JPMorgan Chase, Bernard Madoff's bank, to pay US$1.7b to settle charges

JPMorgan Chase agrees to forfeit US$1.7 billion to settle criminal charges alleging it turned a blind eye to Bernard Madoff's massive Ponzi scheme

PUBLISHED : Wednesday, 08 January, 2014, 11:29pm
UPDATED : Thursday, 09 January, 2014, 4:28am

For more than 15 years, there were signs something was amiss with what US federal prosecutors in Manhattan call the "703 account" at JPMorgan Chase.

Money was being transferred back and forth for no reason. The account holder was recording double-digit returns on investments that were too good to be true. The bank itself was worried enough about possible fraud to withdraw its own investments from him.

The name on the account was Bernard Madoff and on Tuesday JPMorgan paid a steep price for keeping quiet about its suspicions.

Federal authorities announced the nation's largest bank will add to its other costly financial woes by forfeiting a record US$1.7 billion to settle criminal charges alleging it turned a blind eye to the Madoff fraud, plus pay an additional US$543 million to settle civil claims by victims.

It also will pay another US$350 million civil penalty for what the Treasury Department called "critical and widespread deficiencies" in its programmes to prevent money laundering and other suspicious activity. The bank failed to carry out its legal obligations to guard against money laundering while Madoff "built his massive house of cards", George Venizelos, head of the FBI's New York office, said at a news conference.

JPMorgan never closed or even … questioned Madoff’s Ponzienabling account

Madoff banked at JPMorgan through what court papers referred to as the "703 account". In 2008, the bank's London desk circulated a memo describing JPMorgan's inability to validate his trading activity or custody of assets and his "odd choice" of a one-man accounting firm, the government said.

In late October 2008, it filed a suspicious activity report with British officials. In the weeks that followed, JPMorgan withdrew about US$300 million of its own money from Madoff feeder funds. The fraud was revealed when Madoff was arrested in December 2008.

"Despite all these alarm bells, JPMorgan never closed or even seriously questioned Madoff's Ponzi-enabling 703 account," said US Attorney Preet Bharara. "On the other hand, when it came to its own money, JPMorgan knew how to connect the dots and take action to protect itself against risk."

JPMorgan said it recognised it "could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time".

It added: "We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."

Prosecutors called the US$1.7 billion the largest forfeiture by a US bank and the largest Department of Justice penalty for a Bank Secrecy Act violation.

The settlement includes a so-called deferred prosecution agreement that requires the bank to acknowledge failures in its protections against money laundering but also allows it to avoid criminal charges. No individual executives were accused of wrongdoing.

The agreement resolves two felony violations of the Bank Secrecy Act in connection with the bank's relationship with Bernard L. Madoff Investment Securities, the private investment arm of Madoff's former business.

Criminal charges will be deferred for two years as JPMorgan admits to its conduct, pays the US$1.7 billion to a fund established for victims of Madoff's fraud and reforms its anti-money-laundering policies.

A statement of facts included in the agreement described internal communications at JPMorgan expressing concern about how Madoff was generating his purported returns. As early as 1998, a JPMorgan fund manager wrote that the returns were "possibly too good to be true" and there were "too many red flags".

In more recent years, executives were disturbed by the fact that Madoff would not let the bank examine his books, the statement of facts said.

"How much do we have in Madoff at the moment?" a bank analyst wrote in a 2008 e-mail. "To be honest, the more I think about it, the more concerned I am."

When Madoff finally revealed to the FBI that his investment advisory business was a Ponzi scheme, fictitious account statements for thousands of clients showed US$60 billion in assets. Of the roughly US$17.5 billion in principal that was real, most of it was gone.

Since then, a court-appointed trustee has recovered more than US$9.78 billion, including a portion of the JPMorgan civil payout, to redistribute to clients that invested directly with Madoff. The US$1.7 billion criminal forfeiture will go to a second victims' pool, already with US$2.35 billion, that is processing claims from clients of so-called "feeder funds" that also invested heavily with Madoff. The JPMorgan settlement is the latest in a series of deals it has made to resolve its legal troubles.

In November, the bank agreed to pay US$13 billion over risky mortgage securities it sold before the financial crisis, the largest settlement to date between the Justice Department and a corporation.

The more than US$2.5 billion that JPMorgan is paying comes from a company that reported US$21.3 billion in net income for 2012. JPMorgan already has set aside US$23 billion this year to cover settlement and litigation costs.

The settlement of criminal charges "is good, but still inadequate to stop what can only be called a one-bank crime spree", said Dennis Kelleher, the president of Better Markets, a group that advocates strict financial regulation.

"Once again, not a single individual working for JPMorgan Chase has been held accountable. Banks do not commit crimes; bankers do," Kelleher said in a statement. "Until individuals, including executives, are held personally liable, fined and jailed, the crime spree will continue."

Asked why no individual bankers were charged, Bharara said the settlement was the best option under the law.

"Obviously, the statement of facts recites in great detail some of the roles that various individuals played within the overall systemic failure," he said. "But in the interest of justice, you've got to look at every case individually and our view was at this point the obvious charge was against the bank."

The bank's US$543 million agreement was to settle a civil suit with Irving Picard, the trustee liquidating Madoff's firm.

Picard's lawsuit revealed what it called internal communications suggesting that bank executives were aware of Madoff's schemes as far back as 1997. At the time, according to the complaint, another financial institution raised concerns about his transactions.

According to the lawsuit, a Madoff employee would deposit a cheque for between US$1 million and US$10 million into his account at JPMorgan almost every day, after drawing down the same amount at the other institution. The next day, the same amount would be wired back from Madoff's JPMorgan account to the other institution to make it appear he had twice as much money during that period.

The lawsuit cited a 2007 e-mail from John Hogan, then a senior risk officer at JPMorgan, discussing the suspicions of another bank executive.

"For whatever it's worth, I am sitting at lunch with Matt Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme," Hogan wrote, according to the lawsuit.

Picard, who has recovered more than US$10 billion for Madoff victims, claims that JPMorgan earned an estimated US$500 million in fees, interest payments and revenue from Madoff.

Picard has distributed about US$4.9 billion to victims, with billions more held in reserve until various legal issues are resolved.

"In the very early days of this effort, getting back a few pennies on the dollar was a goal," Picard said in an interview last month, around the five-year anniversary of Madoff's arrest on December 11, 2008.

Picard's latest accord with JPMorgan must be approved by a bankruptcy judge.

"JPMorgan as an institution failed, and failed miserably," said Bharara. "In part because of that failure, for decades Bernie Madoff was able to launder billions of dollars in Ponzi proceeds through … JPMorgan."

Additional reporting byThe Washington Post and Bloomberg