UPDATE 3-Madoff investors sue KPMG and major banks

* Charges bank with assisting in money laundering

* Heads of Tremont fund added to complaint (Adds byline, details from complaint, comments from Tremont, Massachusetts Mutual)

By Grant McCool and Gina Keating

NEW YORK/LOS ANGELES, Oct 20 (Reuters) - Some investors defrauded by epic swindler Bernard Madoff on Tuesday added accounting firm KPMG [KPMG.UL], JPMorgan Chase (JPM.N: 行情) and Bank of New York Mellon (BK.N: 行情) to a civil lawsuit in a New York court, lawyer Joseph Cotchett said.

The lawyer, who also named Oppenheimer Acquisition Corp, Massachusetts Mutual Life Insurance [MMLIC.UL], Tremont funds founder Sandra Manzke and former Tremont Chief Executive Robert Schulman in the amended lawsuit, said the complaint was based on his law firm's prison interview with Madoff in July, months of investigation and interviews with former employees.

Cotchett said "KPMG never blew the whistle on fraudulent conduct" at Madoff's British firm, Madoff Securities International Ltd, which the accounting firm audited.

The accounting firm also allegedly failed to catch "red flags" while auditing the feeder funds, including Tremont, that poured billions of dollars into Madoff's operations, the lawsuit read.

"The complaint alleges Bernard Madoff's fraud was not accomplished in isolation," the law firm said in a statement.

It "alleges JP Morgan and the Bank of New York as well as powerhouse accounting firm KPMG LLP and their international counterparts, KPMG UK and KPMG International, were primary players necessary to accomplish the fraud."

"JPMorgan Chase, the complaint alleges, helped Madoff launder money between the United States and London -- almost $6 billion of investors' money," said Cotchett, whose law firm Cotchett, Pitre and McCarthy is based in Burlingame, California.

The bank turned a blind eye to billions of dollars in transfers between Madoff's U.S. and U.K. accounts, which were engineered to make it appear that Madoff was able to sustain double-digit returns as the U.S. economy soured by trading in Europe, according to the complaint.

The lawsuit accuses JP Morgan and Bank of New York Mellon, administrator of the Rye Select Broad Market Prime Funds in which the plaintiffs invested, of failing to file Suspicious Activity Reports regarding suspicious money transfers between New York and London.

Investor Jay Wexler and other investors in the Rye fund are the plaintiffs in the lawsuit.

KPMG declined comment as did JPMorgan Chase. Massachusetts Mutual Life Insurance, parent company of Oppenheimer and Tremont funds, said the company "has strong defenses to the claims and will vigorously defend itself." A representative for Bank of New York Mellon could not be reached for comment.

Tremont spokesman Montieth Illingworth said the claims were false and that the company would defend against them vigorously in court.

The complaint, filed in New York State Supreme Court, also alleges "abuse of drugs and women as a pattern of conduct in the Madoff firm" - Bernard L. Madoff Investment Securities LLC in New York.

"Drug use in the office was described as rampant and likened the office to the 'North Pole' in reference to the cocaine use" at parties unwittingly paid for by investors, the complaint stated.

Madoff, arrested in December for orchestrating the biggest investment fraud in Wall Street history of up to $65 billion, is serving a life sentence in a medium security prison in Butner, North Carolina, after pleading guilty in March to the decades-long fraud.

The case is Jay Wexler on behalf of Rye Select Broad Market Prime Fund LP v KPMG LLP et al, New York State Supreme Court No. 101615/2009 (Editing by Steve Orlofsky, Leslie Gevirtz and Muralikumar Anantharaman)