JPMorgan Chase & Co. (JPM:US), under siege on multiple fronts by state and federal prosecutors investigating alleged wrongdoing at the largest U.S. bank, is in talks with federal prosecutors in New York to resolve allegations it helped facilitate Bernard Madoff’s crimes.
The probe by Manhattan U.S. Attorney Preet Bharara is tied to how the bank handled the funds of the convicted money manager and whether it turned a blind eye to his multibillion-dollar fraud, the biggest Ponzi scheme in U.S. history.
The case may end in a deferred prosecution agreement, a person familiar with the matter said. Under such an agreement, the government agrees not to pursue prosecution for a period of time and dismiss the charges if the entity or individual improves its programs or complies with the law. It is one of the options U.S. authorities have discussed with the bank, including resolving the matter with just a fine, said the person, who asked not to be identified because the talks are private.
JPMorgan is in the midst of negotiating the terms of a tentative $13 billion accord with the Justice Department to resolve state and federal civil investigations tied to residential mortgage backed securities and the collapse of the housing market that led to the 2008 financial crisis.
The record mortgage settlement would help remove one of several legal issues facing the bank and its chief executive officer, Jamie Dimon, who has personally negotiated terms of the record deal with U.S. Attorney General Eric Holder, another person familiar with that agreement said.
JPMorgan, which has $23 billion in legal reserves, is trying to close as many investigations and outstanding lawsuits as it can before the end of the year, executives have said.
The New York Times reported earlier that a deferred prosecution deal in the Madoff probe was possible and said the discussions are preliminary. The government hasn’t decided what action to take against the bank, the person said.
“The firm is responding to various governmental investigations relating to Madoff, including by the Department of Justice and other regulators,” the bank said in a securities filing in August. JPMorgan was the primary banker for Madoff’s Bernard L. Madoff Investment Securities LLC, or BLMIS, for more than 20 years.
Brian Marchiony, a spokesman for the bank, declined to comment on the Madoff probe.
Jim Margolin, a spokesman for Bharara, declined to comment on JPMorgan’s talks with the Manhattan prosecutor regarding the Madoff fraud. Madoff, who pleaded guilty in 2009, is serving a 150-year prison term.
At least eight people, in addition to Madoff, have pleaded guilty to charges stemming from the case. Five former Madoff employees, who have pleaded not guilty, are currently on trial in federal court in New York, accused of conspiring for decades to hide Madoff’s fraud by creating millions of fake documents to trick customers and regulators.
In their criminal investigation, prosecutors have available to them documents and other evidence assembled by Irving Picard, the trustee in charge of liquidating Madoff’s accounts. He sued JPMorgan, seeking damages for its alleged role in helping the con man carry out his fraud scheme.
Amanda Remus, a spokeswoman for Picard, declined to comment on the federal probe.
Picard sued JPMorgan in December 2010, accusing the bank of aiding Madoff’s fraud. The lawsuit, eventually demanding $19 billion, the largest of Picard’s claims against a U.S. bank, was largely dismissed in November 2011. Picard unsuccessfully challenged the dismissal and other bank claims with the federal appeals court in Manhattan, and then asked the U.S. Supreme Court to consider the cases.
According to the trustee’s complaint, JPMorgan “had financial reports in its possession that clearly evidenced fraud,” David J. Sheehan, lead counsel for Picard and a partner at Baker & Hostetler LLP, said in a February 2011 statement.
JPMorgan benefited from Madoff accounts while it “helped perpetuate Madoff’s fraud by ignoring the red flags, and continuing to structure products and collect fees for their own enrichment,” according to the trustee’s lawsuit.
Picard cited both e-mails and oral communications to allege that JPM was careful not to invest in Madoff itself, and that several employees were suspicious of him. The trustee alleged that JPMorgan’s Private Bank “made a conscious and informed decision to avoid doing business with Madoff.”
“The Private Bank chose not to invest with any BLMIS feeder funds because it had never been able to reverse engineer how they made money,” an unidentified JPMorgan employee wrote in a message to customers after Madoff’s fraud case became public. That e-mail was included in an amended version of Picard’s complaint against JPMorgan.
The trustee’s complaint also cited an e-mail by a bank employee to colleagues on June 15, 2007.
“For whatever its worth, I am sitting at lunch with [JPMC Employee 1] who 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 [P]onzi scheme,” the employee wrote. “He said if we google the guy we can see the articles for ourselves--Pls do that and let us know what you find.”
After Madoff confessed to U.S. investigators in December 2008, another unidentified JPMorgan employee messaged co-workers.
“We’ve got a lot wrong this year but we got this one right at least---I said it looked too good to be true on that call with you” the employee wrote, referring to a September 2008 conversation.
“Despite suspecting it was dodgy I am still shocked to see this happen so suddenly,” the employee wrote. “I guess it’s true that when the tide goes out you see who is swimming naked.”
In responding to Picard’s suit, the bank issued a statement in 2011 saying it “did not know about or in any way become a party to the fraud” and called it an “unfounded claim” that JPMorgan earned substantial fees from Madoff’s account.
JPMorgan also objected in court when the trustee sought more freedom to use confidential Madoff documents provided by the bank.
The Office of the Comptroller of the Currency is investigating whether JPMorgan failed to report to regulators suspicious activity on Madoff’s account, according to a person familiar with the probe.
Discussions with prosecutors and the OCC have picked up pace in the last few weeks and the bank has indicated that it is willing to pay a fine to resolve the issue as soon as possible, said the person said, who asked not to be identified because the talks are private.
The OCC also told prosecutors that a criminal case against JPMorgan could trigger a review of its banking charter, the Wall Street Journal reported, citing unidentified people familiar with the matter.
Bryan Hubbard, a spokesman for the OCC, declined to comment on its probe or discussions with the Justice Department.
Investors have also sued JPMorgan, claiming the bank should have been aware that Madoff’s firm was passing all the money he stole from customers through a JPMorgan account known as the “703 Account.”
They had sought to represent all investors who had money invested with Madoff in December 2008, when he was arrested and the fraud collapsed. Many of those suits were later dismissed.
The bankruptcy trustee’s case is Picard v. JPMorgan Chase & Co., 11-cv-913, U.S. District Court, Southern District of New York (Manhattan).
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