The bank will pay the fine, a record for a violation of the Bank Secrecy Act, for failing to report suspicious activity by its client Bernard L. Madoff to authorities.
|Scooped by Joan Dozier|
Updated, 9:37 p.m. | Two men who occupy coveted roles in Manhattan’s power elite, one the city’s top federal prosecutor and the other its top banker, sat down in early November to discuss a case that was weighing on them both.
Preet Bharara, the United States attorney in Manhattan, and Jamie Dimon, the chief executive of JPMorgan Chase, gathered in Lower Manhattan as Mr. Bharara’s prosecutors were considering criminal charges against Mr. Dimon’s bank for turning a blind eye to the Ponzi scheme run by Bernard L. Madoff. Mr. Dimon and his lawyers outlined the bank’s defense in the hopes of securing a lesser civil case, according to people briefed on the meeting.
But at the cordial meeting in Mr. Bharara’s windowless conference room lined with law books, the prosecutors would not budge. Mr. Bharara — flanked by his own lieutenants, including Richard B. Zabel and Lorin L. Reisner — made it clear that he thought the wrongdoing was significant enough to warrant a criminal case.
On Tuesday, Mr. Bharara announced the culmination of that case, imposing a $1.7 billion penalty stemming from two felony violations of the Bank Secrecy Act, a federal law that requires banks to alert authorities to suspicious activity. The prosecutors, calling the amount a record for violating that 1970 federal law, will direct the money to Mr. Madoff’s victims.
The outcome of the case and the tenor of the settlement talks underscore the significant leverage prosecutors wield when negotiating with Wall Street’s biggest firms. Even though JPMorgan had defeated a similar private lawsuit just months earlier, bank executives were unwilling to gamble against the government.
Within weeks of meeting Mr. Bharara and recognizing their limited bargaining power, JPMorgan’s lawyers accepted the $1.7 billion penalty, the people briefed on the meeting said, which was within the range that prosecutors initially proposed. The bank also agreed to pay $350 million to the Office of the Comptroller of the Currency, accepting the agency’s only offer, one of the people said.
It could have been worse for the bank. At one point, prosecutors were weighing whether to demand that the bank plead guilty to a criminal charge, a move that senior executives feared could have devastating ripple effects. Rather than extracting a guilty plea, prosecutors struck a so-called deferred-prosecution agreement, suspending an indictment for two years as long as JPMorgan overhauls its controls against money-laundering.
Still, the size of the fine and the rarity of a deferred-prosecution agreement — such deals are scarcely used against giant American banks and are typically employed only when misconduct is extreme — reflect the magnitude of the accusations.
Having served as Mr. Madoff’s primary bank for more than two decades, JPMorgan had a unique window into his scheme. In a document outlining the bank’s wrongdoing, prosecutors argued that “the Madoff Ponzi scheme was conducted almost exclusively” through various accounts held at JPMorgan.
At a news conference on Tuesday, Mr. Bharara drew a direct line between Mr. Madoff’s fraud and JPMorgan’s failings, citing the bank for “repeatedly” ignoring warning signs.
“In part because of that failure, for decades Bernie Madoff was able to launder billions of dollars in Ponzi proceeds,” Mr. Bharara said.
George Venizelos, a senior F.B.I. official, added that “JPMorgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards.”
In a statement on Tuesday, a JPMorgan spokesman noted that the bank had poured significant resources into bolstering its controls, but acknowledged that it “could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.”
The spokesman, Joseph Evangelisti, also defended the bank’s employees, saying, “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.” He added that “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.”
The charges against JPMorgan, the result of an F.B.I. investigation that spanned several years, are emblematic of a broader problem among giant global banks: ignoring the warning signs of fraud. The case comes a year after HSBC, the large British bank, paid a $1.9 billion fine for enabling Mexican drug cartels to launder cash through its branches.
The case punctuated a sweeping investigation into the movement of tainted money through the American financial system, a crackdown that ensnared other large British banks like Standard Chartered and Barclays. Each of the banks received a deferred-prosecution agreement.
For JPMorgan, the Madoff case is the bank’s latest steep payout to the government. In November, JPMorgan paid a record $13 billion to the Justice Department and other authorities over its sale of questionable mortgage securities in the lead-up to the financial crisis. All told, after paying these settlements, JPMorgan will have paid out some $20 billion to resolve government investigations over the last 12 months.
The payouts, which all but entirely resolve JPMorgan’s Madoff problems, represent a mixed outcome for the bank. While the big-dollar sums are an embarrassment to a bank that once wielded greater influence in Washington, the settlements also allow JPMorgan to put the cases behind it. As JPMorgan continues to report robust profits, the cases are a distraction that the bank is aiming to resolve in rapid succession.
Yet the comptroller’s office also noted on Tuesday that its investigation remained open. In a statement, it declared: “We will continue our oversight efforts and take further action as warranted.”
And critics of Wall Street are unsatisfied, noting that Mr. Bharara’s office opted to defer prosecution and did not charge any JPMorgan employees with wrongdoing.
Preet Bharara, the United States attorney for the Southern District of New York.
Chester Higgins Jr./The New York Times
Preet Bharara, the United States attorney for the Southern District of New York.
“Banks do not commit crimes; bankers do,” said Dennis M. Kelleher, the head of Better Markets, an advocacy group.
In taking aim at JPMorgan, prosecutors reached back two decades to show how the bank ignored warning signs about Mr. Madoff. When one arm of the bank considered a business deal with Mr. Madoff’s firm in 1998, an employee remarked that the financier’s returns were “possibly too good to be true,” and that there were “too many red flags” to proceed. While those concerns were enough the scuttle the deal, they were never shared with compliance officers or regulators.
“The bank connected the dots when it mattered to its own profit, but was not so diligent otherwise when it came to its legal obligations,” Mr. Bharara said at the news conference.
Another bank, identified in the statement of facts only as “Madoff Bank 2,” did cut off ties to Mr. Madoff in 1996 and brought its concerns to authorities. Although the bank, which people briefed on the matter identified as Bankers Trust, now owned by Deutsche Bank, told prosecutors that JPMorgan “was notified” of the concerns, JPMorgan continued to work closely with Mr. Madoff.
After that, JPMorgan’s ties to Mr. Madoff expanded, even as skepticism mounted. In 2007, when JPMorgan was pursuing derivatives deals linked to Mr. Madoff’s so-called feeder-fund investors, the hedge funds that invested their clients’ money with him, one executive remarked that he had heard about a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”
JPMorgan’s private bank also issued internal warnings about Mr. Madoff when considering an investment on behalf of its clients. The unit, prosecutors say, balked when Mr. Madoff refused to meet as part of the bank’s due diligence efforts.
On two occasions, in 2007 and 2008, JPMorgan’s own computer system also raised red flags about Mr. Madoff, according to prosecutors. But both times, JPMorgan employees “closed the alerts.”
It was not until October 2008 that JPMorgan alerted authorities — in Britain — to concerns that his firm’s investment returns were “so consistently and significantly ahead of its peers” that the results “appear too good to be true.” But JPMorgan never provided a similar warning to authorities in Washington, a violation of the Bank Secrecy Act.
On the day of Mr. Madoff’s arrest in December 2008, a JPMorgan employee wrote to a colleague: “Can’t say I’m surprised, can you?” The colleague replied: “No.”