JPMorgan Chase’s latest criminal settlement shows that prosecutors are becoming more creative about getting money to victims of a fraud rather than just putting it into federal coffers.
As part of a deferred-prosecution agreement, JPMorgan will pay $1.7 billion to the Justice Department for not maintaining proper anti-money laundering controls and failing to file a “suspicious activity report†on Bernard L. Madoff’s account. The bank is settling over violations of the Bank Secrecy Act, and prosecutors say the bank failed to see numerous red flags about Mr. Madoff’s extensive Ponzi scheme operated through accounts at the bank.
The bank did notify British authorities just two months before Mr. Madoff was arrested that there were questions about his trading because the consistently good returns were “too good to be true.†However, the bank never made a similar filing in the United States.
JPMorgan played a central role in Mr. Madoff’s scheme, with much of the money from his investors flowing through accounts at the bank, including his primary checking account, which had billions of dollars of activity.
A bank spokesman, Joseph M. Evangelisti, told DealBook that “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.â€
But unlike many of the investors, JPMorgan had a direct view into the money flowing through Mr. Madoff’s account. The government concluded the bank made no real effort to dig deeper despite an obligation to monitor accounts for suspicious activity. Like the Securities and Exchange Commission and other sophisticated parties duped by Mr. Madoff, the bank failed to press for information that might have exposed the fraud.
Perhaps more troubling, the statement of facts released as part of the settlement points out that in the last months before the Ponzi scheme collapsed, JPMorgan cut back its exposure to Mr. Madoff’s investment business that kept its losses to only $40 million rather than $250 million.
This is not the first time JPMorgan has been accused of aiding Mr. Madoff by not calling attention to suspicious transactions through his account. Irving H. Picard, the trustee overseeing the liquidation of Mr. Madoff’s firm, filed a lawsuit against a number of banks for their role in scheme, including a claim for $19 billion against JPMorgan for not taking steps that would have ended the fraud much earlier.
As I discussed in an earlier post, those claims ran into the legal doctrine of “in pari delicto,†or mutual fault, which prevents one wrongdoer from suing another. As the trustee, Mr. Picard takes over Mr. Madoff’s position in the case, so the banks asserted that he could not recover anything from them because Mr. Madoff was responsible for the fraud.
The Federal District Court in Manhattan dismissed the lawsuits on those grounds, which was affirmed by the United States Court of Appeals for the Second Circuit in June. Mr. Picard asked the Supreme Court to review the dismissal of his lawsuit, which is scheduled to consider whether to hear the appeal on Jan. 10.
JPMorgan is no longer part of that case because it has agreed to pay a total of $543 million to Mr. Picard’s fund to settle a variety of claims related to how it dealt with Mr. Madoff. Even though it had been victorious in the lower courts against the trustee, the bank seemed eager to put this entire affair behind it rather than risk having the Supreme Court side with Mr. Picard and expose it to an even higher judgment. His claims against other banks are still up for review by the Supreme Court.
The deferred-prosecution agreement operates much like Mr. Picard’s claim against JPMorgan, even though a violation of the Bank Secrecy Act has nothing to do with fraud. A provision in the agreement provides that the government will treat the $1.7 billion as the forfeiture of proceeds from Mr. Madoff’s fraud rather than just a criminal fine, and so the government will use the money to pay investors whose money was funneled into Mr. Madoff’s firm.
The Justice Department set up a Madoff Victim Fund last year to return approximately $2.35 billion to investors whose claims were denied by Mr. Picard because they bought into the scheme through the “feeder funds†that place money with Mr. Madoff but were not customers of his firm. JPMorgan’s payment will expand the amount available to those who lost money but who have been shut out of the claims process to this point.
A violation of the Bank Secrecy Act does not usually involve individual victims because the statute only imposes requirements on financial institutions to monitor accounts and provide the government with information. Any criminal fine or civil penalty for a violation usually would go directly to the United States Treasury.
As part of the settlement with JPMorgan, however, the Justice Department filed a civil forfeiture complaint that identifies the $1.7 billion as “proceeds of Madoff’s fraud, and constitute some of the billions of dollars that flowed through Madoff Securities accounts†at the bank. Property that is forfeited can be returned to victims of the crime, like the investors in Mr. Madoff’s firm, because it is the product of criminal activity and not just a penalty for misconduct.
Prosecutors went a step further by including a provision in the deferred prosecution agreement that bars JPMorgan from treating the payment as an ordinary business expense, which would permit the bank to deduct the $1.7 billion from its taxable income. So the taxpayers are not effectively subsidizing the payment to Mr. Madoff’s victims.
In the end, JPMorgan decided that paying more than $2 billion was better than trying to fight claims that it aided the biggest Ponzi scheme in history. The winners in the settlements are Mr. Madoff’s victims, who will never be made whole but are at least a step closer to receiving a measure of compensation, due in part to a creative use of the law by federal prosecutors.
