JPMorgan Chase & Co., which agreed Tuesday to pay $1.7 billion to settle claims that it facilitated Bernard Madoff ’s Ponzi scheme, “failed miserably” as a financial institution, Manhattan U.S. Attorney Preet Bharara said.
“JPMorgan had an inadequate and ineffective anti-money-laundering program,” Bharara said at a Tuesday news conference.
JPMorgan, the biggest bank in the U.S. by assets, avoided prosecution by entering into an accord with Bharara’s office that acknowledged oversight lapses related to an account Madoff used to fund his fraud. The bank will pay $1.7 billion to settle the U.S. allegations. The bank cannot write off the sum as a tax deduction. JPMorgan will also pay $350 million in a related case by the Office of the Comptroller of the Currency, plus $543 million to cover separate private claims, the firm said.
“The bank connected the dots when it came to its own profits, but not when it came to its own legal obligations,” Bharara said, who added that the bank was aware of Madoff’s questionable transactions as early as 1994.
Starting in the 1990s, employees of various JPMorgan entities and predecessor entities raised questions about Madoff Securities, including the validity of the firm, the government said.
“At no time during this period did JPMorgan Chase and company personnel communicate their concerns about Madoff Securities,” the U.S. alleged. JPMorgan personnel also didn’t file any suspicious activity reports required under federal banking rules with the U.S., Bharara said. The New York-based bank acknowledged suspicion of Madoff’s investment firm in an Oct. 29, 2008, report to a U.K. regulator, the U.S. said in court papers.
At Tuesday’s news conference, Bharara displayed a timeline chart with comments made by JPMorgan employees who suspected Madoff ’s fraud that ended when he was arrested in December 2008 and cost investors about $17 billion. Madoff is serving a 150-year federal prison sentence in North Carolina.
A JPMorgan fund manager wrote in December 1998, that Madoff’s returns are “possibly too good to be true” and that there were “too many red flags” for the bank to do business with Madoff, according to the timeline.
In June 2007, a senior JPMorgan chief risk officer said, “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme,” according to the exhibit.
In a statement Tuesday, a JPMorgan spokesman noted that the bank has since poured significant resources into bolstering its controls but acknowledged that the bank “could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.”
The spokesman, Joseph M. Evangelisti, also struck a defensive note, saying, “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”
The U.S. agreement includes the largest-ever bank forfeiture and also the largest ever Department of Justice penalty, Bharara said. JPMorgan, led by Chief Executive Officer Jamie Dimon, agreed in 2013 to pay $15.7 billion to resolve other U.S. regulatory investigations into practices including mortgage-bond sales and energy trading.
Between late 1986 and the Madoff firm’s collapse, “the Madoff Ponzi scheme was conducted almost exclusively through a demand deposit account and other linked cash and brokerage accounts held at JPMorgan,” prosecutors said in a criminal information in Manhattan federal court. “Virtually all client investments were deposited into the primary Madoff Securities account at JPMorgan Chase Bank N.A. and virtually all client ‘redemptions’ were paid from a linked disbursement account.”
JPMorgan “failed to carry out its legal obligations while Bernard Madoff built his massive house of cards,” George Venizelos, the FBI assistant director in charge, said in a statement. “JPMorgan finds itself criminally charged as a consequence. But it took until after the arrest of Madoff, one of the worst crooks this office has ever seen, for JPMorgan to alert authorities to what the world already knew.”
“In order to avoid these types of disasters in the future - we all need to be invested in making our markets safer and more equitable,” Venizelos said. “The FBI can’t do it alone. Traders, compliance officers, analysts, bankers, and executives are the gatekeepers of the financial industry. We need their help protecting our markets.”
Bharara said that his office intends for “every penny” of the $1.7 billion go to “help make Bernie Madoff’s victims closer to whole.”
JPMorgan was Madoff ’s primary bank in the latter years of a multidecade fraud that ended in 2008 when he revealed to the FBI that his investment advisory business was a Ponzi scheme.
Account statements for thousands of clients showing $60 billion in assets were fiction. Of the roughly $17.5 billion in principal that was real, most of it was gone.
Since then, a court-appointed trustee has recovered more than $9.5 billion to redistribute to burned clients.
The trustee sued JPMorgan for $6.4 billion in 2010, accusing the bank of being “willfully blind” and “thoroughly complicit” in the fraud, but an appeals court found in 2012 that he had no legal standing to make the claim.
Information for this article was contributed by Patricia Hurtado and Bob Van Voris of Bloomberg News, Ben Protess and Jessica Silver-Greenberg of The New York Times and Larry Neumeister and Tom Hays of The Associated Press.
Business, Pages 25 on 01/08/2014