NEW YORK (
) -- The high-profile lawsuit by Madoff bankruptcy trustee Irving Picard against
is just one of a number of lawsuits focusing on the scope of a bank's responsibility to protect its customers.
Picard is suing for $1 billion in fees and an additional $5.4 billion in damages from JPMorgan Chase, accusing the bank of "aiding and abetting Madoff's fraud" during its "decades-long role" as the primary banker for
Bernard L. Madoff Investment Securities
Separately, HSBC is being sued for 24 counts of financial fraud and misconduct by Picard, who is seeking to recover "at least $9 billion" from the London-based bank on top of unspecified damages. The suit claims that HSBC, which marketed Madoff's funds overseas, was "willfully and deliberately blind to the fraud."
JPMorgan Chase denied the allegations, according to a report in the New York Times Dealbook blog, saying that the claims were false. A spokesperson for HSBC could not be reached.
David Sheehan, counsel for the Madoff trustee and a partner at
, said that JPMorgan was "willfully blind to the fraud, even after learning about the numerous red flags surrounding Madoff," and that the bank "should pay the price for its central role in enabling Madoff's fraud."
But these type of lawsuits are not relegated to large banks. Smaller institutions can be embroiled in legal action of they don't keep an eye on the questionable activity of some customers.
For example, a class action lawsuit has been filed against
Gibraltar Private Bank
of Coral Gables, Fla., by William Scherer, for violating its own procedures and "blindly authorizing" numerous suspicious money transfers and disregarding apparent fraud warning signs" involving the accounts of Scott Rothstein, the Fort Lauderdale lawyer who pleaded guilty to a $1.2 billion Ponzi scheme in January.
Rothstein was sent to cool off in prison for 50 years in June even though he agreed to cooperate with prosecutors. Scherer's firm,
Conrad & Scherer
, is suing on behalf of 37 former customers of Rothstein.
In April Gibraltar said in a statement that there was no reason for the bank to be added to Scherer's lawsuit, since none of Rothstein's investors were clients of Gibraltar and that "the bank upheld all of its regulatory duties."
A TD Bank spokesperson told
that the bank can't discuss the case but has a pending motion to dismiss the claims. The spokesperson also said that TD Bank "believes and expects the facts to prove that it is not liable for the acts of Scott Rothstein, and will, as it has done to date, defend itself vigorously."
Thomas Tew of
- a Miami law firm representing Gibraltar - said that one legal question surrounding the numerous lawsuits against banks springing from clients that run alleged Ponzi schemes is whether or not a bank is responsible to protect the customers of its client.
He also believes that "in order to be responsible for a fraud, you have to have actual knowledge of the fraud being committed."
This argument was previously tested in another case against JPMorgan chase related to the Madoff affair, where
MLSMK Investments Company
sued JPMorgan. In July, Judge Barbara Jones of New York's Southern District ruled that "while it may be true that defendants could have connected the dots to determine Madoff committed fraud, the plaintiffs offered no facts to support the claim that they (JPM) actually reached a conclusion."
"So, you can have all these red flags, but just because they could have connected the dots,
plaintiffs need to show facts to support that they actually reached that conclusion," said Tew.
Finally, Tew added that Ponzi schemes bring about lawsuits with plaintiffs saying that banks should police the financial environment, but in his view, "you cannot have banks being watch dogs and questioning every transaction."
While it is uncertain what effect it will have on any civil lawsuits, Gibraltar Private Bank entered into cease and cesist order with the Office of Thrift Supervision in October. The bank was required to revise its procedures for compliance with the Bank Secrecy Act, anti money-laundering rules and Office of Foreign Assets Control regulations.
Gibraltar was taken private by an investor group led by founder Steven Hayworth that purchased the bank in September 2009 for $93 million from
Boston Private Financial Holdings
, which had acquired Gibraltar in October 2005 for roughly $248 million.
While courts may rule that banks don't have a responsibility to protect the customers of their deposit clients, banks do have enforcement responsibilities under federal law, making them the first line of defense against money laundering and other suspicious activities.
All bank employees are required to attend annual training to learn how to detect and report red flags, by filing Suspicious Activity Reports (SAR) with the Financial Crimes Enforcement Network, or FinCen, which is a U.S. Treasury bureau.
Jonathan Hullick, Gibraltar's former chief operating officer and a former senior policy specialist at the
Federal Deposit Insurance Corp.'s
Washington headquarters, told
that "banks have a federally-mandated responsibility to know their customers' businesses and monitor their activities for potential red flags, regardless of the importance of a customer relationship."
"If a bank fails to report suspicious activity involving a prominent customer that they report for other customers, that could violate federal law and create substantial liability for the bank and the executives involved in the decisions," he said.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.