Yesterday, JPMorgan Chase formally admitted that it had failed to stop the largest investment fraud in world financial history.  In a sweeping settlement with federal prosecutors in Manhattan and the Office of the Comptroller of the Currency, JPMorgan agreed to pay over $2 billion to settle charges that it failed to alert authorities about fraudulent activity by Bernie Madoff.   The biggest slice of that money will go to Madoff's victims.  The Manhattan U. S. Attorney's office forced JPMorgan to forfeit $1.7 billion in order to settle charges that it failed to report Madoff's activities as required by law--money that will be used to help make Madoff's victims whole.  It also reached a separate settlement with the trustee charged with cleaning up after Madoff.  The final bill:  almost $2.6 billion.  I mentioned this yesterday, but thought I'd update and expand on it for the benefit of those who missed it.

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.

The deferred prosecution agreement, viewable here, states that Madoff began his Ponzi scheme in 1986, not long after he opened a business account at Chemical Bank.  Chemical merged with Chase Manhattan in 1996; the merged company took the Chase name even though Chemical was the nominal survivor.  Chase, in turn, bought JPMorgan in 2000.  According to the agreement, suspicions about Madoff's activities cropped up as early as 1994, when money moved between Madoff and another Chemical private banking customer in a manner that looked suspiciously like check-kiting.  However, at no time did Chemical/Chase/JPMorgan Chase report this or any of Madoff's other suspicious banking actitivies to federal authorities, as required by the Bank Secrecy Act.  Indeed, in 2007 and 2008, JPMorgan's own fraud detection system flagged Madoff transactions, but those alerts were closed by JPMorgan employees.  If I'm either of those employees, I'd have lawyers on speed dial.

According to prosecutors, Chemical/Chase/JPMorgan Chase's behavior contrasts sharply with another bank--identified as Bankers Trust, according to the NYT.  Bankers Trust not only red-flagged the 1994 transaction, but actually closed Madoff's account there.  It also points out that while JPMorgan alerted UK regulators that Madoff's returns were "too good to be true," it not only didn't alert American regulators, but allowed Madoff unfettered access to his money until his 2008 arrest.  Small wonder that Manhattan U. S. Attorney Preet Bhahara declared that JPMorgan had "as an institution failed and failed miserably."  The agreement also calls for JPMorgan submit quarterly reports regarding improvements to its anti-money laundering procedures for the duration of the agreement.  According to a press release by Bhahara, this is the largest criminal forfeiture demanded from a bank in American financial history, as well as the largest ever imposed for a Bank Secrecy Act violation.  Take heart, those who are wondering why no individuals are facing charges yet--JPMorgan is required to cooperate with the government in its continuing investigation.

The OCC decree, viewable here, charges that JPMorgan has numerous flaws in its money laundering prevention program--a good number of them unrelated to Madoff.  It also faults Chase for failing to address problems pointed out in a 2013 OCC filing.

According to a press release from Picard, the $543 million settlement will cover avoidance claims and a class-action lawsuit.  That money will go to Madoff's victims, meaning that all told they will be $2.1 billion closer to being made whole.  From the looks of it, the criminal case relied heavily on Picard's claims in his 2011 lawsuit that JPMorgan failed to exercise the most basic oversight over Madoff's banking activities.

JPMorgan really doesn't know how lucky it got.  Prosecutors were seriously considering demanding that the bank formally plead guilty to Bank Secrecy Act violations.  Ultimately, prosecutors opted for a deferred prosecution agreement because the investigation began as a civil matter, not a criminal one.  According to CNN, another factor was that the OCC could not assure prosecutors that it would not revoke JPMorgan's banking charter if JPMorgan was forced to take a guilty plea.  Whenever a bank pleads guilty to felonies, the OCC is required by law to begin charter revocation hearings.  Which may make this case the biggest argument yet against "too big to fail."

CNBC reports that Bharara began investigating JPMorgan almost as soon as he took office in 2009.  The result was a classic slow-motion strangulation during which prosecutors amassed enough evidence against JPMorgan that CEO Jamie Dimon and other senior executives and lawyers from the bank were forced to come to St. Andrews Plaza as supplicants begging for mercy.

One thing that should make JPMorgan nervous--if I'm reading the agreement right, not only does it require JPMorgan to cooperate with Bharara's investigation, but it doesn't foreclose civil suits.  Which means that Dimon might want to be ready to open the wallet again.  Hopefully that will come very soon.

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