J.P. MORGAN CHASE PAY $2.6 BILLION FINE TO AVOID INVESTIGATION ON DECADES-LONG RELATIONSHIP WITH MADOFF PONZI SCHEME
On Sunday evening, January 5th, at 10pm, a story was released in New York Times DealBook in their Legal/Regulatory section.
It was quickly picked up by Agence France-Presse Monday morning. http://www.afp.com/en/node/1231422
J.P. Morgan is the bank that Mr. Madoff used during his decades long ponzi scheme. Wall Street Journal reported on Friday, December 6th, 2013 that J.P. Morgan was in mediation with the U.S. Attorney Office of Preet Bharara in Manhattan regarding their negligence over warnings about Mr. Madoff.
Apparently there were problems for over 15 years with what Federal prosecutors called the “703 account” at JP Morgan Chase & Co. Money was transferred back and forth for no reason. The account owner was recording double-digit returns on investments. JP Morgan itself was worried enough about possible fraud that they withdrew their own investments from the account owner. The account owner was Bernard L. Madoff Investment Securities.
Madoff banked at JP Morgan through what court papers referred to as the “703 account.” In 2008, JP Morgan’s London desk circulated a memo describing JP Morgan’s inability to validate his trading activity or custody of assets, and his “odd choice” of a one-man accounting firm. In late October 2008, JP Morgan did file a Suspicious Activity Report with British officials. JP Morgan withdrew $300 Million of its own money from Madoff feeder funds.
U.S. Attorney Preet Bharara’s office wanted an answer as to why J.P. Morgan Chase & Co. did not file any SAR (Suspicious Activity Report) during their two-decade long business relationship. J.P. Morgan was negotiating a fine and deferred prosecution per the Dec. 6th report. Sunday night’s report came out with the fine amount: $2.6 Billion.
This fine will mean the bank avoids litigation. At the time of the collapse of the Bernard L. Madoff Investment Securities ponzi scheme, the firm claimed it has $65 Billion in client assets under management, whereas it only had $300 Million. J.P. Morgan is the biggest bank in the US by assets.
J.P. Morgan did raise concerns with UK regulators more than a month before Mr. Madoff’s arrest in December 2008. In a document filed with Britain’s Serious Organized Crime Agency, JP Morgan raised several concerns about Bernard L. Madoff Investment Securities, such as returns that appeared “too good to be true.” As to why nothing else was reported during their two-decade business relationship, that is what U.S. Attorney Bharara is investigating. The FBI is also investigating the bank for any larger patterns of failures in controls. JP Morgan has said it did not know about the fraud. SAR (Suspicious Activity Reports) are required by law from banks when they detect suspicious transactions, or signs of violation of federal law.
“Despite all these alarm bells, JP Morgan never closed, nor seriously questioned Madoff’s Ponzi-enabling 703 account,” U.S. Attorney Preet Bharara said. “On the other hand, when it came to its own money, JP Morgan knew to connect the dots and take action to protect itself against risk.”
The Wall Street Journal is reporting the bulk of the $2.6 Billion payout is going to Madoff victims. Reports are conflicting, and ABC News reports $1.7 Billion will settle criminal charges for JP Morgan turning a blind eye to the Madoff fraud; $543 Million will settle civil claims by victims; $350 Million will go towards a civil penalty for what the Treasury Dept. called “critical and widespread deficiencies” in its AML (Anti-Money Laundering) programs.
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 FBI’s New York office, said at a news conference.
The Madoff probe is just part of a series of legal troubles for the megabank, which has agreed in the past months to pay nearly $20 Billion to settle various lawsuits and probes.
The bank reports that their employees acted in good faith on the relationship with Madoff Securities. The authorities involved have declined to comment on the JP Morgan fine. In 2009, Mr. Madoff was ordered to serve 150 years in prison. The appointed liquidator of Madoff’s business, Irving Picard, originally began litigation against JP Morgan in the amount of $20 Billion, but a Federal judge and then an Appeals court rejected Picard’s action, on the argument that only the cheated investors can launch litigation themselves. The procedural issue is now before the Supreme Court.
JP Morgan was also recently under scrutiny for its practice in China of hiring children of the ruling elite to gain entrance in to China’s banking market.
Prosecutors called the $2.6 Billion fine the largest forfeiture ever by a U.S. bank and the largest DoJ penalty for a Bank Secrecy Act violation.