It was one of the largest frauds ever perpetrated – and JPMorgan Chase & Co. had a front-row seat.
There were suspicious transfers of tens of millions of dollars. There were hard-to-believe returns to investors. And there was the odd choice of an accounting firm so obscure that one banker joked he should visit its office to make sure it wasn’t in fact a “car wash.”
For more than two decades, JP Morgan was Bernard Madoff’s main banker. On Tuesday, it agreed to pay $1.7-billion (U.S.) to resolve criminal violations of anti-money laundering laws in its dealings with Mr. Madoff.
JP Morgan, the nation’s largest bank, admitted that it failed to adequately police suspicious activity in Mr. Madoff’s accounts and neglected to report such activity to the authorities as required by law.
Mr. Madoff is currently serving a 150-year prison sentence in North Carolina for orchestrating an epic Ponzi scheme that cost investors an estimated $17.5-billion.
Prosecutors took the rare step of unveiling criminal charges against JP Morgan but declined to indict the firm. Instead, they reached a deal to forgo prosecution on the condition that the bank clean up its act – an arrangement known as a “deferred prosecution agreement.” Preet Bharara, the top federal prosecutor in Manhattan, said that JP Morgan “failed miserably” to meet the statutory requirements to monitor possible criminal activity.
“For years, the bank repeatedly ignored the warning signs,” he said at a press conference on Tuesday. What’s more, JP Morgan “connected the dots when it mattered to its own profit but was not so diligent otherwise when it came to its legal obligations.”
In the fall of 2008, for instance, JP Morgan employees in London were so concerned about the legitimacy of Mr. Madoff’s business that they began liquidating the bank’s investments connected to his firm and notified British authorities of their suspicions. But the bank didn’t share those worries with officials in the United States until after Mr. Madoff’s arrest on Dec. 11, 2008.
“We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time,” said Joseph Evangelisti, a JP Morgan spokesman, in an e-mailed statement. However, he added, “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”
The $1.7-billion penalty will go directly to Mr. Madoff’s victims, prosecutors said. JP Morgan will also pay an additional $800-million to settle other Madoff-related claims by U.S. regulators and private parties.
Tuesday’s fine adds to an eye-popping list of settlements for the bank as it attempts to resolve a host of legal troubles dating back to the financial crisis. In the last six months, JP Morgan has agreed to pay more than $20-billion in fines and settlements.
Now JP Morgan has joined a small list of banks to face criminal sanctions for violating anti-money laundering laws: in recent years, Wachovia Bank, an arm of Wells Fargo & Co., and HSBC Holdings Plc also entered into deferred prosecution agreements with U.S. authorities.
In such cases, prosecutors opt for a deal rather than risking the domino effect of a criminal prosecution, which could bring down the entire bank. “You have to think about what the effect of a criminal indictment and subsequent conviction would be on thousands of employees and shareholders and countless others,” said Michael Bresnick, a partner at Stein Mitchell Muse & Cipollone LLP in Washington, D.C. and a former federal prosecutor.
The agreement reached between prosecutors and JP Morgan portrays the bank as an institution that exercised a higher level of diligence in evaluating its own investments than it did in preventing suspicious activity by its clients.
Mr. Madoff’s Ponzi scheme, court documents noted, was “conducted almost exclusively” through a series of linked JP Morgan accounts, giving the bank a unique vantage point on the fraud.
In 1996, JP Morgan was notified of suspicious daily “round trip” transactions between Mr. Madoff’s accounts and one belonging to another wealthy client. The other bank involved in the transfers terminated its relationship with Mr. Madoff but JP Morgan took no action.
Two years later, an employee in another part of the bank was probing a possible investment in Mr. Madoff’s funds but concluded the returns were “possibly too good to be true” and raised “too many red flags” to proceed.
In 2007, the bank considered raising the limit on its investments with Mr. Madoff to $1-billion. It ultimately rejected the move after learning Mr. Madoff wouldn’t allow the bank to conduct its own direct due diligence. After the meeting where that decision was made, a senior bank executive sent a note to colleagues saying there is a “well-known cloud” over Mr. Madoff’s operation, which is “speculated to be a Ponzi scheme.”
Finally, in October, 2008, a JP Morgan analyst in London specializing in equity-linked derivatives looked into Mr. Madoff’s business. The resulting memo questioned the bank’s inability to validate Mr. Madoff’s trading activity and his choice of an unknown accounting firm. There are “various elements in the story that could make us nervous,” the analyst wrote. “It’s almost a cult he seems to have fostered.”
By the time Mr. Madoff was arrested in December, JP Morgan had successfully unwound 80 per cent of the position it held in the funds feeding into his business.