initial due diligence.

253. Following this meeting, JPMC downgraded Herald’s risk rating to the lowest rating of “5-E.” Palmer noticed aspects of Herald’s operation that caused him to direct JPMC to verify that Herald’s assets actually existed at BLMIS. In hopes of gaining more transparency on

Bank Medici and BLMIS, JPMC scheduled a follow-up meeting with Sonja Kohn for July 10,

2008.

254. The meeting with Kohn proved to be equally disappointing for JPMC. Following this meeting, JPMC affirmed Herald’s recently downgraded due diligence rating of 5-E. JPMC found that Kohn did not provide credible responses to a number of questions related to the managed accounts Bank Medici had with BLMIS. Given that Kohn was the only person at Bank

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Medici to have “any relationship of substance” with Madoff or BLMIS, it was troubling that she could not provide adequate responses to JPMC’s questions.

255. The lack of credible responses JPMC received from BLMIS feeder funds in 2008 was reminiscent of the answers JPMC received in 2007. The only difference between JPMC’s due-diligence efforts in 2007 and 2008 was that, in 2008, JPMC continued to investigate. But as it had the previous year, JPMC kept its findings a secret.

256. In September and October 2008, in light of its increased hedge-fund exposure in the wake of its acquisition of Bear Stearns and in view of the deteriorating economy, JPMC commenced an “exposure health check.” This health check required JPMC to conduct broad due diligence on all BLMIS feeder funds in which it had invested or on which it had structured products. Scott Palmer’s team contacted the managers of Lagoon, Hermes, Fairfield Sentry,

Fairfield Sigma, and Herald, as well as a number of fund custodians.

257. Despite its previous investments in BLMIS-related funds, JPMC now urgently requested the following information: (i) each BLMIS feeder fund’s net asset value, both at the end of the first quarter and as of the date of the request; (ii) any redemptions currently in the pipeline; (iii) whether the fund’s liquidity profile experienced any changes; (iv) whether the fund’s service providers experienced any changes or events, specifically at BLMIS; (v) whether

BLMIS experienced any changes or events; (vi) whether the account documents between BLMIS and its feeder funds had been modified in any way; and (vii) the percentage of fund assets represented by structured products. Anticipating that a number of the BLMIS feeder funds would be less than forthcoming with information, JPMC requested the BLMIS feeder funds’ availability for follow-up questions.

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258. JPMC was asking many of the same questions it had asked more than a year before, and, as before, JPMC received incomplete answers. The BLMIS feeder funds repeatedly found creative ways to dodge questions about their knowledge of Madoff and BLMIS. JPMC was only too willing to accept the dodge.

259. Thus, FGG evaded answering questions about counterparties by stating that the funds were currently in T-bills, so there were not (at that particular point in time) any counterparties.

260. When JPMC asked Bank Medici to provide risk reports in or around April 2008,

Kohn agreed to share the reports. Nearly four months later, however, Kohn had not provided the reports and claimed that the parties needed to sign a confidentiality agreement first. A confidentiality agreement was unnecessary, given that information from the risk reports would be communicated via JPMC’s “Measure Risk.” Measure Risk, a leading risk-and-quantitative- analytics provider to institutional hedge-fund customers, maintained confidentiality by only providing JPMC with summary exposure and risk statistics. The confidentiality attained by the use of Measure Risk was explained to Bank Medici when it initially agreed to provide risk reports.

261. This time the JPMC due-diligence team sought additional answers. The team met with Kohn and Amit Vijayvergiya, the Head of Risk Management at FGG, in October 2008.

Following those meetings, Palmer circulated notes to his colleagues summarizing his findings.

262. Palmer acknowledged: “Fairfield claims to have seen the 19th floor [where

Madoff executed his proprietary trading strategy] but judging from the lack of thoroughness of some of their other due diligence I am not entirely convinced that Madoff allowed them to actually enter the trading area.” When Palmer asked Vijayvergiya how BLMIS’ trade

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information was put into the order entry system, Vijayvergiya told Palmer that “he did not know and did not ask.” These answers by Vijayvergiya revealed that BLMIS feeder funds knew very little about Madoff’s operations and were extremely reluctant to push Madoff for answers.

263. This meeting also forced JPMC to acknowledge again the fact that none of the funds knew who the counterparties were to their own options contracts. They relied solely on

Madoff’s oral assertions that he dealt with 15-25 counterparties, that he strictly monitored the risk level of each counterparty, and that the counterparties posted collateral for the put options.

Indeed, Vijayvergiya openly admitted that “Madoff refused to disclose the list of counterparties.”

Vijayvergiya explained, “Madoff claimed that they did not want to disclose the list of counterparties because they are worried that if the list gets into the market that the counterparties would group together and either steal Madoff’s strategy or otherwise somehow work against

Madoff.” Kohn on the other hand, conceded that she had never even thought to ask Madoff who the counterparties were, and she was reluctant to ask him about it now.

264. JPMC was also reminded that BLMIS’ auditor was Friehling – information it had had for years as Madoff’s and BLMIS’ banker. Palmer noted that this was an “odd choice” and questioned whether such a small firm was even competent to conduct an audit of an investment firm with “$650m in shareholder capital.” Despite Palmer’s surprise, this was not the first time that JPMC had access to such information. In as early as 2006, for example, Coffman conducted due diligence on Friehling and, in October 2007, one of JPMC’s own customers had inquired about the identity of BLMIS’ auditor. JPMC conducted no investigation beyond learning the name of BLMIS’ auditor. And JPMC knew that Friehling was a three-person shop (and one of the three was retired or semi-retired) in a strip mall in Rockland County, New York – a truly odd

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choice for a multi-billion dollar investment enterprise and an indication of intentional misconduct.

265. Had JPMC followed up on these simple facts sooner and expressed its concerns to regulators, Madoff’s illegal activities would have been stopped sooner.

266. JPMC was again told that there was no independent process for confirming that the trades were executed or that the assets existed. BLMIS acted as the sub-advisor, sub- custodian, and broker/dealer to the BLMIS feeder funds. The “reconciliation” process that occurred between the funds’ actual custodians, the funds’ administrators, and the funds themselves could be described as follows: “Effectively all three parties receive a faxed confirmation from Madoff of the day’s positions/trades and enter them into their system. The reconciliation is thus effectively one of data entry integrity as there is no reconciliation of source

data to third parties.”

267. Palmer summarized his observations: “It’s almost a cult [Madoff] seems to have fostered.” Neither Kohn nor Vijayvergiya had been concerned by the lack of information

Madoff provided; rather, “they seem[ed] very defensive and almost scared of Madoff. They seem[ed] unwilling to ask him any difficult questions and seem[ed] to be considering his

‘interests’ before those of the customers.”

268. JPMC’s findings were especially troubling given that, earlier that month, in

October 2008, Tom Petters had been arrested under suspicion of operating a $3.5 billion Ponzi scheme. Dixon, in response to Palmer’s notes summarizing his meeting with Kohn and

Vijayvergiya, drew parallels between Petters and Madoff. He pointed out that they could not just rely on a long history and trust in an investment adviser, a mistake that customers with Petters

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were now regretting. In the face of the Petters fraud, Dixon suggested, “Let’s go see Friehling and Horowitz the next time we’re in NY . . . to see that the address isn’t a car wash at least.”

269. JPMC knew the critical questions to ask to avoid a situation like the Petters Ponzi scheme. It was just that JPMC waited until 2007 and 2008 to ask the right questions. By late

2008, JPMC admitted that “[t]he ‘DD’ done by all counterparties seems suspect.”

270. JPMC’s own due diligence in 2008 revealed: (i) lack of transparency; (ii) resistance on Madoff’s part to provide meaningful disclosure; (iii) involvement of Madoff’s family throughout BLMIS; (iv) lack of effective due diligence and monitoring by the BLMIS feeder funds; (v) fear of Madoff, which prevented customers from asking any serious questions as long as performance was strong; (vi) lack of an independent and competent auditor; and

(vii) unanswered questions regarding BLMIS’ trading, as no one outside of Madoff understood how it was done.

271. These red flags were the same red flags JPMC discovered in the early 1990’s when it observed illegal activity in the accounts of Norman Levy and Madoff. JPMC chose then to ignore the red flags, and instead continue to structure and issue products that facilitated an investment of approximately $250 million in BLMIS feeder funds.

272. Again faced with this overwhelming evidence of a scam, Palmer belatedly suggested that it was a mistake for JPMC to “rely[] on Madoff’s integrity (or Fairfield and

Medici’s belief in Madoff’s integrity) and the quality of the due diligence work (initial and on- going) done by the custodians … to ensure that the assets actually exist and are properly custodied.” In an effort to provide some level of comfort to himself and fellow JPMC employees, Palmer noted that “if some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”

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JPMC Quietly Removes All of Its Assets from the BLMIS Feeder Funds

273. In September 2008, a troubling conversation took place between Krueger and representatives of Aurelia Finance. JPMC had sold its structured products to Aurelia Finance, which in turn had sold the products to its clients. During the call, Krueger explained that JPMC was going to be redeeming from Lagoon. The Aurelia Finance representatives repeatedly opposed JPMC’s plan. At two points in the conversation, the Aurelia Finance representatives

threatened Krueger, referring to “Colombian friends” who could “cause havoc” and telling

Krueger “we know where to find you.”

274. As a result of this conversation, JPMC sent a document to the United Kingdom’s

Serious Organised Crime Agency (“SOCA”) conveying the substance of the threats. This document also revealed that JPMC knew Madoff was not operating a legitimate business.

275. In a letter to SOCA, JPMC’s Vice President for the United Kingdom, Rebecca

Smith, wrote:

Ultimately, the bank reached the same conclusion it had reached during its initial due diligence efforts in 2006 and 2007; JPMorgan was unable to obtain look through transparency at the Feeder Fund level, did not have access to the identities of the counterparties to Madoff’s OTC options, did not fully understand the relationship between the broker-dealer and the investment advisor, and noted the fact that the custodians did not actually hold the assets.

276. On or about October 10, 2008, JPMC submitted requests to redeem approximately

$13 million from Fairfield Sentry and €15 million from Fairfield Sigma. Later that month,

JPMC requested redemptions totaling $154 million from Herald and an additional £72 million from Fairfield Sigma.

277. JPMC also repeatedly rejected requests from clients to structure additional products tied to BLMIS during the Fall of 2008, each time relying on the fact that the funds at issue were invested with BLMIS.

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278. Following these redemptions, JPMC was careful not to discuss with third parties its redemptions from BLMIS-related products or its decision to cease any new involvement with

BLMIS. Instead, when approached by clients that had an interest in BLMIS-related products,

“[w]ithout disclosing too much, [JPMC] got rid of all the Madoff feeder[s]” from clients’ lists of potential investments.

279. On October 28, 2008, after JPMC had redeemed much of its BLMIS exposure, it sent a formal Suspicious Activity Report (“SAR”) to SOCA in the U.K. JPMC wrote:

JPMCB’s [an acronym for “JPMorgan Chase Bank”] concerns around Madoff Securities are based (1) on the investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true – meaning that it probably is; and (2) the lack of transparency around Madoff Securities’ trading techniques, the implementation of its investment strategy, and the identity of its OTC option counterparties; and (3) its unwillingness to provide helpful information. As a result, JPMCB has sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds. [Emphasis added.]

280. In November 2008, Dixon stated, “only limited information has been historically available on anything related to Madoff. We have done some work but this served only to reinforce the fact that we don’t have enough access to Madoff to render independent judgment.”

As a result, JPMC was attempting to divest itself of all of its BLMIS-related investments. In other words, JPMC knew Madoff was a thief/embezzler and quietly pulled out its money.

281. JPMC’s exit strategy was successful. By the time Madoff was arrested, JPMC had managed to redeem all but $35 million of its BLMIS feeder fund investments, due in large part to the fact that its request to redeem its shares of Lagoon in late November had not yet been satisfied.

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282. In redeeming its investments in the BLMIS-related funds, JPMC left itself fully exposed with regard to its structured products. JPMC was still required to pay its customers based on the returns generated by the BLMIS feeder funds, which were generating positive returns while the market was down. But for JPMC’s knowledge of Madoff’s scam, this move not only would have been counterintuitive, but economic insanity.

JPMC’s Active Complicity in Madoff’s and BLMIS’ Crimes

283. JPMC conducts a broad array of training programs for its personnel to assure their knowledge of, and compliance with, all applicable laws. The fact that JPMC turned a blind eye to all of Madoff’s and BLMIS’ crimes proves, beyond doubt, that JPMC’s failure to shut Madoff and BLMIS down was the result of a deliberate decision to provide an array of banking services to Madoff and BLMIS and to enhance JPMC’s profits every step of the way.

284. To do so, JPMC had to willfully ignore all of the highly suspicious activity conducted within JPMC by Madoff, BLMIS, Norman Levy, Carl Shapiro and others to whom

JPMC provided financial accommodations.

285. JPMC knew that the 703 Account held the money of customers who had entrusted it to Madoff and BLMIS’ IA Business, that the 703 Account was a fiduciary account in nature, holding funds impressed with a trust, and that Madoff and BLMIS owed fiduciary obligations to

Madoff’s and BLMIS’ customers. JPMC knew that Madoff and BLMIS were breaching their fiduciary obligations to their customers and that virtually all of the money that Madoff commingled in the 703 Account was held for IA Business clients that were beneficiaries of a relationship of high trust and confidence owed to them by Madoff.

286. Yet, throughout the 1990’s and in the early 2000’s, JPMC allowed Madoff and

Levy to conduct illegal transactions, allowed Madoff and BLMIS to conceal loans that JPMC

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itself made to Madoff and BLMIS, and allowed Madoff and BLMIS to embezzle billions of dollars of customer funds.

287. Between 2006 and the middle of 2008, the 703 Account had an average balance of several billion dollars. This was money on deposit which JPMC was able to utilize for its own enrichment. As the financial markets began to sharply decline in 2008, however, the cash balance in the 703 Account began to drop precipitously. From September 2008 until December

11, 2008, the 703 Account balance often dropped nearly to zero. In November 2008, the balance dropped close to zero several times, forcing Madoff to transfer at least $164 million from

MSIL’s accounts in London to the 703 Account. For the month of November 2008, $300 million was deposited by customers to the 703 Account and Madoff withdrew $320 million.

288. While billions of dollars flowed through the 703 Account, none of it was used to buy or sell any securities that were designated for the account of IA Business customers.

Instead, emblematic of BLMIS’ illegal scheme, the money in the 703 Account was used to fund purchases of securities for the Trading Business and was used to enrich Madoff and certain of his favored customers and co-conspirators who were customers of Chase.

289. JPMC knew that Madoff was engaging in thievery based on the obvious fact that the 703 account activity reflected no legitimate business purpose. JPMC allowed Madoff to funnel billions of dollars through the 703 Account by ignoring clearly illicit activity within that account, including $100 billion of illegal round-trip transactions with its own private banking customer, Norman Levy, and disregarding its own anti-money laundering policies. Rather than put a stop to the crime that it knew was taking place, JPMC continued to participate in the crime as JPMC’s drive for fees and profits became a substitute for common sense, ethics and legal obligations.

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290. In sum, JPMC ignored decades of suspicious and inexplicable activity in the 703

Account, even when its monitoring system alerted JPMC to unusual activity. It did so to further and enrich itself from Madoff’s criminal scheme. JPMC’s complicity allowed Madoff to operate for at least 18 years, during which he stole money from thousands of innocent people, many of whom were Defendants’ customers. JPMC made money, JPMC’s dishonest officers made money, Madoff made money, Levy made money, Shapiro made money, and Madoff’s and

BLMIS’ innocent customers lost $64.8 billion.

JMPC’s History of Tolerating Fraudulent Conduct

291. Despite JPMC’s own understanding about Madoff’s activities, which culminated in a report to the British authorities, the 703 Account was still open and operating without any restrictions at the time of Madoff’s arrest on December 11, 2008.

292. The Bank Secrecy Act, the Patriot Act, and other laws and regulations required

JPMC to file reports with appropriate regulators of suspicious activity by any of its customers.

Such activity includes, inter alia, transactions where the bank has a substantial basis for believing a criminal violation is occurring, transactions involving potential money laundering, and transactions that have no business or apparent lawful purpose or are not the sort in which the particular customer would normally engage.

293. However, the corporate culture at JPMC encouraged officers to violate the law in order to enhance the profits of the business. Madoff was, by no means, the first significant

JPMC client for whom JPMC personnel had turned a blind eye to criminal conduct.

294. Until its bankruptcy filing in December 2001, Enron was number seven on the

Fortune 500 list of largest corporations in the United States and a valuable JPMC customer.

According to SEC allegations, between December 1997 and September 2001, JPMC loaned

Enron a total of $2.6 billion in the form of seven disguised loans, called “prepay” transactions.

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The SEC, in its 2003 complaint against JPMC, alleged that these transactions were structured by

JPMC in a way that was designed to disguise that Enron was in fact receiving loans.

295. The New York District Attorney’s Office concurred, finding that JPMC, along with another bank, had “knowingly structured the prepaid transactions with Enron in a way that

allowed Enron to engage in fraudulent accounting and to make its financial statements less transparent.” JPMC ultimately entered into a settlement agreement with the Federal Reserve

Bank and the New York State Banking Department in 2003.

296. Because of its participation in the Enron fraud, JPMC was required to be more vigilant in overseeing and reporting suspicious activity within the bank and yet JPMC continued to allow BLMIS to use the 703 Account for illegal purposes. If JPMC had followed its purported enhanced oversight procedures, it would have reported the suspicious activity in the

Madoff/BLMIS account and would have terminated its relationship with Madoff/BLMIS.

297. Having been caught before for participating in a fraud in order to profit and accommodate an important customer (Enron), and having warranted to regulators that it had improved its oversight protection, JPMC knew better than to rely on a customer’s public reputation in place of diligence.

298. JPMC’s failure to shut Madoff and BLMIS down was the result of a deliberate institutional determination to permit Madoff and BLMIS to operate illegally under the protection of JPMC. Thus, JPMC failed to take the following steps that were required of it.

JPMC’s Ignored Madoff’s Dishonesty when Structuring Feeder Fund Investments

299. As part of its obligation to know each customer, JPMC assigned to each client a

“sponsor.” Cassa was JPMC’s sponsor for the 703 Account through early 2008 and Cassa was responsible for reviewing BLMIS’ FOCUS reports for the entire period from October 2001 to early 2008.

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300. The information Cassa had was flatly inconsistent and contradictory of the information provided in BLMIS’ SEC filings. Yet Cassa ignored these inconsistencies.

301. In early 2006, when Equity Exotics began working with Cassa and the

Broker/Dealer Group to conduct due diligence on Madoff and BLMIS feeder funds, Equity

Exotics requested BLMIS FOCUS Reports as part of the due diligence it conducted.

302. On January 25, 2007, Cassa acknowledged receipt of the FOCUS Report for the period of October l, 2006 through December 31, 2006 (“December 2006 FOCUS Report”). The

December 2006 FOCUS Report revealed numerous inconsistencies and irregularities that would have been readily apparent to JPMC as BLMIS’ banker and that should have prompted further investigation of Madoff and BLMIS by JPMC.

JPMC’s Admitted Knowledge That Madoff Was a Thief

303. In the immediate aftermath of Madoff’s arrest, many JPMC officers admitted that they knew Madoff was a crook. Palmer admitted Madoff’s “[r]eturn seems a little too good to be true.”

304. The day of Madoff’s arrest, McCormick stated:

We’ve got a lot wrong this year but we got this one right at least – I said it looked too good to be true on that call with you in Sep. Despite suspecting it was dodgy I am still shocked to see this happen so suddenly. I guess it’s true that when the tide goes out you see who is swimming naked.

305. McCormick’s criticisms of Madoff were in stark contrast to comments he had made in June 2007, following Hogan’s decision to execute $250 million of business across products referencing BLMIS. Upset that the amount approved was not higher, McCormick complained that “it sometimes feels very hard to make money.”

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306. The confessions continued as various individuals at JPMC stated matter-of-factly that it was “statistically impossible” for BLMIS to have generated 1.25% returns every month for years.

307. Dixon admitted that he was not surprised to learn Madoff was a crook.

Additionally, Palmer admitted that the Madoff Ponzi scheme “wasn’t completely unexpected but the scale of it is still a shock.”

308. Hogan, who knew in the early 1990’s that Levy and Madoff were doing illegal round-trip transactions, congratulated himself that JPMC had limited its exposure. “Bobby F-ing

Magee wanted to do $1bio of [BLMIS-related products] and we made it $200mio – thank God.”

309. Cox acknowledged that JPMC’s limited documentation on Aurelia violated basic know your customer concepts:

This document[ation] alone, irrespective of what’s happen [sic], is probably a fireable offence based on my own KYC training. Marco told me last night he objected to dealing with Aurelia as there was no transparency, which maybe [sic] the reason for the statement in the document. I looked at Aurelia’s website www.aurelia.com and they are prohibited from dealing with customers from US, UK, Switzerland and Bermuda. Now that’s a red flag!

310. Sankey best summarized JPMC’s knowledge of the scam and fear that JPMC’s knowledge would be revealed following Madoff’s arrest when he stated, in reference to the June

15, 2007 meeting agenda for the HFUC where Equity Exotics requested approval to increase

JPMC’s risk limit for BLMIS-related transactions to over $1 billion: “Perhaps best this never sees the light of day again!!”

311. JPMC congratulated itself that, while many of its Private Bank customers (to whom JPMC owed a fiduciary duty) had invested with BLMIS, “luckily we didn’t place any there.”

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312. Indeed, knowing that Madoff was a criminal, JPMC’s Private Bank had made a conscious and informed decision to avoid doing business with him. Following exposure of

Madoff’s scheme, JPMC’s Michael Cembalest distributed an e-mail to Private Bank clients to inform them that the Private Bank chose not to invest with any BLMIS feeder funds because it had “never been able to reverse engineer how they made money” and BLMIS “did not satisfy

[their] requirement for administrative oversight.”

313. Cembalest provided a lengthy list of red flags that had informed the Private

Bank’s decision not to invest. These red flags included: (i) Madoff served as his own prime broker, custodian, and investment adviser; (ii) Madoff utilized a three-person accounting firm in

Rockland County, which was “almost unheard of for a fund of that size;” (iii) while the Madoff feeder funds were audited by large, well-known accounting firms, those audits did not cover

BLMIS; (iv) the Private Bank’s due-diligence team was not allowed to meet Madoff; (v) Madoff did not charge fees for his money management services (essentially leaving billions of dollars on the table); (vi) the volatility of Madoff’s returns was only 2.5% over the preceding 17 years, a period which included some of the most volatile capital markets in history; and (vii) Madoff’s fund “lost money in only 2 of 214 rolling quarterly periods since 1990.”

314. Cembalest also noted his suspicion after hearing Madoff speak at a conference in

October of 2007, where Madoff had stated: “In today’s regulatory environment, it’s virtually impossible to violate rules.” Cembalest concluded that this type of attitude was the reason “why hedge-fund due-diligence is more than just looking at volatility and return patterns.”

315. Cembalest conceded that these “Oz-like signals … were too difficult to ignore.”

Yet, in order to enhance its own profits, JPMC was willing to provide cover for Madoff’s crimes for a 20-year period.

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316. In other areas of JPMC, people tried to conceal JPMC’s involvement with

Madoff. For example, on December 17, 2008, Nikolakopoulos emailed FGG’s Vijayvergiya to set up a call to discuss “[c]onfidentiality in relation to investments or disinvestments by

JPMorgan and any of its affiliates in the two funds ([FOG] Sentry and Sigma).”

History Revisited

317. On December 19, 2008, JPMC’s IBRC held a meeting at which Yang and Wise presented a “postmortem of the Madoff transactions.” They provided a chronology of the events surrounding JPMC’s investments in BLMIS. They began by explaining how Equity Exotics had requested approval from the HFUC to increase JPMC’s risk limit for Madoff-related transactions to over $1 billion – a request that “far exceeded the IBRC approved single HP limit of $100mm.”

They then recounted how a conference call with Madoff had been arranged in an attempt to gather due-diligence information, but during the call Madoff “clearly expressed his dislike of doing structured products on his strategy and would not accommodate any direct due diligence on his firm.”

318. Both the positives and negatives of Equity Exotics’s risk-limit request were considered. The postmortem prepared by JPMC in December 2008 stated the following:

Cons: [T]he lack of ability to do a full due diligence on Madoff itself;

[T]he potential risk of fraud given the strategy was managed by Madoff in customer brokerage accounts. This risk of fraud given the structure & set-up was correctly identified and flagged, but was considered at the time to be a remote likelihood given the Equity Exotics business sponsorship of the deal, sponsorship of Madoff by ICM and JPM’s long standing (though limited) credit relationship with Madoff; and

Inability to reconcile Madoff’s returns with ostensible strategy; alpha generation dependent on “black box” timing mode]: Risk modeled the split strike conversion strategy, confirmed its benign market risk but could not replicate the fund returns and suspected

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that alpha may have been generated by front-running via the market-making. Risk consequently request a background check – but nothing showed up. [Emphasis added.]

319. JPMC nevertheless had approved Madoff exposure in the amount of $250 million

– despite the strong risk of fraud and suspicions that Madoff was engaged in illegal front- running. JPMC redeemed most of its Madoff-related investments before his arrest. As of

December 11, 2008, JPMC had only $35 million in risk exposure to Madoff feeder funds, having previously redeemed approximately $276 million.

320. Yang’s and Wise’s presentation ended with a summary of lessons learned and red flags:

Lessons Learned: How much to bank on reputation and SEC regulation: Reliance on Madoff’s long standing reputation, 40yr of [sic] track record and good standing as a regulated entity. At what level of notional risk does the possibility of fraud at a private, unrated custodian outweigh the potential profitability of the transaction? Reliance on third party due diligence is insufficient and risky; More rigorous background check on Madoff could have revealed additional red flag such as the questionable auditor used by Madoff; Fraud is possible even on an unprecedented scale and longevity; and Having risk transparency, control over assets and liquidity via a managed account platform greatly mitigate fraud risk.

Red Flags: No Transparency: No transparency on the blackbox timing model implemented by Madoff;

Unexplainable Returns: Consistently smooth returns and low volatility appear too good to be true…. Risk had concern on whether Madoff’s prop trading activities were appropriated [sic] Chinese Walled from its market making business;

Secrecy and Exclusivity: No direct due diligence and mystique of exclusive relationship with long standing clients only. Madoff’s dislike of structured products;

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U[nu]sual Business Model: commission based revenue instead of fee based revenue despite of the consistent double digital [sic] returns year over year;

Restricted Information Access: JPM could only review sample trade tickets and trading agreements with Madoff during onsite visit with access funds, but was not able to obtain written copies of these documents; and

PPM Risk Disclosures: fund assets are exposed to credit risk of the sub custodian and primer [sic] brokers.

321. The December 19, 2008 meeting minutes indicated that “[g]iven the red flags and lessons learned, the group agreed that going forward we should not do business with any client or counterparty – either directly or indirectly – who will not provide basic due diligence, without exception.” It is impossible to believe that it took Madoff to teach one of the world’s largest financial institutions this basic precept. Rather, JPMC was concerned only with its own bottom line and just did not care.

322. Thus, some JPMC officers concluded that it was acceptable to deal with a thief because JPMC could not get hurt: “Based on overall estimated size of BLM strategy, it would take [a] ... fraud in the order of $3bn or more ... for JPMC to be affected.”

323. Other JPMC officers relied on SIPC to protect its profits: “JPMorgan’s investment in BLM ... is treated as customer money ... and therefore [is] covered by SIPC.”

324. Even when it admitted knowing that Madoff had to be committing crimes in

October 2008, JPMC still did nothing to stop it. It did not even restrict activity on the 703

Account. JPMC made at least half a billion dollars in revenue from Madoff’s customers. The cost to the investing public of that half billion dollars in profits was $64.8 billion in losses.

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CLAIMS FOR RELIEF

COUNT ONE: VIOLATIONS OF SECTION 20(A) OF THE EXCHANGE ACT

BLMIS’ Primary Violations of Section 10(b)

325. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein.

326. Madoff and BLMIS violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder (together “Section 10(b)”). Madoff pled guilty to criminal securities fraud under Section 10(b). Madoff admitted that his fraud involved billions of dollars.

327. Madoff and BLMIS carried out a plan, scheme, and course of conduct that was intended to and did cause the Plaintiffs to enter into investment advisory agreements with

Madoff and BLIMIS in which they granted Madoff and BLMIS complete discretion over their funds. Madoff and BLMIS misappropriated the assets of customers in furtherance of their unlawful scheme. As a result, Plaintiffs suffered the theft of their money.

328. Madoff and BLMIS (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of materials fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon brokerage customers who entered into investment advisory agreements with Madoff and BLMIS in violation of Section 10(b).

329. As part of and in furtherance of this conduct, BLMIS engaged in an ongoing scheme to misappropriate funds that constituted the property of customers of Madoff and

BLMIS.

330. Madoff and BLMIS directly and indirectly, by the use, means and instrumentalities of interstate commerce and of the mails, engaged and participated in a

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continuous course of conduct to misappropriate funds that constituted the property of BLMIS customers such as the Plaintiffs.

331. Madoff and BLMIS made untrue statements of material fact and/or omitted to state material facts necessary to make their statements not misleading, and employed devices, schemes and artifices to defraud, and engaged in acts, practices, and a course of conduct in an effort to mislead and misappropriate the assets of IA Business customers. Such misconduct included the making of, or the participation in the making of, untrue statements of material fact and omitting to state material facts necessary in order to make the statements made about Madoff and BLMIS, the financial performance of IA Business customers’ investments, and their business operations, in the light of the circumstances under which they were made, not misleading, and which included engaging in manipulative and deceptive transactions, practices and courses of business that operated as a fraud and deceit upon the customers of Madoff and

BLMIS, including the surreptitious and unauthorized theft of customer assets and securities.

332. Madoff and BLMIS had actual knowledge of the misrepresentations and omissions of material facts set forth herein. Madoff’s and BLMIS’ material misrepresentations and/or omissions were done knowingly for the purpose and effect of enriching Madoff and

Madoff’s other co-conspirators including Norman Levy, Carl Shapiro, and Jeffry Picower. At all relevant times, Madoff and BLMIS knowingly disseminated false and misleading information to

IA Business customers concerning the performance of their investments.

333. At the time of the misrepresentations and omissions, Plaintiffs were ignorant of, and could not have known of, their falsity and believed them to be true, and they were ignorant of the manipulative and deceptive conduct complained of herein. Plaintiffs reasonably relied upon the false information disseminated by Madoff and BLMIS. If Plaintiffs had known the

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truth regarding Madoff’s and BLMIS’ materially false statements and deceptive and manipulative conduct alleged above, which was not disclosed, Plaintiffs would never have entered into agreements with Madoff and BLMIS giving them complete discretion to invest the

Plaintiffs’ funds.

334. As a direct and proximate result of BLMIS’ wrongful, manipulative, and deceptive conduct, including the dissemination of the materially false and misleading information set forth above, Plaintiffs suffered damages in the amount of the present value of the securities listed on their November 2008 Statements.

335. By virtue of the foregoing, BLMIS violated Section 10(b).

Defendants Are Section 20(a) Control Persons

336. Each of the Defendants is an entity operating as part of a control group of Madoff and BLMIS. Madoff and BLMIS could not have operated without the material assistance of a major financial institution capable of receiving customer funds and disbursing those funds throughout the world. Defendants’ reputation as a world-class financial institution allowed

Madoff and BLMIS to perpetuate their fraudulent scheme. BTC had refused to accommodate

Madoff’s illegal practices. That is when Madoff turned to JPMC, which readily accommodated him.

337. At all relevant times from at least 1992, the Defendants knew that Madoff was committing crimes and Defendants had the ability, the obligation, and the power to shut Madoff down. Yet, for their own enrichment, they decided to look the other way and provide cover for

Madoff’s and, after 2000, BLMIS’, vast criminal conduct and embezzlement of customer funds.

338. The Defendants had observed the round-trip transactions totaling over $100 billion in a ten-year period. The Defendants had repeatedly met with Madoff and Levy to complain about these transactions because they knew they were illegal. The Defendants even

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suggested ways that the transactions could be structured so that their illegality would be less obvious to bank regulators. Yet, the Defendants waited until 2002 to tell Madoff and Levy that they could no longer do any round-trip transactions. Madoff and Levy had no choice but to accede to the Defendants’ demand because, without the active cooperation of the Defendants,

Madoff’s entire scam could not operate and, of course, if the Defendants reported Madoff’s crimes to law enforcement authorities, Madoff would have been prosecuted.

339. The Defendants observed Norman Levy’s vast increase in wealth. They had possession of Levy’s account statements from his Madoff account and they could see that the transactions reflected on those statements could not have occurred. Thus, they knew that Levy’s exponential increase in personal wealth was the result of the theft of money from other Madoff customers. The Defendants also knew that Madoff’s other customers included upstate New York pension funds, charities, family foundations, and universities, as well as hundreds of hard- working individual and retirees.

340. At any point in time from the early 1990s through 2008, the Defendants were confronted on a daily basis with documentary evidence that Madoff was not purchasing securities for his customers, that Madoff was transferring billions of dollars to his friends and co- conspirators like Jeffry Picower and Norman Levy, that Madoff was transferring billions of dollars of customer funds to overseas accounts.

341. At any point in time from the early 1990s through 2008, the Defendants had the power and the ability and the obligation to terminate their banking relationship with BLMIS, with Levy, and with Carl Shapiro, and the obligation to notify the federal banking authorities and the SEC of the conduct of BLMIS, Madoff and Levy.

342. The Defendants made a deliberate decision not to do so.

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343. The Defendants acted collectively and in concert as a control group of BLMIS within the meaning of Section 20(a) of the Exchange Act as alleged herein.

344. Madoff admitted in February 2014 that Defendants knew of his fraudulent conduct. Madoff knew that, if he did not accede to Defendants’ demands, both in the day-to-day business affairs of BLMIS and with respect to specific fraudulent actions alleged herein,

Defendants could close his account, destroy his business, and see that he was put him in prison.

345. By virtue of the services they provided to Madoff and BLMIS, which were essential to the survival of their fraudulent scheme, by virtue of the Defendants’ ability to force

Madoff and Levy to stop their illegal round-trip transactions, by virtue of the Defendants’ ability to shut Madoff down at any point in time, the Defendants did, in fact, control, the overall operations of the IA Business.

346. The Defendants also controlled the flow of funds in and out of the 703 Account between the 703 Account and the accounts of Madoff’s co-conspirators Jeffry Picower, Carl

Shapiro, Norman Levy and others. Yet, instead of refusing to house Madoff’s crimes, they provided Levy with his own private office at the Chase Private Bank.

347. The Defendants regularly communicated and agreed with Madoff and other

BLMIS personnel to perpetuate the fraud by providing the banking services that were essential to the continuation of the embezzlement scheme. By their conduct the Defendants ensured that

Madoff and BLMIS could continue to conceal the scheme from customers of the IA Business.

348. Because of their specific knowledge of the activities in the 703 Account and the falsity of BLMIS’ FOCUS reports and financial statements, the Defendants knew that Madoff and BLMIS were not using customer funds to buy securities for the customers.

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349. The Defendants concealed the scheme that BLMIS engaged in because they were substantially enriched by it and it was in their economic interests to allow it to continue. Thus, the Defendants materially benefitted from Madoff’s and BLMIS’ violations of Section 10(b).

350. The Defendants were culpable participants in Madoff’s and BLMIS’ wrongful, manipulative, and deceptive conduct described herein.

351. As a direct and proximate result of Madoff’s and BLMIS’ securities violations and the Defendants’ support, facilitation, control over and complicity in those violations,

Plaintiffs lost their investment capital and suffered damages in the amount of the present value of

the securities listed on their November 2008 Statements.

352. Pursuant to Section 20(a), because of the Defendants’ control of Madoff and

BLMIS, the Defendants are jointly and severally liable as a control group to the same extent as

Madoff and BLMIS themselves for violations of Section 10(b).

COUNT TWO: VIOLATION OF FLORIDA SECURITIES & INVESTOR PROTECTION ACT (“FSIPA”)

353. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein.

354. The federal securities violations set forth above constitute violations of FSIPA by

Madoff/BLMIS.

355. The Plaintiffs’ investments with Madoff/BLMIS involved the offer, sale, or purchase of securities or investments.

356. In connection with the offer, sale, or purchase of securities or investments,

Madoff/BLMIS:

a. employed devices, schemes, or artifices to defraud the Plaintiffs;

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b. obtained Plaintiffs’ money or property by means of untrue statements of

material facts or omissions to state material facts necessary to make the

statements made, in the light of the circumstances under which they were

made, not misleading; or

c. engaged in transactions, practices, or courses of business which operated

as fraud or deceit upon the Plaintiffs.

357. The Defendants were the agents of Madoff/BLMIS in connection with the sale of securities to Plaintiffs.

358. The Defendants personally participated and/or aided in the sale of securities to the

Plaintiffs by Madoff/BLMIS, and the Defendants personally engaged in acts that induced

Plaintiffs to invest with Madoff/BLMIS. As a direct and proximate result of Madoff’s and

BLMIS’ securities violations and the Defendants’ having personally participated and/or aided in the sale of securities to them by Madoff/BLMIS, Plaintiffs lost their investment capital and suffered damages in the amount of the present value of the securities listed on their November

2008 Statements.

COUNT THREE: AIDING AND ABETTING EMBEZZLEMENT

359. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

360. Plaintiffs entered into investment advisory agreements with Madoff and BLMIS pursuant to which plaintiffs granted Madoff and BLMIS complete discretion to invest their funds. These were contracts for personal services, not for the purchase or sale of securities.

361. Madoff and BLMIS could not have carried out their massive embezzlement scheme but for the active participation of the Defendants, who had actual knowledge of the

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scheme and provided substantial assistance to Madoff and BLMIS in committing the embezzlement of customer funds.

362. The Defendants identified illegal conduct between Levy and Madoff in the early

1990’s. Yet, they looked the other way.

363. The Defendants learned that BTC shut Levy and Madoff out of BTC because of the round-trip transactions. Yet, the Defendants looked the other way.

364. The Defendants saw that Madoff and BLMIS were filing materially false FOCUS

Reports and financial statements with the SEC. Yet, they looked the other way.

365. The Defendants saw that the funds in the 703 Account were not used to purchase securities. Yet, they looked the other way.

366. The Defendants saw that Madoff had increased Levy’s net worth exponentially.

They also had the statements from Levy’s Madoff account so they had before them the documentary evidence setting forth securities transactions that could not possibly have taken place but which accounted for Levy’s vast increase in wealth. Yet, they looked the other way.

367. Defendants looked the other way because the JPMC corporate culture is to enrich

JPMC and its officers, legally or illegally, whichever way they can and JPMC can make vast profits providing the cover of a prestigious financial institution for criminal financial activities.

368. Each of the Defendants aided and abetted the embezzlement scheme.

369. All of the Defendants operated as a single, indivisible entity. Therefore, each of the Defendants is liable for the actions of the other Defendants.

370. If some of JPMC’s senior management did not have actual knowledge of the crimes that Madoff and BLMIS were perpetrating, it is only because others in senior management deliberately concealed the facts they knew about Madoff’s operations.

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371. The Defendants substantially assisted the crimes of Madoff and BLMIS by, among other things: funneling approximately $250 million into BLMIS by way of the

Defendants’ investments in BLMIS feeder funds; lending Madoff, through BLMIS, over $100 million dollars without which the scheme could not have continued; lending Levy, one of

BLMIS’ largest customers, over $100 million that Levy then invested with BLMIS; allowing

Madoff through BLMIS to use the 703 Account to run the scheme; executing transfers at Madoff and/or BLMIS’ behest and honoring hand-written checks for tens of millions of dollars that were necessary for the operation of the scheme; providing short-term investment vehicles that generated revenue necessary for the continuation of the scheme; choosing not to execute its

AML policy, which it touted to its customers, failing to provide a functional, competent account sponsor to the 703 Account; ignoring over 90 instances of irregular activity in the 703 Account, and dismissing the one alert that was issued in January 2007; providing unsupervised Private

Bank accounts to some of BLMIS’ biggest customers; and ignoring false statements made by

Madoff through BLMIS in regulatory filings.

372. The Defendants’ assistance was a direct and proximate cause of the criminal scheme. Without the Defendants’ assistance, Madoff and BLMIS would not have been able to continue to operate the scheme for over two decades.

373. As a direct and proximate result of the Defendants’ aiding and abetting embezzlement, Plaintiffs lost their investment capital and suffered damages in the amount of the present value of the securities listed on their November 2008 Statements.

COUNT FOUR: AIDING AND ABETTING BREACH OF FIDUCIARY DUTY

374. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

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375. Madoff and BLMIS owed a fiduciary duty to their customers. The IA Business customers gave Madoff and BLMIS complete discretion to invest their savings and they had no knowledge, other than the statements and trade confirmations they received from Madoff and

BLMIS, what was done with their money.

376. Defendants, however, knew that Madoff and BLMIS breached their fiduciary duty because the Defendants knew that Madoff and BLMIS did not purchase securities with the customers’ money. By virtue of their ability to monitor all of the deposits and withdrawals in the

703 Account, the Defendants knew precisely what Madoff and BLMIS were doing with customers’ money, i.e., they were embezzling billions of dollars.

377. Defendants knowingly participated in that embezzlement and breach of fiduciary duty because the Defendants provided the banking services which allowed Madoff to carry out his fraudulent scheme.

378. Plaintiffs bring this claim against all Defendants because each Defendant, individually, aided and abetted the breach of fiduciary duty by Madoff and BLMIS. In addition, all of the Defendants operated as a single, indivisible entity. Therefore, each of the Defendants is liable for the actions of the other Defendants.

379. At a minimum, the Defendants consciously avoided knowledge that Madoff and

BLMIS were breaching their fiduciary duty to the IA Business customers by virtue of the information they had.

380. The Defendants knew Madoff and BLMIS had a fiduciary duty to BLMIS’ customers and that Madoff and/or BLMIS breached that duty.

381. The Defendants knew that Madoff and BLMIS were operating as brokers with discretionary authority over customer funds and were using the 703 Account as a fiduciary

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account. Defendants knew, from the early 1990’s, that Madoff had discretionary control over

Levy’s money, managing to increase Levy’s wealth from $180 million to $l.5 billion.

382. Defendants knew that many BLMIS customers were fiduciaries and trustees in their own right who had delegated their fiduciary duties to Madoff and that Madoff exercised fiduciary powers as a trustee or custodian for retirement plans, pensions, foundations and trusts.

383. Thus, the Defendants had a heightened duty to take action when the 703 Account was used by Madoff in a manner inconsistent with what Defendants knew the Account was supposed to be used for.

384. Based on all of the information that was available to the Defendants, they knew of or were willfully blind to Madoff’s crimes. By virtue of their conduct, the Defendants knowingly participated in, and provided substantial assistance to, Madoff and BLMIS in their breach of fiduciary duty by, among other things: moving billions of dollars in and out of the 703

Account at Madoffs’ behest in transactions that had no legitimate explanation; allowing BLMIS customers’ funds to be used to make payments to Madoff and to Madoff’s co-conspirators including Norman Levy, Carl Shapiro, and Jeffry Picower.

385. Without the Defendants’ assistance, Madoff and BLMIS would not have been able to embezzle tens of billions of dollars of fiduciary funds over a period of two decades.

386. As a direct and proximate result of the Defendants’ aiding and abetting breach of fiduciary duty, Plaintiffs lost their investment capital and suffered damages in the amount of the present value of the securities listing on their November 2008 Statementss.

COUNT FIVE: UNJUST ENRICHMENT

387. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

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388. Defendants have been unjustly enriched by their receipt of property that

Defendants acquired only as a result of perpetuating and participating in the criminal scheme of

Madoff and BLMIS.

389. Just taking the period since 2002, Defendants received approximately $149 million from BLMIS consisting of approximately $4 million in the form of fees and interest payments and $145 million in repayment of loans. Defendants also benefitted by receiving deposits of customer funds into the 703 Account, which often carried billions of dollars of balances which Defendants utilized for their own enrichment.

390. Defendants knowingly afforded Madoff and BLMIS all of the advantages of having a banking relationship with Defendants precisely so that they could enrich themselves at the expense of the victims of Madoff’s and BLMIS’ fraud.

391. Defendants refused to take steps to shut Madoff and BLMIS down because they did not want to lose the fees and profits they were earning on the relationship. Thus, Defendants decided to assist Madoff and BLMIS in perpetuating the embezzlement of customer funds.

392. Equity and good conscience require full restitution of the monies received by

Defendants, directly and indirectly, from Madoff BLMIS. This includes not only the customer property Defendants received directly from Madoff and from BLMIS, but also any profits made from Defendants’ use of this money.

393. Defendants proximately caused loss to the Plaintiffs.

394. As a result of the Defendants’ conduct, they have been unjustly enriched and are liable to Plaintiffs for damages in an amount to be proven at trial.

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COUNT SIX: BREACH OF FIDUCIARY DUTY

395. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

396. Defendants knew that the 703 Account held fiduciary funds entrusted by customers to BLMIS, including the following Plaintiffs who maintained accounts with

Defendants or were Defendants’ customers: Donald A. Benjamin, Joel Busel Revocable Trust,

Sandra Busel Revocable Trust, Frank & Carol DiFazio as TIC, Melvin H. Gale and Leona Gale

Joint Revocable Living Trust, Ben Heller, JABA Associates, LP, Eugene Kissinger Trust U/A/D

12/6/99, Peerstate Equity Fund, LP, Marsha Peshkin, Jeffrey Shankman, and Stony Brook

Foundation.

397. Defendants knew that fiduciary funds entrusted to BLMIS in the 703 Account were being misappropriated by BLMIS.

398. Defendants benefited from the illegal scheme of BLMIS.

399. In the circumstances, Defendants owed a fiduciary duty to Plaintiffs to prevent further misappropriation of funds which Defendants knew had been entrusted to BLMIS in the

703 Account.

400. Defendants breached their fiduciary duty to Plaintiffs by failing to act to safeguard funds they knew had been entrusted to Madoff and BLMIS and were embezzled by

Madoff and BLMIS.

401. As a direct and proximate result of the Defendants’ breach of fiduciary duty,

Plaintiffs lost their investment capital and suffered damages in the amount of the present value of the securities listed on their November2008 Statements.

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COUNT SEVEN: COMMERCIAL BAD FAITH

402. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

403. Defendants had actual knowledge of the facts and circumstances of the criminal scheme by Madoff and BLMIS, which constituted egregious bad faith.

404. Defendants were complicit in the illegitimate scheme and in confederation with

Madoff and BLMIS profited from the devastation caused to the Plaintiffs.

405. Defendants acted in commercial bad faith by facilitating that scheme and continuing to provide banking services to Madoff and BLMIS with knowledge that the 703

Account was being utilized for illegal purposes.

406. As a direct and proximate result of the Defendants’ commercially bad faith conduct, acts and omissions, Plaintiffs lost their investment capital and suffered damages in an amount equal to the present value of the securities listed on their November 30Statements.

COUNT EIGHT: GROSS NEGLIGENCE

407. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

408. Based upon Defendants’ actual knowledge of the facts and circumstances of

Madoff’s and BLMIS’ utilization of the 703 Account and other circumstances set forth herein,

Defendants had a duty to thoroughly investigate BLMIS under relevant law and prudent business practices and, when they failed to receive credible explanations from BLMIS, Defendants should have closed the 703 Account.

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409. Defendants’ failure to close the 703 Account was, if not intentional, then grossly negligent.

410. Defendants owed Plaintiffs a duty, under the circumstances described herein, to handle the Plaintiffs’ funds that were deposited into the 703 Account in a legal manner.

411. Defendants breached that duty and caused Plaintiffs damages in the amount of the present value of the securities listed on their November 30, 2008 statements.

COUNT NINE: FEDERAL RICO

412. The preceding paragraphs and the facts set forth in the exhibits hereto are realleged and incorporated by reference as if set forth fully herein, except for the paragraphs alleging violations of Section 20(a) and FSIPA in Counts One and Two.

413. In the alternative to the securities claims alleged in Count One and Count Two,

Plaintiffs sue pursuant to Section 1964(c) of the Federal RICO Act, 18 U.S.C. §§ 1961-1968, which confers a private right of action on any person injured in his business or property by reason of a violation of § 1962.

414. Defendants, Madoff and BLMIS, Jeffrey Picower and his various entities,

Norman Levy, Carl Shapiro, and others, with criminal intent and through a pattern of racketeering activity, operated a criminal enterprise, which functioned from the offices at 885

Third Avenue, New York, New York, and which affected interstate trade or commerce.

415. The enterprise had an ascertainable structure and hierarchy that set it apart from the mere commission of the predicate acts (set forth herein), and that form a pattern of racketeering activity in which Madoff and/or BLMIS actively engaged.

416. Madoff controlled and operated the criminal enterprise in violation of 18 U.S.C.

§1962(c) by inducing customers to retain his investment advisory services and agreeing to

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entrust their money to him for investment through the BLMIS Discretionary Trading Program,

utilizing false and fraudulent materials, and disseminating fraudulent account statements.

417. None of the predicate acts on which the Plaintiffs rely involves “any conduct that

would have been actionable as fraud in the purchase or sale of securities” as prohibited by 18

U.S.C. § 1964(c).

418. Madoff conducted the affairs of a criminal enterprise through a pattern of

racketeering that ran from approximately 1992, until December 11, 2008, in violation of 18

U.S.C. § 1962 for the unlawful purpose of intentionally defrauding the Plaintiffs.

419. Madoff and BLMIS conducted the enterprise’s affairs through a pattern of

racketeering acts that consisted, among other things, of sending through the United States mail to

thousands of customers of the BLMIS Discretionary Trading Program every month, between

1992, and December 11, 2008, periodic trade confirmations reflecting trades in their accounts

that, in fact, did not occur, and monthly account statements that stated falsely that the customers’

money was invested in various securities and that BLMIS has transacted various stock and bond

transactions on their behalves.

420. The BLMIS trade confirmations and account statements were intended to cause,

and did in fact cause, customers in the BLMIS Discretionary Trading Program to believe that

their money was earning a positive return which caused them to give more money to BLMIS for

investment pursuant to the BLMIS Discretionary Trading Program.

421. The RICO violation is the conduct of an enterprise’s affairs through a pattern of

racketeering activity in violation of 18 U.S.C. § 1962(c), namely the use of the mails and wires

in furtherance of a scheme to defraud or obtain property by means of false or fraudulent

pretenses, representations, or promises, in violation of 18 U.S.C. §§ 1341 and 1343.

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422. Each predicate act was related and had as its purpose the criminal diversion of

funds from the accounts of customers of the BLMIS Discretionary Trading Program.

423. The conduct underlying the fraudulent scheme alleged in the complaint

establishes a "pattern of racketeering activity" within 18 U.S.C. § 1961(5). This conduct does

not consist of isolated incidents.

424. The Defendants knowingly and purposefully agreed and conspired with Madoff

and BLMIS to violate 18 U.S.C. § 1962(c) by knowingly participating in Madoff’s racketeering

enterprise and by, among other things:

a. moving billions of dollars in and out of the 703 Account at Madoff’s

behest and allowed BLMIS customers’ funds to be used to make payments to Madoff, as well as

to his friends and family, and to fund redemptions from other customers, rather than to make

investments on behalf of customers;

b. funneling approximately $250 million into BLMIS by way of the

Defendants’ investments in BLMIS feeder funds;

c. lending Madoff, through BLMIS, over $100 million dollars without which

the scheme could not have continued;

d. lending Levy, one of BLMIS’ largest customers, over $100 million that

Levy then invested with BLMIS;

e. allowing Madoff through BLMIS to use the 703 Account to run the

scheme;

f. executing illegal transfers at Madoff’s and BLMIS’ behest and honoring

hand-written checks for tens of millions of dollars that were facially irregular but necessary for

the operation of the scheme;

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g. providing short-term investment vehicles that generated revenue necessary

for the continuation of the scheme;

h. choosing not to execute its AML policy, which it touted to its customers,

by effectively failing to provide an account sponsor to the 703 Account;

i. ignoring repeated instances of irregular activity in the 703 Account, and

dismissing the one alert that was issued in January 2007;

j. providing unsupervised Private Bank accounts to some of BLMIS’ biggest

customers;

k. ignoring false statements made by Madoff through BLMIS in regulatory

filings

l. failing to act to safeguard funds it knew had been entrusted to BLMIS in

its 703 Account after receiving clear evidence of misappropriation thereof by BLMIS;

m. facilitating Madoff’s scheme by continuing to provide banking services to

BLMIS without any meaningful investigation; and

n. failing to thoroughly investigate BLMIS and to close the 703 Account..

425. The Defendants’ knowing participation in the fraudulent scheme was an integral

part of the racketeering enterprise.

426. Plaintiffs are victims of Madoff’s criminal enterprise. As a direct and proximate

result of the fraudulent scheme of Madoff and the Defendants, in violation of 18 U.S.C. § 1962,

the Plaintiffs lost their investment capital and suffered millions of dollars of damages in an

amount to be proven at trial. At a minimum, the fraudulent scheme caused a loss for each

Plaintiff measured by the value of the stock listed on their last BLMIS statement as of the date of

the filing of this action, plus interest.

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COUNT TEN: FLORIDA RICO ACT

427. The preceding paragraphs and the facts set forth in the exhibits hereto are

realleged and incorporated by reference as if set forth fully herein, except for the paragraphs

alleging violations of Section 20(a) and FSIPA in Counts One and Two.

428. Plaintiffs also sue for violations of the Florida Civil Remedies for Criminal

Practices Act, Fla. Stat. § 772.101, et seq., also known as the Florida RICO Act.

429. Florida Stat. § 772.104 provides that any person who has been injured by reason

of the provisions of Section 772.103 shall have a civil cause of action for threefold actual

damages and also for reasonable attorneys’ fees and court costs through the trial and appellate

courts.

430. Section 772.103 provides that:

[i]t is unlawful for any person:

(1) Who has with criminal intent received any proceeds derived, directly or indirectly, from a pattern of criminal activity or through the collection of an unlawful debt to use or invest, whether directly or indirectly, any part of such proceeds, or the proceeds derived from the investment or use thereof, in the acquisition of any title to, or any right, interest, or equity in, real property or in the establishment or operation of any enterprise.

(2) Through a pattern of criminal activity or through the collection of an unlawful debt, to acquire or maintain, directly or indirectly, any interest in or control of any enterprise or real property.

(3) Employed by, or associated with, any enterprise to conduct or participate, directly or indirectly, in such enterprise through a pattern of criminal activity or the collection of an unlawful debt.

(4) To conspire or endeavor to violate any of the provisions of subsection (1), subsection (2), or subsection (3).

431. Under Fla. Stat. § 772.102(3), an "enterprise" is defined as "any individual, sole

proprietorship, partnership, corporation, business trust, union chartered under the laws of this

state, or other legal entity, or any unchartered union, association, or group of individuals

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associated in fact although not a legal entity; and the term includes illicit as well as licit

enterprises[.]”

432. The enterprise was comprised of an association in fact of Madoff, individually,

and through the association with BLMIS, with the Defendants, and others, that engaged in a

scheme to fraud customers of the BLMIS Discretionary Trading Program.

433. Madoff, with criminal intent, received proceeds from the operation of the criminal

enterprise in violation of Fla. Stat. § 772.103(1).

434. Additionally, Madoff, with criminal intent, through the pattern of criminal activity

of the enterprise, participated in the conduct of, was otherwise in control of, and operated the

enterprise by inducing new customers to enroll in the BLMIS Discretionary Trading Program,

utilizing false and fraudulent materials, disseminating fraudulent trade confirmations and account

statements to customers of the BLMIS Discretionary Trading Program, and submitting falsified

BLMIS financial statements to regulators.

435. The enterprise had an ascertainable structure and hierarchy that set it apart from

the mere commission of the predicate acts (set forth herein), and that form a pattern of

racketeering activity in which Madoff and BLMIS actively engaged.

436. Under Fla. Stat. § 772.102(1)(a)(22), "criminal activity" includes any act

indictable under Chapter 817 of the Florida Criminal Code relating to fraudulent practices, false

pretenses, and fraud generally.

437. "Criminal activity" also encompasses any conduct that is subject to indictment or

information as a criminal offense and listed in 18 U.S.C. § 1961(1), which includes sections

1341 and 1343 of Title 18 relating to mail fraud and wire fraud, respectively. See Fla. Stat. §

772.102(1)(b).

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438. As set forth in great detail above, Madoff engaged in a systematic ongoing course

of criminal conduct with the intent to defraud customers of the BLMIS Discretionary Trading

Program, including Plaintiffs, based on the following predicate acts: (a) a scheme to defraud and

obtain property with the intent to obtain property by false or fraudulent pretenses,

representations, or promises as well as by unlawful misrepresentations in violation of Fla. Stat. §

817.034(4); (b) federal mail fraud; and (c) federal wire fraud.

439. Under Fla. Stat. § 772.102(4), a "pattern of criminal activity" is defined as

"engaging in at least two incidents of criminal activity that have the same or similar intents,

results, accomplices, victims, or methods of commission or that otherwise are interrelated by

distinguishing characteristics and are not isolated incidents; provided that the last of such

incidents occurred within 5 years after a prior incident of criminal activity."

440. Madoff and BLMIS engaged in a "pattern of criminal activity" that consisted,

among other things, of sending through the United States mail to thousands of customers of the

BLMIS Discretionary Trading Program, including customers in Florida, every month, between

1992 and December 11, 2008, trade confirmations and monthly account statements that stated

falsely that the customers’ money was invested in various securities and that BLMIS had

transacted various stock and bond transactions on their behalf.

441. Each predicate act alleged herein was related and had as its purpose the criminal

diversion of funds from customers of the BLMIS Discretionary Trading Program in connection

with the conspiracy conducted by BLMIS, Madoff, and the Defendants.

442. This conduct did not arise out of a single contract or transaction, but was a

pervasive scheme that injured Plaintiffs over many years. Each predicate act was related, had a

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similar purpose, involved the same or similar participants and method of commission, had

similar results, and impacted Plaintiffs in a similar fashion.

443. The predicate acts specified above which Madoff committed, and which the

Defendants conspired with Madoff to commit, were related to each other in furtherance of the

scheme implemented by the enterprise.

444. Under Fla. Stat. § 772.102(1), "criminal activity" also includes the conspiracy to

commit the predicate acts under that section.

445. At all relevant times, the Defendants knew of, agreed and conspired to participate

in the scheme set forth herein through a pattern of criminal activity in violation of Fla. Stat.

§772.103(4).

446. The Defendants knowingly and purposefully agreed and conspired with Madoff

and BLMIS to violate FLRICO by knowingly participating in Madoff’s criminal enterprise.

447. The Defendants knowingly and purposely committed and/or caused to be

committed a series of overt acts in furtherance of the conspiracy alleged herein to effect the

objective of the fraudulent scheme, including, but not limited to, acts alleged in paragraph

438 (a) – (n).

448. The Defendants’ knowing participation in the fraudulent scheme was an integral

part of the criminal enterprise.

449. Plaintiffs are victims of Madoff’s criminal enterprise. As a direct and proximate

result of the fraudulent scheme of Madoff and the Defendants in violation FLRICO, the Plaintiffs

lost their investment capital and suffered millions of dollars of damages in an amount to be

proven at trial. At a minimum, the fraudulent scheme caused a loss for each Plaintiff measured

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by the value of the stock listed on their last BLMIS statement as of the date of the filing of this

action, plus interest.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment against Defendants, as follows:

A. Awarding compensatory and/or consequential damages, and other damages as permitted

by law, in favor of Plaintiffs against all Defendants, jointly and severally, for all damages

sustained as a result of Defendants’ wrongdoing, in specific amounts to be determined at

trial, including interest and any enhanced damages thereon;

B. Awarding Plaintiffs restitution of monies Defendants received from Madoff and/or

BLMIS and any profits earned through Defendants’ use of these monies;

C. Establishment of a constructive trust over the proceeds of the unjust enrichment of

Defendants in favor of the Plaintiffs;

D. Awarding Plaintiffs their reasonable costs and expenses incurred in this action, including

counsel fees and expert fees;

E. Awarding Plaintiffs treble damages on Counts VII and IX; and

F. Such other and further relief as the Court may deem just and proper.

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JURY DEMAND

Pursuant to Fed. R. Civ. P. 38(b), plaintiffs hereby demand a trial by jury of all issues

triable by right to a jury.

Dated: June 20, 2014

BECKER & POLIAKOFF, P.A. Attorneys for Plaintiffs 12140 Carissa Commerce Court, Ste. 200 Fort Myers, FL 33966 Telephone: (239) 433-7707 Facsimile: (239) 433-5933 Email: [email protected] Email: [email protected] s/ Helen Davis Chaitman Helen Davis Chaitman US District Bar No. HC4266 (Pro Hac Vice application pending)

s/ Kevin Miller J. Kevin Miller Florida Bar No. 0245460

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