JPMorgan Settles Madoff Case for $2.6 Billion

JPMorgan Settles Madoff Case for $2.6 Billion

JPMorgan agreed to a deferred-prosecution which will see it pay $2.6 billion in total, and make improvements to its controls over checking and reporting suspicious activities within two years, after which criminal charges will be dropped


By Darren Gold on Jan 8, 2014 at 8:39 am EST

JPMorgan Chase (JPM) agreed yesterday to settle the $17.3 billion Madoff case, and the bank will now pay $1.7 billion to settle the reporting violations. JPMorgan also will pay $350 million to settle a related case by the Office of the Comptroller of the Currency and $543 million to resolve US Bankruptcy Court actions by the trustee seeking Madoff assets on behalf of burned investors.

The $2.6 billion settlement involves the largest ever payment made by a bank in a case involving money laundering violations.

The news caused the stock price to drop 1.15% to $58.32.

This deal comes as part of the larger probe by federal regulators in an attempt to hold big banks accountable for ignoring red flags related to fraudulent activities. HSBC Holdings (HSBC) faced similar charges in 2012, which saw it pay $1.9 billion for failing to report suspicious money transfers through its branches made by Libyan, Iranian, and Mexican drug cartels.

JPMorgan admitted it missed warning signs raised by employees of different divisions all through the 1990s up to 2008. However, the bank maintained its stance that it was not intentionally involved in the criminal acts.

“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,” a JPMorgan spokesman said. “We do not believe that any J.P. Morgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”

In October 2008, UK-based JPMorgan withdrew $275 million of its own money from Madoff’s funds and filed a document with the authorities, describing the returns made by the fund as “too good to be true.” The same month, a derivatives analyst at the London branch of the bank found irregularities in reports, and said that there “are various elements in the story that could make us nervous.” The unidentified analyst sent an email saying that the bank “seem(ed) to be relying on Madoff’s integrity” rather than proceeding with proper verification.

The bank never took serious steps to look into the matter though.

Manhattan US Attorney Preet Bharara, who conducted his investigation with the FBI, said that JPMorgan “failed miserably” as an institution and it constantly ignored warnings about Madoff despite “plenty of reasons to be uniquely suspicious.”

He went on to say that levying a charge against the bank was a better course of action than charging individual employees. “Our view is…at this point, the appropriate charge was against the bank,” he said.

Madoff’s Ponzi scheme was exposed in December 2008, when the man himself admitted to the senior employees of his company, Bernard Investment Securities Company LLC, that "it's all just one big lie”, after which he turned himself in. It is the largest Ponzi scheme ever uncovered and thousands of investors were cheated of almost $17 billion.

Out of the $2.6 billion, $1.7 billion will go to the Madoff Victim Fund, which was established by the Department of Justice to compensate investors who bought into Madoff’s scheme.

JPMorgan has already paid up to $29 billion in legal costs and penalties, and this settlement will push the figure to well over $30 billion. To put this amount into perspective, JPMorgan generated net revenues of $97 billion in the year, trailing back from the third quarter of fiscal year 2013. JPMorgan added $7.2 billion in the third quarter, only to increase its legal reserves to $23 billion.

Fourth quarter earnings are expected to decline by $850 million due to Tuesday’s settlement.

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