Welcome to the club, Citigroup.  Madoff trustee Irving Picard seeks $425 million from Citigroup Inc.’s Citibank, saying the bank ignored warning signs of Bernie Madoff’s Ponzi scheme.  The complaint says that an unidentified bank executive knew Bernie's stated trading strategy couldn’t generate the reported returns.  The $425mn was earned "in connection with" a loan to a Madoff feeder fund and a swap transaction with a Swiss hedge fund linked to a second feeder fund.

The unidentified Citibank executive, who was responsible for making recommendations to clients on derivatives, "concluded" by June 2007 that returns reported by a Madoff feeder fund, Fairfield Sentry Ltd., couldn’t have come from the strategy.  That executive reached his conclusion after meeting with whistleblower Harry Markopolos, who also alerted U.S. regulators to the fraud.  The Citibank official later communicated with Markopolos orally and in writing, specifically discussing the fraud before the Ponzi scheme was exposed in December 2008.

"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."  -- Trustee Picard.

"Citi will vigorously defend against these claims by the trustee as they are entirely without merit and completely false." -- Citi spokesperson. 

    Citibank's Alleged Red Flag.   Around March 2008, Citibank allegedly learned "red flag information" that Madoff was making fraudulent transfers from an unidentified employee whose previous firm had blacklisted Madoff-related investments.  Soon after, the bank began to unwind its Madoff trades and rid itself of its remaining Madoff exposure, Picard charges. 

The main case is SIPC v. Bernard L. Madoff Investment Securities LLC (BLMIS), 08-01789.

The Citigroup case is Picard v. Citibank, 10-05345, U.S. Bankruptcy Court, Southern District of New York Manhattan).   [Bloomberg, 2/22]