Pomerantz LLP

JPMorgan Chase Admits that it Covered Up the Madoff Ponzi Scheme

Pomerantz Monitor, January/February 2014 

This January, Federal District Judge Jed Rakoff published an essay in The New York Review of Books that reverberated in the financial community. He noted that, five years after the market crash of 2008 that caused millions of people to lose their jobs, “there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.” Yet the Wall Street malefactors who caused this catastrophe have never been called to account. “Why,” he asked, “have no high-level executives been prosecuted?” Many of us have asked the same question. After all, after previous periods of financial scandal, several big time honchos spent years staring at the inside of a jail cell. Just ask Dennis Koslowski and Jeffrey Skilling, to name only two. The JPMorgan Chase case shows how much things have changed. The bank has confessed to a litany of misconduct, including fraud in connection with its sale of mortgage-backed securities, and allowing its “London Whale” trader to run amok, causing the company to lose billions of dollars, and then covering it up. Now, on almost the same day as Judge Rakoff’s essay was published, JPMorgan Chase has fessed up again, admitting that it committed two criminal violations when it covered up its knowledge of Bernard Madoff’s $65 billion Ponzi scheme, which was run through Madoff’s bank accounts at the bank. According to prosecutors, JPMorgan’s actions amount to “programmatic violation” of the Bank Secrecy Act, which requires banks to maintain internal controls against money laundering and to report suspicious transactions to the authorities. According to Preet Bharara, the U.S. Attorney for the Southern District of New York, JPMorgan’s “miserable” institutional failures enabled Madoff “to launder billions of dollars in Ponzi proceeds.” To resolve these Madoff cases, JPMorgan agreed to pay more than $2.6 billion in various settlements with federal authorities. At the same time, it also filed two settlements in private actions totaling more than $500 million – one for $325 million with the trustee liquidating the Madoff estate, and the other for $218 million to settle a class action. 

Interestingly, the federal prosecutors credited the trustee’s team with discovering many of the unsavory facts of the bank’s involvement. 

These payouts bring to nearly $32 billion the total that JPMorgan has reportedly paid in penalties to federal and state authorities since 2009 to settle a litany of charges of misconduct. Most notably it came to a record $13 billion settlement just months ago with federal and state law enforcement officials and financial regulators, over its underwriting of questionable mortgage securities before the financial crisis. 

And yet, no one at the bank has been criminally prosecuted for any of this. The deal reached by JPMorgan with prosecutors in the Madoff case stopped short of a guilty plea, and no individual prosecutions were announced. Instead, the bank entered into a deferred prosecution agreement, which suspends a criminal indictment for two years on condition that the “too big to fail” and “too big to jail” bank overhauls its money laundering controls. Even so, this is reportedly the first time that a big Wall Street bank has ever been forced to consent to a non-prosecution agreement. 

Given what JPMorgan Chase admits happened here, it is amazing that there were no prosecutions of individuals. According to documents released by the U.S. Attorney’s office, the megabank’s relationship with Madoff stretched back more than two decades, long before Madoff was arrested in 2008. One document released by prosecutors outlining the megabank’s wrongdoing observed that “The Madoff Ponzi scheme was conducted almost exclusively through” various accounts “held at JPMorgan.” 

By the mid-nineties, according to an agreed statement of facts released by prosecutors, bank employees raised concerns about how Madoff was able to claim remarkably consistent market-beating returns. Indeed, one arm of the bank considered entering into a deal with Madoff’s firm in 1998 but balked after an employee remarked that Madoff’s returns were “possibly too good to be true” and raised “too many red flags” to proceed. Then, in the fall of 2008, the bank withdrew its own $200 million investment from Madoff’s firm, without notifying either its clients or the authorities. 

Twice, in January 2007 and July 2008, transfers from Madoff's accounts triggered alerts on JPMorgan's anti-money-laundering software, but the bank failed to file suspicious activity reports. In October 2008, a U.K.-based unit of JPMorgan filed a report with the U.K. Serious Organised Crime Agency, saying that "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." But that information was not relayed to U.S. officials, as required by 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.” 

In commenting on this latest settlement by the bank, Dennis M. Kelleher, the head of Better Markets, an advocacy group, observed that “banks do not commit crimes; bankers do.” Jailing people is the best way to deter future misconduct. If anyone thinks that huge fines are enough to deter misconduct by huge financial institutions, they should think again. Despite its huge penalties, JPMorgan just reported another multi-billion dollar quarterly profit, and announced that Chairman Jamie Dimon will receive a hefty raise. Obviously, it can afford to keep treating penalties as just another cost of doing business.