Settling charges that it ignored evidence of fraud, the bank’s payments to the US government total nearly $20bn.<\/i><\/p>\n
JP Morgan has agreed to pay a record $2bn to settle charges that it knowingly ignored evidence <\/a>that\u00a0convicted fraudster Bernard Madoff\u2019s massive Ponzi scheme was \u201ctoo good to be true.\u201d<\/p>\n 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.<\/p>\n 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)<\/a> in connection with\u00a0Madoff\u2019s con<\/a>. 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.<\/p>\n 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\u2019s office. JP Morgan will pay another\u00a0$350m to settle with the US Office of the Comptroller of the Currency over related issues.\u00a0Shares of JP Morgan were down 1.3% at $58.26 in afternoon trading.<\/p>\n Preet Bharara, the US attorney for the southern district of New York, said\u00a0JP 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\u2019s returns were \u201cpossibly too good to be true\u201d and raised \u201ctoo many red flags\u201d to invest.<\/p>\n \u201cJP Morgan as an institution failed, and failed miserably,\u201d said Bharara at a New York press conference. There were \u201clots of failures by lots of people outside the bank,\u201d said Bharara but the bank allowed Madoff to operate for years despite its own concerns about his operations.<\/p>\n \u201cThe bank connected the dots when it came to its own profits but was not so diligent when it came to its legal obligations,\u201d said Bharara. Bharara said the bank had plenty of reasons to be suspicious of Madoff.<\/p>\n \u201cThe sheer volume and use of the funds in Madoff,\u201d 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\u2019s business, said Bharara.<\/p>\n \u201cWhen it came to its own money JP Morgan knew how to connect the dots and protect itself against risk,\u201d said Bharara. In 2007 there were grave concerns within the bank that Madoff was a \u201cPonzi scheme\u201d. The bank redeemed $275m of its own money from Madoff funds between October 2008 and December 2008.<\/p>\n After Madoff\u2019s arrest on December 11 2008 a supervisor at the bank wrote to a JP Morgan analyst: \u201cCan\u2019t say I\u2019m surprised.\u201d \u201cNo,\u201d replied the analyst.<\/p>\n Madoff was arrested at his Manhattan penthouse<\/a> 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<\/a> even though staff suspected something was wrong.<\/p>\n The fraudster himself predicted the bank would one day face a big fine over their relationship. In a 2011 interview<\/a> with the Financial Times he said: \u201cJPMorgan doesn\u2019t have a chance in hell of not coming up with a big settlement.\u201d He claimed: \u201cThere were people at the bank who knew what was going on.\u201d<\/p>\n The payment brings the total of fines imposed on JP Morgan <\/a>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>, a move allegedly made to drum up business.<\/p>\n 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.<\/p>\n US authorities believe that Madoff Securities operated as a Ponzi scheme for more than three decades<\/a>. 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<\/a>.<\/p>\n 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.<\/p>\n 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\u2019s own analysts were worried that Madoff was a fraudster.<\/p>\n In October 2008, a derivative analyst wrote a memo in which he questioned Madoff\u2019s alleged investment strategy. The memo questioned Madoff\u2019s \u201codd choice\u201d of a small, unknown accounting firm to audit his books and that the bank seemed to be relying on \u201cMadoff\u2019s integrity\u201d with little to validate that decision. \u201cThere are various elements in the story that could make us nervous,\u201d the memo stated, including an \u201capparent fear of Madoff, where no one dares ask any serious questions as long as the performance is good.\u201d<\/p>\n According to court papers filed by Irving Picard, the trustee charged with recouping losses for Madoff\u2019s victims, another JP Morgan banker claimed Madoff\u2019s \u201cOz-like signals\u201d were difficult to ignore some 18 months before the scheme collapsed.<\/p>\n Picard\u2019s filings also quote a June 2007 email from a senior JP Morgan banker warning colleagues that another banker \u201cjust 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.\u201d<\/p>\n In late October 2008 the bank alerted the UK\u2019s serious organised crime agency that Madoff\u2019s returns were \u201ctoo good to be true \u2013 meaning that it probably is.\u201d However it did not file a suspicious activity report with the US authorities.<\/p>\n The attorney general\u2019s agreement states that JP Morgan \u201cwilfully\u201d failed to report Madoff\u2019s suspicious activity and that its own internal compliance systems were inadequate.<\/p>\n JP Morgan has always denied wrongdoing in the case. In a statement the bank said it \u201ccould have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.\u201d<\/p>\n But the bank added that it did not believe any JP Morgan employee had knowingly assisted Madoff\u2019s Ponzi scheme. \u201cMadoff\u2019s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses,\u201d said the bank.<\/p>\n John Coffee, Columbia law professor, said: \u201cJP 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.\u201d That said Coffee said JP Morgan was not the only organisation that failed to stop Madoff. \u201cThe securities and exchange commission failed to spot him too,\u201d said Coffee.<\/p>\n JP Morgan’s deep pockets<\/b><\/p>\n $2bn<\/b> paid on Tuesday for failing to alert US authorities about Madoff Ponzi scheme, despite suspicions. Total fines in the past three years = $28.7bn<\/b><\/p>\n
\n$13bn<\/b> paid in November to settle charges that it routinely bundled bad home loans into securities sold as high-quality to investors.
\n$4.5bn<\/b> in November to settle allegations it mis-sold mortgage bonds to pension funds and other investors.
\n$920m<\/b> paid in September to settle US investigations into the \u201cLondon Whale\u201d trading scandal.
\n$470m<\/b> paid in September in ($390m refunds and $80m in settlement) for billing customers for identity theft protection they did not receive.
\n$410m<\/b> paid in July in penalties and repayments for alleged manipulation of California and midwest electricity markets.
\n$100m<\/b> paid in March to former customers of collapsed investment firm MF Global.
\n$850m<\/b> (approximately) paid in \u00adJanuary for robosigning \u2013 automatic home repossessions.
\n$6.4bn<\/b> \u2013 the total of nine separate fines paid in 2011 and 2012.<\/p>\n