Bernard Madoff’s firm reported $65 billion to its clients. When it collapsed, it held $300 million.
That gap is the backdrop to the $2.6 billion JPMorgan Chase has agreed to pay, in a US settlement over criminal charges tied to the bank’s dealings with Madoff. PBS NewsHour described it as a record-breaking fine, and said authorities charged that the bank had turned a blind eye to the Ponzi scheme.
A banker for more than 20 years
Madoff was a prominent Wall Street broker and once chaired the Nasdaq exchange. About 4,000 clients gave him billions to manage across more than two decades. He did not invest it. The money went in and out of accounts at JPMorgan, while statements to clients showed large gains that never existed.
Justice authorities said Madoff’s firm used JPMorgan “almost exclusively” as its banker for over 20 years. Staff at the bank had suspicions about him going back to at least 1994, according to the account of the case. They did not tell the bank’s anti-money laundering staff or any regulator.
“For decades, Bernie Madoff was able to launder billions of Ponzi proceeds essentially through a single set of accounts at JPMorgan,” said US attorney Preet Bharara. “The bank repeatedly ignored warning signs.”
Two episodes stand out in the case file. In 2007, the bank’s chief investment officer wrote that a colleague talked of “a well-known cloud” hanging over Madoff, whose returns had stirred suspicions of a Ponzi scheme. Separately, a client asked a JPMorgan senior investment officer to press Madoff on how he delivered steady returns in a volatile market. That officer decided Madoff might be “smoothing out the returns” using trading profits from other Madoff accounts.
The US said JPMorgan still never filed a “suspicious activity report” with the Treasury and never raised the problems with senior compliance staff.
How the $2.6 billion splits
Victims are due $2.24 billion. Another $350 million is a penalty to the Office of the Comptroller of the Currency. The victims’ portion includes a $1.7 billion payment routed through the Justice Department, the largest penalty ever for a Bank Secrecy Act violation, and $543 million for the trustee chasing the $17.5 billion in principal Madoff’s clients lost. With the JPMorgan money counted, the trustee has recovered about $9.8 billion.
The criminal charges are not gone yet. Prosecutors agreed to dismiss them after two years, provided JPMorgan pays, overhauls its anti-money laundering policies, cooperates with continuing investigations and reports any wrongdoing by the bank or its employees.
At a news conference, Bharara was asked if that kind of deal deters less than trying to convict the largest US bank. “You take into consideration all factors,” he said, and pointed to “collateral consequences” of a criminal case against a big financial institution and employer.
The bank’s response
JPMorgan called Madoff’s operation “an unprecedented and widespread fraud that deceived thousands, including us.” It added: “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.” And it said it did not believe “that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”
Madoff was arrested in December 2008 for fabricating account statements covering tens of billions of dollars. After admitting the firm was a Ponzi scheme, he received a 150-year prison sentence. Efforts to claw back investors’ money continue.
The penalty followed a $13 billion settlement over high-risk mortgage securities and more than $1 billion to settle charges that the bank failed to detect and prevent a fraudulent trading scheme. JPMorgan shares fell 1.2% on a day when most other Dow Jones Industrial Average components rose.
Sources
- JPMorgan to pay $2.6 billion for role in Madoff Ponzi fraud
- PBS News Hour | JPMorgan settles for $2.6 billion fine over Madoff fallout | Season 2014
- Bernie Madoff
