Bloomberg News

JPMorgan to Pay $2.6 Billion Over Madoff Scheme Lapses

January 08, 2014

Bernard Madoff

Bernard Madoff walks out of Manhattan federal court in New York, U.S., on Jan. 5, 2009. Photographer: Jin Lee/Bloomberg

JPMorgan Chase & Co. (JPM:US) will pay $2.6 billion to resolve criminal and civil allegations it failed to stop Bernard Madoff’s Ponzi scheme, bringing its legal settlements from the past two years to more than $29 billion and further eroding its once-record earnings.

JPMorgan avoided prosecution by acknowledging in an accord with the U.S. that it ignored red flags for about 15 years that Madoff used his account to run a fraud, Manhattan U.S. Attorney Preet Bharara said. The bank will pay $1.7 billion to settle the government’s charges, $350 million in a related case by the Office of the Comptroller of the Currency and $543 million to cover private claims, the firm said in a filing.

The company “failed miserably” in its responsibility as a financial firm, Bharara said yesterday at a press conference. “The bank connected the dots when it came to its own profits but not when it came to its own legal obligations.”

Related: Madoff Trustee Tops $10B Recovery With Bank Deal

JPMorgan, led by Chief Executive Officer Jamie Dimon, has announced settlements of government and private disputes in the past two years equal to about three-fourths of the $39 billion of profit analysts estimate the bank will have earned in that time after it reports fourth-quarter results (JPM:US) next week.

The bank will probably say earnings fell about 20 percent to $17 billion in 2013, ending three straight years of record profits under Dimon’s watch, according to analysts’ estimates compiled by Bloomberg. The cost of yesterday’s settlements reduced net income for the fourth quarter by about $850 million, the bank said.

The agreements, which include a record Justice Department penalty for a violation of the Bank Secrecy Act, highlighted inadequate programs for policing money laundering. The actions take JPMorgan a step closer to resolving a slate of probes that have engulfed the bank since the 2008 financial crisis.

‘Wake Up’

JPMorgan’s board (JPM:US) needs to “wake up” and question the settlements reached during Dimon’s tenure, said Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University.

“This is a continuation of a systemic problem at the bank,” Williams said. “It’s a cultural problem that stems from the top.”

The bank reached a record $13 billion settlement in November to end probes into mortgage-bond sales. The company also resolved inquiries last year into botched derivatives bets, energy-market manipulation and credit-monitoring products.

Dimon, 57, has said legal costs at the bank will remain high for the next few years as he attempts to deal with remaining probes, which include investigations into whether hirings in Asia violated anti-bribery laws and possible manipulation of interest rates and currency benchmarks. The lender added about $400 million to litigation reserves in the 2013 fourth quarter on a pretax basis.

Reaching Peak

Investors aren’t preoccupied with the legal costs because they think the worst has passed, said Charlie Peabody, an analyst at Portales Partners LLC.

“The prevalent attitude is that whatever the litigation costs were in 2013, we think the peak is at hand,” he said.

Wall Street firms have spent years fighting claims by Madoff’s victims that the companies ignored wrongdoing to continue reaping fees. Madoff, 75, maintained accounts with JPMorgan for more than 20 years before confessing to running a fraud that cost investors about $17 billion. He’s serving a 150-year federal prison sentence in North Carolina.

‘Better Job’

“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,” Joseph Evangelisti, a spokesman for JPMorgan, said in an e-mailed statement. “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”

No individuals were charged as part of the agreement.

JPMorgan fell 1.2 percent to $58.32 yesterday in New York. That trimmed the New York-based firm’s advance for the past 12 months to 28 percent, trailing the 31 percent gain for the 24-company KBW Bank Index. (BKX)

With yesterday’s settlement, the U.S. and Irving Picard, the trustee unwinding Madoff’s defunct investment firm, have recovered about $14 billion.

In the private accord, JPMorgan will pay $325 million to Picard and $218 million to settle claims of class-action plaintiffs, the bank said.

Picard has so far returned to investors about $4.9 billion of the $10 billion he has recovered since he started liquidating the firm five years ago, according to his website. The U.S. will distribute its $4 billion in recoveries through a separate process. The government has allowed people who lost money through feeder funds to also bring claims.

Promising Cooperation

From late 1986 until 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 filing 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.”

The bank is charged with one count of failure to maintain an effective money-laundering program and one count of failure to file a suspicious activity report. As part of the deferred prosecution agreement, JPMorgan promised to cooperate with the U.S. government in its investigation for a period of two years from execution of the accord. Charges are usually dismissed after the term of such an agreement expires.

Redemption Requests

JPMorgan acknowledged suspicion of Madoff’s investment firm in an Oct. 29, 2008, report to a U.K. regulator, the U.S. government said in court papers.

The bank said the “‘investment performance achieved by (the Madoff Securities) funds ... is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear too good to be true -- meaning that it probably is,’” according to the government filing.

JPMorgan told the agency that as a result “‘it had submitted redemption requests for more than $300 million of its own funds, which were invested in Madoff Securities ‘feeder’ funds,’” according to prosecutors.

In recent years, deferred-prosecution agreements have become a common tool for the Justice Department to resolve criminal investigations against large banks.

From 2000 to 2005, the Justice Department entered into 35 corporate deferred-prosecution and non-prosecution agreements, according to data compiled by Gibson Dunn & Crutcher LLP. Since 2006, the department has struck 222 such deals, according to the law firm.

Linked Accounts

HSBC Holdings Plc (HSBA) entered into a $1.9 billion deferred-prosecution agreement in December 2012 to resolve allegations of money laundering and violations of U.S. sanctions on Iran.

In the JPMorgan case, the U.S. said the bank and its entities had identified questionable transactions by Madoff Securities and ignored them.

A series of Madoff accounts were linked under the umbrella of a centralized “concentration account” known as the “703 Account” that received the overwhelming majority of funds that Madoff’s victims invested with Madoff Securities. The account at its peak in August 2008 held about $5.6 billion, the U.S. said.

In the four months before the Madoff firm collapsed in December 2008, billions of dollars were transferred from it to customers of Madoff Securities, leaving a balance of $234 million, the U.S. said.

Money Laundering

Starting in the 1990s, employees of JPMorgan entities and predecessors 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 employees also didn’t file any suspicious activity reports required under federal banking rules, according to Bharara.

JPMorgan had tools to identify money laundering among broker-dealer clients and a JPMorgan banker made “periodic” visits to staff at Madoff’s Manhattan offices, the U.S. said.

Madoff Securities reported consistently positive returns during the October 1987 stock market crash, the U.S. said.

In late 2007, JPMorgan private bank personnel conducted due diligence on Madoff Securities, the lender said, according to the acceptance of responsibility portion of the accord with the U.S. JPMorgan staff were told that “Madoff would be unwilling to meet with JPMorgan Chase in connection with its due diligence efforts,” prosecutors said. The firm then ended the process.

According to the government, after Madoff was arrested, the chief investment officer of JPMorgan’s Private Bank wrote to a customer, stating, “We did not do business with the Madoff funds, having never been able to reverse engineer how they made the money -- the numbers didn’t add up.”

JPMorgan Private Bank personnel didn’t provide this information to other employees, JPMorgan said in its acceptance of responsibility.

To contact the reporters on this story: Patricia Hurtado in Federal Court in Manhattan at

pathurtado@bloomberg.net; Greg Farrell in New York at gregfarrell@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Sara Forden at sforden@bloomberg.net; Peter Eichenbaum at peichenbaum@bloomberg.net


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