Unsealed Complaint | Citi Tried to Pass Off Madoff Exposure – Irving Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC v Citibank and Citigroup Global Markets Limited

Citi Tried to Pass Off Madoff Exposure

Citigroup Inc tried to pass on its exposure to Bernard Madoff to other banks just months before his epic fraud was revealed, the Madoff trustee said in a lawsuit accusing a second major U.S. bank of unsavory dealings with the financier.

Trustee Irving Picard said red flags about Bernard L. Madoff Investment Securities LLC were apparent to Citi as early as 2005, according to court papers unsealed on Monday. The lawsuit seeks $425 million from the bank.

From the unsealed complaint…

Irving Picard,
Trustee for the Liquidation of
Bernard L. Madoff Investment Securities LLC

v

Citibank and Citigroup
Global Markets Limited

Armed with  public  and  considerable  non-public  information  about Madoff, Citi knew or should have known of possible fraud at Madoff’s investment advisory business.

Leverage And The Madoff Ponzi Scheme

The Madoff Feeder Funds wanted to use leverage to increase the amount of assets invested through Madoff, increasing their management and performance fees.  They found eager leverage-provider  partners  in  large  financial  institutions,  like Citi, who  created  any  number  of lending and alternative investment products designed for the same purpose – to exploit Madoff’s “success” for their own institutional gains.

The Citi Loan

In  2005,  a  Citi  entity2 made  a  loan  of  $300 million  to  a Madoff  Feeder  Fund called Rye Select Broad Market Prime Fund, L.P. (“Prime Fund”).  Virtually all of Prime Fund’s assets were invested through BLMIS.

In connection  with  the  Prime  Fund  transaction,  Citibank  lent  $300  million  to Prime  Fund  to  invest  directly  into BLMIS.   Later,  as Citi  became more  suspect  of Madoff’s legitimacy, Citi backed out of a proposal to provide leverage to a newly-created fund

Shortly thereafter,  Citibank  also  refused  to  increase  the amount  of  the  existing  Prime  Fund  loan,  and  ultimately cancelled  the  Citibank-Prime  Fund
lending  relationship, demanding  full repayment of  the $300 million  loan.   To  repay the  loan  to Citibank, Prime Fund withdrew and/or utilized more than $300 million from its BLMIS account and  then  subsequently  transferred  those  funds  to Citibank.   That money is Customer Property and should be returned to the BLMIS estate.

The Citi Swap

In 2005, CGML entered  into a  swap  transaction  for approximately $280 million with  a  Swiss-based  hedge  fund  known  as  Auriga  International  Limited  (“Auriga”).   The
underlying asset  for  this swap was Sentry.   As part of  this swap  transaction, CGML purchased $140 million of Sentry shares, and held a total of approximately $280 million of Sentry shares at various points in time between 2005 and 2008.  In the months prior to Madoff’s arrest in 2008, CGML redeemed  approximately $130 million  of  its  Sentry shares  on  notice  of  red  flags concerning Madoff’s very legitimacy.

CGML submitted  its  Sentry redemptions  and  received  multi-million  dollar transfers of money from Sentry at  times when Citi not only knew or should have known about major  red  flags  of  possible  fraudulent  activity  by Madoff,  but  in  fact  had  been  advised specifically  that Madoff was  likely  running  a massive  Ponzi  scheme.

CITI WAS ON INQUIRY NOTICE OF POSSIBLE MADOFF FRAUD

Citi  had  access  to  and  received  information  placing  it  on  inquiry notice  that Madoff’s advisory business was potentially a fraud, and/or that Madoff was making hundreds of millions, if not billions, of dollars in avoidable transfers.

Citi’s “Due Diligence” And Early Discovery Of The Risks Of Possible Fraud

During the course of Citi’s 2005 initial “due diligence,” and as part of negotiating the final terms of the Prime Fund loan transaction, Citi learned, among other things, that Tremont received  only  paper  copy trade  confirmations  approximately five  (5)  days  after BLMIS conducted the alleged trading – a practice rife with the possibility for fraud due to the ability of the brokerage firm to backdate or manufacture trading activity with no ability on the customer’s part to check that the trades actually took place.

Citi Sought An  Indemnity Against Madoff Fraud  In The Agreement Because Madoff’s Control Over The Trading And Custody Of Assets Was Unchecked

As part of  its pre-agreement due diligence, Citi flagged a key indicator of fraud: “[b]ecause  the  Investment  Advisor  [Madoff]  has  full  discretion  over  the  Brokerage  Account [Prime Fund’s account at BLMIS],  the potential risk, while  remote, of  fraud by the  Investment Advisor  is  introduced.”   In  the  same  document,  dated May 31,  2005,  an  entire  paragraph  is devoted  to  what  is  titled  “Fraud  by  the  Investment  Advisor  due  to  physical  control  of  the Brokerage Account and full discretion over account activity.”

The Terms Of The Prime Fund Loan

Under  the  Prime Fund  Loan’s  terms  and  conditions,  Tremont was  obligated  to provide  CNAI and  Citibank with weekly and monthly reports  of Madoff’s  purported  trading activity on  behalf  of  Prime  Fund.   Upon  information  and  belief,  Prime  Fund  and  Tremont provided this information to Citi.  Because of the anomalies apparent on the face of these reports, or which could be discovered upon reasonable review and analysis, this information placed Citi on  inquiry notice of fraudulent activity and/or fraud  in connection with hundreds of millions of
dollars of avoidable transfers being made by BLMIS.

ATTEMPTS  TO  FURTHER  EXPLOIT  MADOFF’S  RETURNS THROUGH TREMONT – CITI’S CONCERNS DEEPEN

In or  about  January 2006,  Tremont  and  several  individuals  at  Citi  began discussing  possible  transactions whereby Citibank  or CNAI would  provide  two  or  three  times leverage  for  either  a  single Tremont-sponsored BLMIS  feeder  fund,  or  two  distinct Tremont- sponsored  BLMIS  feeder  funds  with  a  single  share  class  each.

CITI’S “DILIGENCE”

With Citi having already executed nearly half a billion dollars worth of Madoff- related  financial  products,  it was,  upon  information  and  belief,  not  until March  2006  that Citi first  asked Sentry whether BLMIS’s mysterious  (and  ultimately  non-existent)  option  contracts were done over-the-counter or on a listed exchange.  CGML also asked if FGG could “tell us one to two names of the counterparties with which the option trades have been done.”

According to  , Citi was repeatedly told that Madoff refused to identify the options  counterparties,  and  that  Citi was  never  satisfied  in  terms  of  its  questions  concerning BLMIS’s  options  trading.   According  to  ,  Citi  did  nothing  more  to  attempt  to independently  identify options  counterparties  for  BLMIS  or  the  Madoff  Feeder  Funds. Additionally,  FGG  never  provided  Citi  with  copies  of  options  confirmations  received  from BLMIS.  In fact, FGG provided Citi with only one binder of trade confirmations during the April meeting with FGG, and the Citi representatives were not allowed by FGG to take the binder with them.

Citi  was  in  a  unique  position  to  discover  Madoff’s  fraud  by virtue  of  its Information  Agreement  with  Sentry,  giving  Citi  access  to  a  wide  array of  information  not otherwise publicly available.   Citi  also had  considerable non-public  information  about BLMIS to Citi should have led any reasonable investor in Citi’s position to discover numerous red flags of possible fraud involving BLMIS.

Upon information and belief, during 2007 and 2008, it became increasingly clear that CGML was no longer comfortable with its overall Madoff exposure, including its swap with Auriga.   In  an  internal  FGG  e-mail  about  potential  sources  for  new  structured  products, Vijayvergiya stated  he  “heard  about  a  year  ago  that  unless  they could meet BLM, Citi’s  risk group probably wouldn’t approve increasing their exposure.”

CITI TERMINATES THE AURIGA SWAP

Upon information and belief, by September 2008, CGML also began reaching out to other banks  to  take over  its  remaining exposure  to BLMIS.   In one e-mail, a CGML  trader said,  “We’re  needing  to  terminate  our Madoff  trade.   Do  you  have  appetite  for  that  risk  over there?”  to which  the  other  bank  responded,  “don’t  think  so, madoff  is  not  very popular  here either.”

CITI WAS SPECIFICALLY TOLD MADOFF WAS RUNNING A PONZI SCHEME

By no later than June 2007, and likely several years earlier, Citi had knowledge of the  possibility of Madoff’s  Ponzi  scheme.

Upon  information  and belief,  “redacted” had  the opportunity to meet and befriend Harry Markopolos, a  fellow member of the financial industry.  Markopolos is a certified financial analyst who, for many years, had been exclaiming that Madoff was most likely operating a Ponzi scheme and that BLMIS’s investment advisory business was a complete fraud.

Markopolos  reached  out  directly  to “redacted” via  e-mail  in  June  2007,  informing “redacted” of  Markopolos’s  suspicions  regarding  an  unspecified  leveraged  swap  that  provided exposure  to  Madoff.   Markopolos  made  his  suspicions  regarding  Madoff  remarkably clear stating, “[w]e all know how Ponzi schemes turn out.”  Upon information and belief, Markopolos and “redacted”  had additional oral and written communications before December 10, 2008, in which Madoff’s fraud was specifically discussed.

Years before the collapse of BLMIS, and before  the June 2007 email, “redacted”  met with Markopolos  at Citi’s New York  offices.   During  that  visit, Markopolos  showed  “redacted” a description of Madoff’s SSC Strategy and historical returns generated by that trading strategy as reported by a Madoff Feeder Fund, which, upon information and belief, was Sentry.

Markopolos asked  “redacted” whether  the  strategy that was described could  result  in the returns claimed.  Within minutes,  “redacted” concluded that Madoff’s strategy as described could not generate the returns indicated by the Madoff Feeder Fund.   “redacted” attempted to reconcile the discrepancy he  saw between  the  strategy as described and  the  returns  supposedly generated by the  strategy, but  could not  resolve  the discrepancy.    “redacted” quickly  concluded  that  the  claimed returns  were  not  in  fact  generated  by the Madoff  strategy as  described.   “redacted” relayed  his conclusion to Markopolos that same day.

“redacted” and Markopolos  also  discussed whether  others  at Citi were  familiar with Madoff trading in the equity and options markets.  That same day, before Markopolos left Citi’s offices  in New York, “redacted” asked around various desks at Citi and quickly determined  that no trader at Citi on the index trading desk was trading options with BLMIS, nor were they aware of BLMIS  trading OEX options.  “redacted”  also  asked salespeople  at Citi  if  they knew BLMIS  as  a customer or as someone who is active in the market, to which the salespeople told “redacted” “no.”

Citi willfully turned a blind eye to indicia of possible fraud at BLMIS based upon information  available  to  them.   Citi  knew,  and was  on  notice  of,  irregularities  and  problems concerning  the  trades  reported  by BLMIS,  and  strategically  chose  to  ignore  these  concerns  in order to continue to enrich themselves.

CITI EXECUTIVES ALSO KNEW MADOFF HAD BEEN BLACKLISTED

Upon information and belief, Citi learned more red flag information placing it on inquiry notice that Madoff was making fraudulent transfers when “redacted”  became its “redacted”
in  or  around March  2008.   Prior  to  joining Citi,   “redacted” “redacted” a multi-strategy hedge fund which was acquired by Citigroup in 2007.

COUNT ONE:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
11 U.S.C. §§ 548(a)(1)(A), 550(a), AND 551
Against Citibank and CNAI

COUNT TWO:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
11 U.S.C. §§ 548(a)(1)(B), 550(a), AND 551
Against Citibank and CNAI

COUNT THREE:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against Citibank and CNAI

COUNT FOUR:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against Citibank and CNAI

COUNT FIVE:
FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278,
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against Citibank and CNAI

COUNT SIX:
FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278,
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against Citibank and CNAI

COUNT SEVEN:
PREFERENTIAL TRANSFERS (SUBSEQUENT TRANSFEREE)
11 U.S.C. §§ 547(b), 550(a), AND 551
Against CGML

COUNT EIGHT:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
11 U.S.C. §§ 548(a)(1)(A), 550(a), AND 551
Against CGML

COUNT NINE:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
11 U.S.C. §§ 548(a)(1)(B), 550(a), AND 551
Against CGML

COUNT TEN:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 276, 276-a, 278
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against CGML

COUNT ELEVEN:
FRAUDULENT TRANSFER (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 273 AND 278
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against CGML

COUNT TWELVE:
FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 274, 278,
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against CGML

COUNT THIRTEEN:
FRAUDULENT TRANSFERS (SUBSEQUENT TRANSFEREE)
NEW YORK DEBTOR AND CREDITOR LAW §§ 275, 278,
AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 551
Against CGML

Full complaint below…

Quite interesting if you are into reading these kinds of things…

~

4closureFraud.org

~

Irving Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC v Citibank and Citigroup Global Markets Limited

Leave a Reply