JPMorgan Chase Nears a $2 Billion Deal in a Case Tied to Madoff

Working through a long list of legal problems, JPMorgan Chase is starting the new year with another steep payout to the government.

The bank plans to reach as soon as this week roughly $2 billion in criminal and civil settlements with federal authorities who suspect that it ignored signs of Bernard L. Madoff’s Ponzi scheme, according to people briefed on the case.

All told, after reaching the Madoff settlements with federal prosecutors in Manhattan and regulators in Washington, the bank will have paid some $20 billion to resolve government investigations over the last 12 months.

JPMorgan’s Madoff settlements, the people briefed on the case said, would also involve a so-called deferred prosecution agreement, a criminal action that would essentially suspend an indictment as long as JPMorgan acknowledged the facts of the government’s case and changed its behavior. The agreement, nearly unheard-of for a giant American bank and typically employed only when misconduct is extreme, underscores the magnitude of the case against JPMorgan.

The bank’s settlement talks with the authorities, reported by The New York Times last month, thrust JPMorgan into the spotlight on the fifth anniversary of Mr. Madoff’s arrest.

Under the terms of the deals, the bank will pay more than $1 billion to the prosecutors in Manhattan and the remainder to the Office of the Comptroller of the Currency and a unit of the Treasury Department investigating broader breakdowns in the bank’s safeguards against money-laundering. The government plans to earmark some of the payout for Mr. Madoff’s victims, according to the people briefed on the case, who spoke on condition they not be named because they were not authorized to discuss private settlement talks.

JPMorgan at one point discussed a so-called tolling agreement with prosecutors that would essentially extend the five-year legal deadline for bringing a case, one person said. The deadline might have otherwise expired late last year.

JPMorgan declined to comment for this article, but has publicly maintained that “all personnel acted in good faith” in the Madoff matter.

A spokesman for the United States attorney’s office in Manhattan, and the F.B.I., which led the investigation into JPMorgan, declined to comment. A spokesman for the comptroller’s office also declined to comment.

Despite serving as painful reminders of JPMorgan’s ties to Mr. Madoff â€" it was his primary bank for more than two decades â€" the settlements would enable the bank to put another investigation behind it. The expected deal comes on the heels of JPMorgan’s payment of a record $13 billion to the Justice Department and other government authorities over its sale of troubled mortgage securities in the period leading up to the financial crisis.

The payouts reflect a new conciliatory stance at JPMorgan. Within the bank, there is growing impatience among executives who worry that the scrutiny distracts from its record profits. And while it continues to haggle over the details of each settlement, people close to the bank say, JPMorgan is keen to regain its credibility and is resigned to pulling out the checkbook to make that happen.

Jamie Dimon, the bank’s chief executive, has played a role in some of the government negotiations and has directed billions of dollars to new compliance measures. In his annual letter to shareholders in 2013, Mr. Dimon also apologized for letting “our regulators down.”

But even as JPMorgan whittles down its regulatory woes, new threats have emerged. Authorities have opened a bribery investigation into JPMorgan’s hiring practices in China, prompting the bank to turn over internal emails and documents about its “Sons and Daughters” hiring program, which employed the children of the nation’s ruling elite.

The Madoff case, perhaps the largest threat to JPMorgan as it hung over the bank these last five years, produced its own damaging emails. The emails, some of which came to light in a private lawsuit against the bank, suggest that even as questions swirled about the legitimacy of Mr. Madoff’s operation, JPMorgan continued to do business with him.

In one internal email sent before Mr. Madoff’s arrest in December 2008, a senior risk manager at JPMorgan reported that another bank executive “just told me 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.”

No individual executives have been accused of wrongdoing. And the bank was hardly the only one to miss signs of Mr. Madoff’s fraud, which eluded regulators for decades.

Still, federal prosecutors are expected to cite JPMorgan for a criminal violation of the Bank Secrecy Act, a federal law that requires banks to maintain internal checks against money-laundering and to report suspicious transactions to the authorities. Alongside the bank’s ties to Mr. Madoff, the regulators at the comptroller’s office have examined lax controls in JPMorgan’s private banking unit in Asia and within the so-called correspondent banking business, in which it relies on foreign institutions to process transactions overseas.

At one point in the settlement talks, the people briefed on the case said, prosecutors explored a harsher punishment for JPMorgan: demanding that the bank plead guilty to a criminal violation of the Bank Secrecy Act. In a meeting with prosecutors to discuss the potential fallout from such a plea, which could have jeopardized JPMorgan’s charter as a national bank, the comptroller’s office promised not to interfere.

But ultimately, the prosecutors opted for the fine and the deferred prosecution agreement. While big foreign banks like UBS have reached deferred prosecution agreements, according to a University of Virginia Law School database, JPMorgan will be the first American bank on Wall Street to strike such a deal.

The decision could reignite concerns that Wall Street banks are too big to indict, though prosecutors very likely concluded that a deferred prosecution agreement was more appropriate for a case that began as a civil investigation, without a criminal component. Preet Bharara, the United States attorney in Manhattan whose office is handling the JPMorgan case, has been an outspoken critic of prosecutors’ backing down for fear of putting a company out of business.

“I don’t think anyone is too big to indict â€" no one is too big to jail,” he said in a recent speech.

A version of this article appears in print on 01/06/2014, on page B1 of the NewYork edition with the headline: JPMorgan Nears Deal In Case Tied To Madoff.

$1 Billion as Milestone and Omen

Fab.com, an online retailer selling affordable high design, last year seemed as if it could be the next Amazon.

Just a few months later, however, it looked as if it could become the next Pets.com.

Big-name venture capitalists, including the Andreessen Horowitz firm, poured money into the company over the last few years, lured by its startling growth rate. After raising some $170 million in venture funding, Fab accepted an additional $150 million in June, a round that valued the company at $1 billion and vaulted it into the club of billion-dollar technology start-ups that include Snapchat, Pinterest, Evernote, Spotify and Dropbox.

But by the end of the summer, Fab had fallen from that elite. Amid financial trouble, it fired hundreds of employees. A company co-founder and the chief operating officer left the company. Its valuation sank below $1 billion, leaving some investors underwater.

The rise and stumbles of Fab demonstrate how swiftly the fortunes of start-ups can change. At the company’s giddy high point, it also illustrated why some billion-dollar-plus valuations have raised concerns of a new dot-com bubble.

“Predicting what’s undervalued and what’s overvalued is fabulously hard,” said Josh Lerner, a professor of entrepreneurship at Harvard Business School. “It’s a trope to see a young, highly valued company and say it’s wrong, but sometimes it is.”

Fab declined to comment for this article.

The growth of the billion-dollar club has eclipsed the exuberance of more than a decade ago.

In the three years from 2011 through 2013, there were at least 34 investments that valued companies at $1 billion or more, according to Dow Jones VentureSource, compared with 16 from 1998 to 2000.

Yet it is more than a speculative frenzy that is driving up the valuations of these companies. A number of changes in the capital markets, the venture capital industry and the public equity markets have conspired to make it easier than ever for unproven start-ups to be valued at $1 billion or more.

For one, the stock and merger markets have demonstrated that many companies’ high-flying valuations are justified. Facebook’s stock has surged after its early stumbles. Newly public companies like Twitter are performing well. And Instagram and Tumblr both sold for more than $1 billion each, emboldening venture capitalists.

“A number of high-profile companies in the social media space have been successful,” Mr. Lerner said. “It’s creating a feedback loop.”

Another factor driving up valuations is the 38 percent rise last year in the Nasdaq composite index, which is heavy with technology companies. For venture investors eager to find the next big thing, the healthy stock market acts as a green light to keep pouring money into private companies that might go public or get sold.

“There’s always this long and almost irrational exuberance tied to the enthusiasm, excitement and growth of a company when the economy is doing well,” said Jayshree Ullal, chief executive of Arista Networks, a cloud networking company reportedly valued near $2.5 billion.

What’s more, the availability of cheap financing for companies and investors, which has helped buoy the stock market, is allowing investors to easily finance deals and borrow money.

Pension funds and endowments are putting more money into venture funds. In the third quarter, venture capital firms raised $4.1 billion, an increase of 28 percent from the previous quarter, according to the National Venture Capital Association.

And with so much cash to deploy, venture funds are competing with one another to invest the money, a process that often drives up valuations.

When the ride-sharing service Lyft was seeking to raise a new round of funding last year, many firms, including Greylock Partners, were interested in investing. But before they could offer Lyft any cash, Andreessen Horowitz swooped in with an offer that Lyft could not refuse, according to people briefed on the situation.

Andreessen Horowitz is known in Silicon Valley for such tactics, having had success with companies like Facebook, Twitter and Skype. According to CB Insights, which tracks venture investing, the average size of the firm’s investment was substantially higher than those of rivals New Enterprise Associates and Greylock.

But Andreessen Horowitz is not alone. In the third quarter, venture capital firms invested $7.8 billion, an increase of 12 percent from the previous quarter, according to the venture capital association and PricewaterhouseCoopers.

The competition is especially tough when it comes to later-stage investments in the most admired billion-dollar tech companies, a group that includes such companies as Square, Box and Uber.

And the fight is becoming more fierce as new investors jockey to compete with venture funds. Competition from later-stage investors like Meritech Capital, Institutional Venture Partners and hedge funds like Tiger Global and Valiant Capital Management has driven up valuations.

These funds expect lower returns than venture capitalists, so they take less risk by investing in more mature companies that are safer bets.

“If you’ve got funds and you need to basically deploy pretty big chunks of capital, wouldn’t you rather invest in things that seem like a sure thing?” said Aileen Lee, founder of Cowboy Ventures. In a widely read blog post on tech companies worth more than $1 billion, Ms. Lee called the group the “Unicorn Club.”

Last May, Evernote, a company that makes a productivity app, raised money that drove the valuation significantly higher. Just seven months later, interest from Valiant, a hedge fund based in San Francisco that also invested in Dropbox, and AGC Equity Partners’ affiliate m8 Capital, elevated the valuation to a reported $2 billion.

For those venture firms that aren’t able to invest in the top companies, the inclination is to spread out their investments among a broad pool of companies, many of which are derivative.

When the deals site Groupon was thriving, for example, big investors including Amazon poured money into rival LivingSocial. For a time, the company was valued at more than $1.5 billion. But in February, LivingSocial took $110 million in new funding at a lower valuation, a so-called down round.

“These funds have a lot of money and push money out into whatever looks hot,” said Alexander Ljungqvist, professor of finance at New York University. “It’s like throwing spaghetti at the wall and seeing what sticks.”

With so much cash in the bank, many companies that in previous cycles might have been prompted to sell or go public can now stay private longer â€" a strategy they saw Facebook use with success.

“That’s why you’re seeing LinkedIn, Twitter, etc., going out at $20 billion valuations instead of a billion like eBay or Amazon,” said John Backus, founder of New Atlantic Ventures and a member of the National Venture Capital Association board. “There’s a lot more value accruing to the private investors.”

And the rise in so-called secondary offerings, which allow executives and early employees to sell some of their shares when the company is still private, is driving up valuations as new investors compete for a limited number of shares on the secondary market.

Some find recent valuations unreasonable.

“I don’t know any other way to value a company than to look at its future cash flow and compare it to current cash flow,” said Brian Hamilton, the chairman of Sageworks, which analyzes the financials of private companies. “Where we are today, I don’t see where the values are coming from based upon any judicious or even very optimistic view of a company’s future cash flow and revenue.”

But many investors contend that young companies will one day justify their eye-popping valuations.

“Valuations are never a reflection of today’s performance, it’s a reflection of the future opportunity,” Ms. Ullal of Arista Networks said. “Most of these companies grow into their valuations nicely and those that don’t fall by the wayside.”

And technology boosters note that the market for Internet companies is larger than it was 15 years ago.

“In the last cycle, there were barely 500 million people online, and they were all on 56k modems,” said David Lee of SV Angel, an early-stage investor. “By 2015, there will be five billion people with a supercomputer in their hands.”

Still, to some, Fab and other companies that attain high valuations are a sign that too much money is chasing too few good ideas.

“This is a drama that has played out many times before,” said Mr. Lerner of Harvard. “The music inevitably stops at a certain point.”

Nicole Perlroth contributed reporting.