The Bernie Madoff Ponzi case continues to offer attention-grabbing headlines and some startling revelations.  Compliance-Insights thinks this Bloomberg News headline might fall into that category:  "JPMorgan, Banks Say Madoff Trustee Would Break Secrets Pact."  

Perhaps we're being a tad sensitive, but what the heck is a "secrets pact" and what's the rationale for such an arrangement within an investigation into the "fraud of the century?"  

    Apparently, the story goes something like this...   JPMorgan Chase, which is being sued for $6.4 billion by Madoff trustee Irving Picard, said the trustee has no right to "abrogate" a year-long agreement to protect trade secrets by revising his rules for handling confidential information.  The bank was protesting Mr. Picard's court request for more freedom to use information demanded for his investigations.  JPMorgan is one of at least 8 banks and investment managers - including UBS, Citigroup, HSBC - filing objections against Mr. Picard's efforts.  

JPMorgan said it gave Picard documents 22 times in the past 15 months, relying on his agreement not to share the information with competitors or other parties.  Yet, if Mr. Picard has his way, the bank says its AML policies, risk-assessment methods and internal reviews might be shared with every major financial institution in New York and thousands of other parties.

Citigroup called Picard’s proposal "fatally flawed," noting that it had delivered thousands of pages of documents to Picard since receiving his July 2009 subpoena.  Like JPMorgan, Citi says the documents were delivered under a confidentiality agreement with Picard that he now is seeking

    Picard’s 2/1/11 proposal.    Mr. Picard's request reportedly would allow the trustee to share a bank’s trade secrets with more than 4,000 parties, UBS calculated in court papers - including Madoff customer names and account numbers, amounts of withdrawals, redemptions, transfers and transferees.  All would lose their protection, UBS said in its filing. 

Picard , who's demanding over $18bn from banks, accuses them of aiding Madoff’s fraud by ignoring red flags that should have prompted them to investigate.  The banks deny any wrongdoing, saying that fees earned from dealing with Madoff or feeder funds were minor for a big bank, giving no motive to be willfully blind, JPMorgan said in its rebuttal of the trustee’s allegations.

At least one bankruptcy lawyer, Harvey Miller, says Picard’s lawsuits against banks are in a "gray area" of the law - "It’s not clear a financial institution has fiduciary duties to investigate fraud and go out and report it."

A court hearing on Picard’s so-called litigation protective order is set for3/16.  The Bankruptcy Court case is Picard v. JPMorgan Chase & Co., 10-ap-4932.   [Bloomberg, 3/3]