Bernie Madoff

JPMorgan accused of aiding yet another Ponzi scheme

March 14, 2014: 2:01 PM ET

A civil complaint filed in federal court in Missouri Thursday accuses JPMorgan of allowing the Millennium Bank Ponzi scheme to operate right under its nose.

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FORTUNE -- The ghosts of financial crises past continue to haunt JPMorgan.

Just months after the bank settled with federal authorities over allegations that it turned a blind eye to Ponzi-schemer Bernie Madoff, the bank is facing fresh accusations that it failed to do anything about yet another, albeit much smaller, Ponzi scheme. The fraud was perpetrated by William Wise, a Canadian citizen who advertised yielding certificates of deposits online and used the money he received to fund his lavish lifestyle. Wise pleaded guilty in 2012 to 18 counts including mail and wire fraud but has yet to be sentenced.

According to a complaint filed Thursday in federal court in Missouri on behalf seven plaintiffs who claim to have been defrauded by Wise, he opened accounts at Washington Mutual Bank (WaMu) and used those accounts to deposit the money given to him by his victims. From these accounts, according to the complaint, Wise then funneled money into offshore accounts and to his friends and relatives.

Wise's scheme went on for five years, between 2004 and 2009, during which he defrauded investors of anywhere between $68 million and $200 million. Most of this occurred while Washington Mutual functioned as an independent bank, but it continued after it was put into receivership by the FDIC and sold to JPMorgan (JPM) in the fall of 2008. A previous class action suit on this matter was dismissed in March 2012 on the grounds that JPMorgan was not liable for fraud committed by WaMu before it purchased the bank. A spokesperson for JPMorgan declined to offer comment.

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Thursday's complaint unearths new documents, however, including an investigative report filed by JPMorgan on Oct. 8, 2008, which the plaintiffs argue shows that JPMorgan was aware of suspicious activity after its purchase of WAMU in the fall of 2008 but did nothing to stop it. According to the complaint, between October 2008 and March 2009, when the SEC shut down the scheme, roughly $16 million passed through the bank, and "ended up in overseas accounts beyond the reach of U.S. law enforcement authorities."

The complaint also includes a declaration from Casey Stein, a compliance manager at JPMorgan, who testified that he was aware by mid-February 2009 of suspicious activity going on in William Wise's Washington Mutual account. "The unusual activity ... involved rapid movement of funds and international wire transfers to countries with an increased risk of potential money laundering. Further, a large portion of the funds that were deposited into [Wise's] account were being redistributed to Wise, [his employee] Hoegel, and their apparent relatives," Stein said in a declaration included in the complaint. Though Stein's statement accurately describes the fraud, it contradicts the timing described in JPMorgan's investigative report, which suggests that the bank may have been aware of the fraudulent activity as early as October 2008.

Meanwhile federal regulations require that when banks are aware of "violations that require immediate attention" like money laundering schemes, the bank is supposed to immediately contact an appropriate law enforcement authority and the OCC by telephone, in addition to filing the sort of investigative report that was included in the complaint. The complaint alleges that JPMorgan never took this step, a claim that is backed up by the fact that the SEC didn't shut down the scheme until six months after the initial report was filed.

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