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It is my contention that this routine violation of the lending laws, recording laws, and other rules and regulations concerning liens and transfers of property amounts to a waiver on the part of the lender(s) or pretender lenders of any claim that this was a loan at all, much less secured. The transactions were in fact the illegal and fraudulent sale of securities to homeowners who could not know that they were being converted from homeowner to investor. — Neil F Garfield

EDITOR’S NOTE: In a theme echoing in courtrooms around the country, the chickens are coming home to roost. The latest round in litigation between Morgan and the Madoff receivership is the allegation that Morgan should have known of suspicious activity and probably did, but they ignored it. Why? At this point one can only speculate as to reasons but it seems pretty clear at this point that Morgan actually knew enough to conclude that the entire Madoff model was a Ponzi scheme. My conjecture is that (1) Morgan was running its own PONZI scheme in the securitization markets for credit derivatives and (2) that there were people at Morgan who were channels for investment in the Madoff scheme.

This is no idle theory. The allegations pile up from investors, investigators and reporters that it was impossible for Madoff to pull off a $60 billion scam without most of Wall Street being aware that he hadn’t done a single trade.

The exact same thing applies in the mortgage mess — how could $14 trillion in defective mortgages be originated without proper documentation from an industry that was the author of all such documentation for centuries? Investors are alleging and asking the same questions as homeowners. How could the appraisals of the securities, the real property (homes) and the loans have been so wrong for so long? Why were virtually all underwriting standards dropped as a condition to approval of so-called loans. My conjecture is that the only reason this was allowed was by intentionally ignoring, evading and hiding the facts from investors who bought defective mortgage bonds and homeowners who bought “defective mortgage loan products.”

My conclusion is that the reason for the lack of loan underwriting is that these were not really loans. They were unregistered securities disguised as loans to evade the disclosure and registration requirements for the sellers and sale of the financial products as securities. To answer a question that has been asked several times since I first posited that the transaction was never a loan transaction, much less secured and that it was a security, a “security” is usually defined as any evidence of an investment in which the person advancing the money is expecting a gain, profit or income without actively participating in any business.

A security is thus defined by its passivity — the lack of any requirement that the investor do anything to make or lose money. In this case the the loan products were sold as vehicles to gain a profit or additional capital by virtue of the rising value of the home — the same thing as any stock sale by a broker — except that in this case there was a statutory and contractual and common law guarantee that the lender would verify the viability of the investment and would not misrepresent the values portrayed. The main representation that the property was worth more than the financial loan product was false and anyone of the least sophistication should have known it was a false and probably did.

Unknown to the homeowner who was becoming an investor without adequate disclosure, the assurances received and the statutes relied upon were routinely violated. It is my contention that this routine violation of the lending laws, recording laws, and other rules and regulations concerning liens and transfers of property amounts to a waiver on the part of the lender(s) or pretender lenders of any claim that this was a loan at all. If it wasn’t a loan then it couldn’t be secured. And the documents themselves prove the point by naming non-lenders as “lenders.” The bloated appraisals of homes, increasing as much as 20% per month was unprecedented and unsupported by any known market fundamentals. That fact alone, if disclosed, would not doubt have diminished if not eliminated both the investor purchase of the bogus mortgage bond and the homeowner’s purchase of the security purchased, disguised as a mortgage loan product.

It is the obviously defective nature of the mortgage and foreclosure process that proves the point that these were never loans, but instead were investments that were based upon deceptions without the right of rescission and rights to disclosure that any ordinary investor would get if they were buying into an IPO. If the so-called “loan” transaction included a component wherein the payments reset to unsupportable levels, subject to the ability to finance those payments and remove additional capital from the investment with price rises in the real property, then this was a security not a loan. By definition, a loan is a transaction where the money is advanced in anticipation of getting it back. Most of these transactions were based upon values and requirements that made it highly unlikely they would ever be paid. That being the case, it cannot be defined as a loan. After all, the main word used throughout the industry was “securitization.”

Where does this leave us? Back at JPM’s doorstep, along with “government” Sachs et al.

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Madoff Trustee Sues JPMorgan for $6.4 Billion

Brendan McDermid/ReutersIrving H. Picard, the trustee, contends JPMorgan should have spotted highly suspicious cash movements in the Madoff accounts.

8:12 p.m. | Updated

The trustee who is tracking down assets for the victims of Bernard L. Madoff’s Ponzi scheme sued JPMorgan Chase for $6.4 billion on Thursday, contending that the bank bears some responsibility for the losses of victims because it continued to serve as Mr. Madoff’s primary banker despite growing evidence that he was running an enormous fraud.

“Madoff would not have been able to commit this massive Ponzi scheme without this bank,” David J. Sheehan, a lawyer for the trustee, Irving H. Picard, said in a statement after the case was filed in United States District Court in Manhattan.

The complaint was filed under seal to conform with a confidentiality agreement the bank negotiated with the trustee when it first began responding to his document requests.

According to Mr. Sheehan, the lawsuit contends that JPMorgan ignored “clear, documented suspicions” about Mr. Madoff.

Moreover, he said, the bank should have spotted highly suspicious cash movements through Mr. Madoff’s accounts and recognized them as hallmarks of a Ponzi scheme.

In a statement on Thursday, JPMorgan called the trustee’s claims “irresponsible and overreaching” and said it had no advance knowledge that anything was amiss at Mr. Madoff’s firm.

The trustee’s complaint “blatantly distorts both the facts and the law in an attempt to grab headlines,” the bank said in the statement. “Contrary to the trustee’s allegations, JPMorgan did not know about or in any way assist in the fraud orchestrated by Bernard Madoff.”

The bank intends to “defend itself vigorously against the meritless and unfounded claims” in the lawsuit, the statement concluded.

For nearly two years, Mr. Picard has used his subpoena power to obtain internal bank documents and conduct depositions with bank employees, and the lawsuit will clearly reflect his conclusions from that research. But with the complaint filed under seal, the trustee’s specific accusations are not yet public.

There may be clues, however, to the case’s main themes in excerpts of internal bank documents that were leaked to the French media after the bank submitted them last summer to a magistrate in France who is investigating the Madoff scandal.

According to an exclusive account in L’Express on July 10, the bank provided a computer disk with more than 500 pages of documents to the magistrate. L’Express published what it identified as excerpts of those documents that show that some bank executives had expressed concern about Mr. Madoff several years before his fraud unraveled in December 2008.

In assessing a large European feeder fund, a document identified as an internal bank report from 2008 noted the fund’s total reliance on Mr. Madoff to confirm what its assets were worth from day to day. With “no real way to confirm those valuations, fraud presents a material risk,” the report said.

But Mr. Madoff’s personal wealth and his status over several decades as a respected leader in a regulated industry were also cited in the report as “factors making fraud unlikely.”

The excerpted documents also included what was described as a confidential report the bank made to British authorities in October 2008, after the bank had withdrawn nearly $250 million of its own money from the Fairfield Sentry fund, the largest of the Madoff feeder funds.

The report said the bank was concerned that Mr. Madoff’s investment performance was “so consistently and significantly ahead of its peers” that it appeared “too good to be true — meaning that it probably is.”

The report also asserted that a Swiss investment manager had made “thinly veiled” threats to a bank employee after learning that one of the bank’s Madoff-linked investments could lose value. In the report, the bank complained that the Swiss banker had insisted the price of the investment must not fall and made references to “Colombian interests who will not be happy” with the bank’s actions.

A spokeswoman for the bank could not immediately comment on the authenticity of these excerpts, but there is no sign that L’Express ever published a retraction of its article.

The trustee’s lawsuit against JPMorgan Chase is the second-largest claim he has filed in the Madoff liquidation so far, after a $7.2 billion claim last year against the estate of Jeffry M. Picower, one of Mr. Madoff’s longtime investors.

Negotiations between the trustee and the Picower estate have been continuing since before Mr. Picower’s death in October 2009, and lawyers for the trustee have hinted at court hearings that a settlement in the billions of dollars is possible. But so far, no final agreement has been reached, according to several people who have been briefed on the discussions.

A large number of significant cases against big banks, large feeder funds and prominent longtime investors are likely to be filed in the next dozen days because Mr. Picard faces an ironclad deadline of Dec. 15 for filing lawsuits against those who received money from Mr. Madoff’s fraud before it collapsed in December 2008.

Last week, Mr. Picard sued UBS and its feeder fund affiliates for $2 billion, accusing the Swiss bank of profiting from the fraud by accepting fees for lending its name and sponsorship to several big Madoff feeder funds without providing the supervision or due diligence that its role required.

Thomas Kaplan and Peter Lattman contributed reporting.

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