Banking giant J. P. Morgan Chase has reached a deal with federal prosecutors to avoid criminal prosecution for its role in the Bernard Madoff Ponzi scheme. According to the prosecutors, J. P. Morgan, which had custody of Madoff accounts, witnessed suspicious money transfers, too-good-to-be-true investment returns, unverifiable trading activity, and the use of a one-man accounting firm. But while the bank connected the dots, filed a suspicious activity report with British officials, and was concerned enough to withdraw its own money from Madoff feeder funds, it failed to protect investors in that it “never closed or even seriously questioned Madoff’s Ponzi-enabling 703 account,” according to U. S. Attorney Preet Bharara.
The nation’s largest bank faced two felony charges of violating the Bank Secrecy Act because it did not file a Suspicious Activity Report after witnessing red flags about Madoff and did not have appropriate anti-money laundering compliance procedures in place. The charges come on top of other legal woes at J. P. Morgan, including a $13 billion settlement with the U. S. government in connection with its mortgage practices that led up to the financial crisis.
Madoff reportedly perpetrated his Ponzi scheme through accounts at J. P. Morgan from 1986 up until his arrest in 2008. Almost all of his clients’ funds were deposited at J. P. Morgan, and money flowed into and out of those accounts. In October 2008, one of J. P. Morgan’s analysts wrote a memo indicating that the bank could not verify Madoff’s trading activities or custody of assets. It also questioned Madoff’s “odd choice” of using a small, unknown accounting firm. Also in October 2008, J. P. Morgan filed a report with British regulators that stated in part that Madoff’s purported investment returns were “too good to be true.”
J. P. Morgan will pay approximately $2.24 billion to settle criminal charges plus another $350 million in civil penalties. In return, the U. S. will defer prosecution of the bank for two years as long as the bank complies with certain provisions, including reforming its anti-money laundering policies and cooperating with ongoing investigations. No individual executives at J. P. Morgan Chase were charged with a crime.
In addition to the criminal case settlement, the trustee for the liquidation of Bernard L. Madoff Investment Securities, LLC (“BLMIS”) appointed by the Securities Investor Protection Act (SIPA), Irving H. Picard, announced recovery agreements with J. P. Morgan totaling approximately $543 million for the benefit of BLMIS customers, for which bankruptcy court approval is being sought. The SIPA trustee has recovered approximately $9.783 billion for the BLMIS Customer Fund, or about 56% of the $17.5 billion that was lost in the Madoff ponzi scheme, according to a press release from the office of Mr. Picard.
While $1.7 billion is reported to be the largest bank forfeiture in history, investor advocates have been critical of the criminal case settlement. In particular, they criticize the failure to charge individual bank executives, who may have turned a blind eye to Madoff’s fraud, with a crime. They also criticize the leniency of the settlement terms as amounting to an ineffective deterrent.
Jason Doss is the owner of The Doss Firm, LLC, an Atlanta-based law firm devoted to representing consumers across the country in a variety of areas including investment disputes and consumer class action litigation. Mr. Doss earned his J.D. from Florida State University in 2002 and his B.A. from the University of Florida in 1997.