JPMorgan to Pay $1.7 Billion in Madoff Deferred Prosecution

Jan 07, 2014 10:58 am ET

(Updates with criminal filing in sixth paragraph.)

Jan. 7 (Bloomberg) -- JPMorgan Chase & Co. agreed to pay $1.7 billion to resolve U.S. claims that it facilitated Bernard Madoff’s Ponzi scheme, the largest in U.S. history, resolving yet another legal obstacle facing the embattled bank.

JPMorgan, the biggest bank in the U.S. by assets, entered into a deferred-prosecution agreement with Manhattan U.S. Attorney Preet Bharara, acknowledging oversight lapses related to an account Madoff used to fund his multibillion-dollar fraud. Separately, the bank agreed to pay $543 million to resolve private claims over losses tied to the scheme, according to a person with direct knowledge of the matter.

The U.S. agreement includes the “largest ever bank forfeiture and also the largest ever Department of Justice penalty,” Bharara said today in a statement. JPMorgan, led by Chief Executive Officer Jamie Dimon, agreed in 2013 to pay $15.7 billion to resolve other U.S. regulatory probes into practices including mortgage-bond sales and energy trading.

The bank still faces criminal inquiries into its energy trading practices, which were subject to a $410 million civil settlement with the Federal Energy Regulatory Commission in July. Along with other banks, the firm also faces a probe into the possible manipulation of interest rates and currency benchmarks in Europe.

‘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 today in an e-mailed statement. “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”

JPMorgan fell 60 cents to $58.40 at 10:51 a.m. in New York. The shares had climbed 30 percent in the past 12 months through yesterday.

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.

Almost $9.5 billion has been recovered as of Dec. 6, according to Irving Picard, the trustee overseeing the Madoff firm liquidation. Almost $4.9 billion has been returned to investors.

In the private plaintiff accord, JPMorgan will pay $325 million to Picard and $218 million to settle claims of class-action plaintiffs, said the person familiar with the matter, who requested anonymity because the deal hasn’t been publicly announced.

Firm’s Collapse

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 agreed to the filing of a two-count criminal information in Manhattan federal court. As part of the deferred prosecution agreement, the bank agreed to fully cooperate with the U.S. government in its investigation for a period of two years from execution of the accord.

No individuals were charged as part of the agreement.

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.

‘Too Good’

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.’”

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.

The New York-based bank is charged with failure to maintain an effective money-laundering program and failure to file a suspicious activity report, according to a copy of a letter dated yesterday to the bank’s lawyers provided by Bharara’s office.

Under the deferred prosecution agreement, JPMorgan admitted to a statement of facts and to pay the $1.7 billion to the government, which said it plans to distribute the funds to victims of Madoff’s fraud.

In recent years, such agreements have become a popular tool for the Justice Department to resolve criminal investigations against large banks.

Deferred Prosecution

HSBC Holdings Plc 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.

From 2000 to 2005, the Justice Department entered into a total of 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.

In the JPMorgan case, the U.S. said JPMorgan 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.

Four Months

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

Starting in the 1990s, employees of various JPMorgan entities and predecessor entities raised questions about Madoff Securities, including the validity about Madoff Securities, 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 so-called “Suspicious Action Reports” required under federal banking rules with the U.S., according to Bharara.

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

“Madoff Banker 1 had a limited and inaccurate understanding of both Madoff’s business as well as the purpose and balance of the demand deposit accounts maintained my Madoff Securities and JPMorgan,” the U.S. alleged.

Positive Returns

Madoff Securities reported consistently positive returns during the October 1987 stock market crash that JPMorgan and its predecessor entities, the U.S. said.

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

According to the government, after Madoff was arrested, the chief investment officer of JPMorgan’s Private Bank wrote to a private bank 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 bank employees, JPMorgan said in its acceptance of responsibility.

--With assistance from Dawn Kopecki in New York. Editors: Mary Romano, David E. Rovella