JP Morgan Chase to Pay More Than $2bn in Penalties for Madoff Ties

CAPITALISM, 13 Jan 2014

Dominic Rushe – The Guardian

Settling charges that it ignored evidence of fraud, the bank’s payments to the US government total nearly $20bn.

JP Morgan has agreed to pay a record $2bn to settle charges that it knowingly ignored evidence that convicted fraudster Bernard Madoff’s massive Ponzi scheme was “too good to be true.”

The settlements, announced Tuesday [7 Jan 2014], included a so-called deferred prosecution agreement that requires the bank to acknowledge its failures but also allows it to avoid criminal charges provided reforms are enacted at the bank within two years. No individual executives were accused of wrongdoing.

The US attorney’s office for the southern district of New York said the bank it had lodged two charges against JP Morgan for violations of the Bank Secrecy Act (BSA) in connection with Madoff’s con. The act requires banks to file suspicious activity reports when they “detect certain known or suspected violations of federal law or suspicious transactions”. To settle those charges, JP Morgan has agreed to pay $1.7bn.

The penalty, which is subject to court approval, is the “largest ever bank forfeiture and largest ever [Department of Justice] penalty for a Bank Secrecy Act violation,” according to the attorney’s office. JP Morgan will pay another $350m to settle with the US Office of the Comptroller of the Currency over related issues. Shares of JP Morgan were down 1.3% at $58.26 in afternoon trading.

Preet Bharara, the US attorney for the southern district of New York, said JP Morgan held suspicions about Madoff as early as 1998 but continued to take his business. One fund manager warned the bank in December 1998 that Madoff’s returns were “possibly too good to be true” and raised “too many red flags” to invest.

“JP Morgan as an institution failed, and failed miserably,” said Bharara at a New York press conference. There were “lots of failures by lots of people outside the bank,” said Bharara but the bank allowed Madoff to operate for years despite its own concerns about his operations.

“The bank connected the dots when it came to its own profits but was not so diligent when it came to its legal obligations,” said Bharara. Bharara said the bank had plenty of reasons to be suspicious of Madoff.

“The sheer volume and use of the funds in Madoff,” should have alerted the bank, said Bharara. Some $150bn went in and out of the account between 1998 and 2008 and none of it was used to buy securities, which was ostensibly Madoff’s business, said Bharara.

“When it came to its own money JP Morgan knew how to connect the dots and protect itself against risk,” said Bharara. In 2007 there were grave concerns within the bank that Madoff was a “Ponzi scheme”. The bank redeemed $275m of its own money from Madoff funds between October 2008 and December 2008.

After Madoff’s arrest on December 11 2008 a supervisor at the bank wrote to a JP Morgan analyst: “Can’t say I’m surprised.” “No,” replied the analyst.

Madoff was arrested at his Manhattan penthouse five years ago last month after his $20bn scam came to light. He is currently serving a 150-year prison sentence. JP Morgan was his bank for two decades and the US authorities charge that the bank continued to service his business even though staff suspected something was wrong.

The fraudster himself predicted the bank would one day face a big fine over their relationship. In a 2011 interview with the Financial Times he said: “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement.” He claimed: “There were people at the bank who knew what was going on.”

The payment brings the total of fines imposed on JP Morgan to nearly $20bn in the past year. The bank has also been fined for its mortgage bond sales and still faces an investigation into its hiring of the children of Chinese officials, a move allegedly made to drum up business.

JP Morgan will have to make quarterly reports to the US authorities for the next two years in order to prove it is in compliance with the BSA and anti-money laundering legislation. The bank has agreed not to write off the $1.7bn penalty against tax. The money will go to victims of Madoff’s fraudulent activities.

US authorities believe that Madoff Securities operated as a Ponzi scheme for more than three decades. While Madoff claimed to have technical formula that allowed him to produce outsized returns, he was in fact paying people with money taken from new clients in a giant pyramid scheme.

At the time of its collapse in December 2008 Madoff Securities claimed to have assets of more than $65bn. In fact its assets were worth around $300m.

The US authorities claim JP Morgan bankers were aware that Madoff was running a scam, one that was run almost exclusively through the bank. This arrangement continued even as the bank’s own analysts were worried that Madoff was a fraudster.

In October 2008, a derivative analyst wrote a memo in which he questioned Madoff’s alleged investment strategy. The memo questioned Madoff’s “odd choice” of a small, unknown accounting firm to audit his books and that the bank seemed to be relying on “Madoff’s integrity” with little to validate that decision. “There are various elements in the story that could make us nervous,” the memo stated, including an “apparent fear of Madoff, where no one dares ask any serious questions as long as the performance is good.”

According to court papers filed by Irving Picard, the trustee charged with recouping losses for Madoff’s victims, another JP Morgan banker claimed Madoff’s “Oz-like signals” were difficult to ignore some 18 months before the scheme collapsed.

Picard’s filings also quote a June 2007 email from a senior JP Morgan banker warning colleagues that another banker “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.”

In late October 2008 the bank alerted the UK’s serious organised crime agency that Madoff’s returns were “too good to be true – meaning that it probably is.” However it did not file a suspicious activity report with the US authorities.

The attorney general’s agreement states that JP Morgan “wilfully” failed to report Madoff’s suspicious activity and that its own internal compliance systems were inadequate.

JP Morgan has always denied wrongdoing in the case. In a statement the bank said 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.”

But the bank added that it did not believe any JP Morgan employee had knowingly assisted Madoff’s Ponzi scheme. “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses,” said the bank.

John Coffee, Columbia law professor, said: “JP Morgan worked with Madoff for 20-odd years. It appears they didn’t want to look too closely at a large and presumably profitable client.” That said Coffee said JP Morgan was not the only organisation that failed to stop Madoff. “The securities and exchange commission failed to spot him too,” said Coffee.

JP Morgan’s deep pockets

$2bn paid on Tuesday for failing to alert US authorities about Madoff Ponzi scheme, despite suspicions.
$13bn paid in November to settle charges that it routinely bundled bad home loans into securities sold as high-quality to investors.
$4.5bn in November to settle allegations it mis-sold mortgage bonds to pension funds and other investors.
$920m paid in September to settle US investigations into the “London Whale” trading scandal.
$470m paid in September in ($390m refunds and $80m in settlement) for billing customers for identity theft protection they did not receive.
$410m paid in July in penalties and repayments for alleged manipulation of California and midwest electricity markets.
$100m paid in March to former customers of collapsed investment firm MF Global.
$850m (approximately) paid in ­January for robosigning – automatic home repossessions.
$6.4bn – the total of nine separate fines paid in 2011 and 2012.

Total fines in the past three years = $28.7bn

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