As Ponzi-master Bernie Madoff repeats jailhouse acquisitions that senior JPMorgan Chase & Co. (NYSE:JPM) officials “had direct knowledge” of his fraud, a theft from investors now estimated at $17.3 billion, a lawsuit filed in Manhattan yesterday pointed the finger directly at the bank’s teflon Chief Executive Jamie Dimon and 12 additional current and former JPMorgan directors and employees.

JPMorgan Chase

Bank “uniquely positioned” to see crimes

As Madoff’s bank and prime broker, “JPMorgan was uniquely positioned for 20 years to see Madoff’s crimes and put a stop to them,” the lawsuit said, reiterating what is a growing question.

The banking and prime brokerage relationship a hedge fund has is among its most strategic and intimate.  Like its accounting relationship, the bank has access to the profit and loss statements, but the banking / brokerage relationship is more intimate. Unlike an accountant, the bank’s brokerage unit typically is expected to understand what’s going on inside the hedge fund’s investment strategy.  In the Madoff Ponzi scheme there was very little “investing.”  In fact the amazing returns cited often were the source of considerable buzz and even disbelief among hedge fund professionals that a strategy could operate so consistently regardless of market environment.

Alternative investment brokerage firms processing trades are known to watch as the fund manager executes the investment strategy.  Regulators typically rely on brokerage firms, actually mandated in certain rules, to assist in preventing fraud. Knowledge of a fraud and not reporting suspicious activity, or covering up that activity, is typically the source of significant regulatory and criminal scrutiny.

A 121-page complaint against JPMorgan Chase & Co. (NYSE:JPM), unsealed Thursday by the U.S. Bankruptcy Court, says “By October, 2008, JPMC’s London office reported to the United Kingdom’s Serious Organised Crime Agency (SOCA) that it knew Madoff was ‘too good to be true,’ and a likely fraud…Incredibly…JPMC still did nothing to stop the fraud.”

Lawsuit: Bank executives confronted Madoff, then backed off

While there is a plethora of evidence against JPMorgan Chase & Co. (NYSE:JPM) cited in the complaint, perhaps most damning are charges that two senior JPMorgan executives went as far as to confront Madoff with “significant concerns about irregularities.” The suit says that the bank was “petrified” with losing business after one associate of Madoff, the late Norman Levy, had threatened to pull his business away from J.P. Morgan if questions about Madoff didn’t stop.

The relationship between Madoff, Levy and JPMorgan is interesting to consider.  The lawsuit claims JPMorgan examined reports that Madoff was required to produce on Levy, a former client of JPMorgan and Madoff.  The reports made it appear that Madoff was not investing Levy’s money or lending him money on margin.  As Levy’s banker, J.P. Morgan saw his brokerage accounts, which showed margin accounts with the Madoff firm, according to reports.

DoJ settlement doesn’t mention key Levy relationship

The lawsuit says Madoff’s account of the relationship between Levy and J.P. Morgan is confirmed by testimony in the bank’s deferred prosecution agreement with the DoJ. In the government’s January settlement of criminal and civil charges against JPMorgan, where the bank agreed to settle charges it ignored serious signs of the fraud for $2.6 billion, the DoJ only identified Levy only as “Private Bank Client” and did not mention what is being considered a key element in the case.

DoJ accused of not revealing criminal information

It’s important to put into context that official DoJ documents in the case failed to mention the Levy relationship with JPMorgan and Madoff, as it might be construed as a smoking gun of sorts. This January, Better Markets, a non-partisan organization promoting financial reform, sued the DoJ over a $13 billion settlement with JPMorgan concerning unregulated mortgage derivatives irregularities at the center of the 2008 financial crisis.  The suit claims, among other things, the DoJ should not be allowed to withhold from public view potential criminal information. “The DOJ and the Attorney General have used the settlement amount of $13 billion as a sword and a shield to deflect questions and blind people to the utter lack of meaningful information about their unilateral action and JP Morgan Chase’s illegal conduct,” the complaint reads. Serious questions remain regarding DoJ involvement in blocking the investigation into MF Global and its CEO, Jon Corzine. JPMorgan was the custodian bank and clearing firm for MF Global when $1.6 billion of customer funds “disappeared” and were later located.  A large percentage of funds MF Global had transferred were ultimately found at JPMorgan.

Lawsuit against JPMorgan executives filed by JPMorgan shareholders

Frustration exists in certain quarters with the apparent impunity in which JPMorgan Chase & Co. (NYSE:JPM) executives are allowed to operate.  For instance, after being hit with $20 billion in regulatory fines in 2013, the most in history of any bank, JPMorgan’s board of directors gave Jamie Dimon a 74% raise.

The lawsuit against the bank was filed on behalf of JPMorgan shareholders by Central Laborers Pension Fund and Steamfitters Local 449 Pension Fund, who are also shareholders in the bank.