By Ann Woolner
Feb. 9 (Bloomberg) -- In everyday life, a gap often separates what you know from what you should have figured out. Blissfully ignorant, you plunge past signs of lurking trouble only to crash into it and wonder how you could have been so stupid.
But what if you?re having so much fun or reaping so much profit that you consciously ignore warnings? And what if others get hurt because you do?
In criminal law, there isn?t a lot of room between known and should have known. Turning your head to avoid facing the truth is called willful blindness, or in some circles, plausible deniability. It probably won?t save you from getting nailed for your crime.
Now, Irving Picard is trying to bring that idea to bankruptcy court, where, as trustee in the Bernard Madoff matter, he chases claw backs for victims of the Ponzi scheme. In lawsuits, he says Madoff?s bankers and several investors either knew the fund manager was crooked or should have known. It doesn?t matter which, he says.
JPMorgan Chase and the owners of the New York Mets baseball team had every reason to know, the suits say. Alarms blared. Warnings issued. Secrecy cloaked his operation. Still, they kept pouring money into Madoff funds.
This is a novel extension of the legal concept of willful blindness, says Peter J. Henning, a Wayne State University law professor who teaches securities law and white collar crime.
Constructive Knowledge
Also called deliberate ignorance or constructive knowledge, it isn?t something you normally see applied to people who aren?t accused of actually committing a crime, Henning said in a telephone interview.
?It?s a stretch, but he?s not going to get laughed out of court,? he said, declining to predict an outcome.
Picard uses this concept to go after more money than the relatively easy claw back of false profits and fees these folks and their firms made off of Madoff, which amount to $300 million for the Mets owners and almost $1 billion for JPMorgan.
To win the bankruptcy equivalent of punitive damages on top of those sums, Picard is trying to show that they knew or should have known they were raking in money that Madoff had ripped off from others.
The Mets owners, Fred Wilpon, Saul Katz and Sterling Equities, ?consciously disregarded? alarms, the suit claims. They decided ?to blindly accept their good fortune without conducting any investigation whatsoever.?
Wilpon and Katz called the lawsuit ?an outrageous ?strong arm? effort to try to force a settlement? by publicizing allegations that are ?abusive, unfair and untrue.?
Duty to Victims
Yes, Picard had the lawsuit unsealed after settlement negotiations failed. We won?t know about the truth of the allegations for some time. From the Mets owners, the trustee wants a total of $1 billion. That?s $300 million in fictitious profits and $700 million in principal invested with Madoff.
To get the bigger number, is it enough to show that they should have known their profits were bogus? How red must those flags be, how loud the siren?
And did the Mets owners have a duty to Madoff?s victims? Not in any legal sense. Not unless Picard can persuade the bankruptcy court to buy into his theory.
As for JPMorgan, the trustee?s suit claims it was ?thoroughly complicit? in the fraud as primary banker for Madoff?s investment advisory business for 20 years. From 1986 on, all the money Madoff collected from victims went through a single account opened with Chemical Bank, which eventually became part of JPMorgan.
Inconsistencies
As banker, JPMorgan had legal duties to make sure it wasn?t laundering ill gotten gains, duties Picard says it blew off. The lawsuit accuses the bank of allowing the ?stolen money? to be washed under its roof, seeming not to notice suspicious activity and glaring inconsistencies and omissions in regulatory reports.
We are talking jump-off-the-page inconsistencies. Madoff?s business repeatedly underreported the account?s cash on hand to regulators, once by as much as $290 million, according to the suit.
Madoff turned in at least 15 reports that should have shown millions of dollars in customer activity but which showed none.
(Of course, the U.S. Securities and Exchange Commission somehow missed the fraud, too.)
The bank also should have noticed that the Madoff account had money coming in from customers and money going out to other customers, the suit claims, but no purchases or sales of stocks, bonds or Treasury bills. What did it think was happening?
JPMorgan also had duties to clients because it structured and sold them products linked to Madoff feeder funds. But whenever it attempted due diligence and ran into Madoff?s stone wall, it never even slowed down, according to the lawsuit.
Picard?s Job
The bank denies it knew about, much less aided Madoff?s fraud, and says the lawsuit has no merit.
Picard?s job is to go after money for the people who were bilked by Madoff?s Ponzi scheme and to do it aggressively. If he?s stretching the law, it?s the court?s job to rein him in.
But if what these lawsuits say is true, then the Mets owners built their businesses knowing they were using stolen money or ignoring that likelihood. And if Picard is right, JPMorgan abandoned its obligations under the law making it possible for Madoff to prey on hundreds, perhaps thousands more people.
Letting them off the hook by giving up only that which they gained and no more would hardly be justice.
(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)
--Editors: Charles W. Stevens, James Greiff
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To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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