He had a trading floor (practically a mini-exchange) which made front-running a distinct probability, and should have exposed him to more regulatory scrutiny, not less, as was the case (him being a good liberal Democrat, and all). That was "the well-known cloud over the head of Madoff" but he was audited by SEC only a few times, on outside tips, with only a slap on the wrist for "regulatory compliance" misdemeanors.
Dropping or reporting a client because someone heard something from someone at lunch? Investment banking (or many other industries) would not exist if that were the case, but that kind of hearsay "warnings" always make great headlines in lawsuit news.
There is no substance here, the better case can actually be made against SEC and FInRA. But Picard can't lose by filing these kinds of lawsuits against "deep pockets" that are not currently favored by public at large - he might get a settlement (ridiculous $5B in "damages" to his clients should be thrown out out immediately) because it keeps him "in business" and collecting legal fees for several years while it would cost JPMorgan (and other "deep pockets") millions in legal fees, time, reputation and potential business. That's not very different from modus operandi that cons Larry Milberg and Melvyn Weiss (of former Milberg Weiss Bershad & Schulman) used in their sleazy class action lawsuits, only here it's actually authorized by the SPIC:
Now JPMorgan could be saddled with lawsuits from Madoff investors for "the next five, six, seven years," said banking analyst Richard Bove of Rochdale Securities. < snip > ....."We've got a lot wrong this year, but we got this one right at least -- I said it looked too good to be true on that call with you in [September] . . . I guess it's true that when the tide goes out you see who is swimming naked," one staffer bragged after the humongous scam became public knowledge.
That comment actually proves that they didn't know about Bernie's Ponzi scheme - only that it "looked too good to be true" for them to invest with him. They didn't have the responsibility to do the same kind of due diligence for anyone else, or even disclose it (may even have been prevented from external disclosure by lack of evidence and potential "defamation" or "loss of business" lawsuits).
Quick dismissal of this kind of lawsuit would be a positive step against legal abuse; "clawback" process shouldn't be used for "fishing expeditions" and "lawsuits with intent to settle" based on nothing more than some "degree of separation" with the schemer.
From JPMorgan claims no wrongdoing in Madoff mess - NYP, 2011 February 09
..... Firing back, JPMorgan said in a lengthy court filing that Picard was effectively trying to get the courts to create new law holding banks to much tougher accountability standards. The trustee is entirely wrong in asserting that JPMorgan violated any federal statutes or regulations; quite simply, the trustee's interpretation of federal banking law would impose broad investigative duties on banks that do not exist, the bank's lawyers wrote. The bank also challenged Picard's legal standing to bring the case. JPMorgan said that as the trustee for Madoff's company, he had no authority to bring what amounted to an enormous backdoor class action on behalf of Madoff's customers. ..... < snip > JPMorgan Chase, the bank where Bernard Madoff kept his clients' money, said in a court filing Tuesday that it had no legal obligation to figure out that the Ponzi king's investment scheme was a fraud. ..... < snip >
Sounds familiar - this is effectively a "deep pockets" class action extortion suit à la Milberg Weiss; it's not within the letter, the spirit or the purview of the "clawback" law. A quick dismissal should put Picard in his place and back on track looking for the money and the real culprits / co-conspirators, not the scapegoats.