By the end of 2008, when Bernard Madoff’s Ponzi jig was finally up, he had been maintaining more than 4,000 client accounts, which were supposed to have a combined balance of about $65 billion.
Actually, the balance was just a fraction of that at the time – about $300 million, including $234 million in cash on deposit at JPMorgan Chase, the bank Mr. Madoff had been doing business with since 1986. For more than 20 years, however, the bank had received deposits and transfers from him totaling about $150 billion.
But this merry-go-round of cash was a classic Ponzi scheme, and on Tuesday, the US Department of Justice demanded a $1.7 billion criminal penalty from JPMorgan, now America’s largest bank with about $2.4 trillion in assets. The penalty is part of a “deferred-prosecution agreement” in which the bank is charged with two felony violations of the Bank Secrecy Act, which requires banks to inform the government of any suspicious activity.
It is the largest penalty ever issued for a violation of that law, and the agreement allows the Justice Department to pursue criminal charges again if JPMorgan does not abide by the terms of Tuesday’s settlement. The bank was required to admit to the violations and to agree to overhaul its own safeguards against the kind of money-laundering Madoff was conducting in JPMorgan accounts.
“J.P. Morgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards," said George Venizelos, FBI assistant director-in-charge, in a statement. “It took until after the arrest of Madoff, one of the worst crooks this office has ever seen, for J.P. Morgan to alert authorities to what the world already knew.”
The bulk of the $1.7 billion will be used to compensate the victims of Madoff’s scheme, in which investors lost about $18 billion. JPMorgan also agreed to pay an additional $543 million to the court-appointed Madoff bankruptcy trustee, Irving Picard, who has already collected $9.5 billion for victims. Combined with other fines to federal regulators, the bank will pay more than $2 billion in penalties for its long relationship with Madoff, who is now serving a 150-year prison sentence.
“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,” said JPMorgan spokesman Joseph Evangelisti, in a statement. “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses. We believe the lessons we have learned will make us a stronger company.”
The penalty, announced Tuesday, comes less than two months after JPMorgan agreed to pay a record $13 billion civil settlement for its role in the questionable mortgage-bundling practices that helped plunge the United States into the Great Recession in 2009. In 2013, JPMorgan paid more than $20 billion in fines and penalties.
The bank told its investors at the end of the third quarter last year that it has allocated $23 billion to settle lawsuits – just more than its total 2012 net income.
As noted in the Justice Department statement of facts, JPMorgan did report Madoff to British regulators in October 2008, before his arrest, saying that his investments were “so consistently and significantly ahead of its peers” that his returns were “too good to be true.”
Earlier, in an e-mail from 2007, one bank official wrote that “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”
JPMorgan never alerted US regulators, however, which led to the violations of the Bank Secrecy Act and Tuesday’s record penalty.
Deferred prosecution is a rarely used tactic with banks, experts say, reserved for factually powerful cases in which a criminal indictment could tear apart a company. Tuesday’s agreement, in which no individual was held responsible, has reignited concerns that Wall Street banks have become “too big to fail.”