USA TODAY - JPMorgan Chase will pay $1.7 billion to settle criminal charges that it ignored signs of Bernard Madoff's Ponzi scheme in its role as Madoff's banker, federal authorities said Tuesday.
The bulk of the expected financial settlement is expected to go toward helping repay the thousands of ordinary investors, celebrities, charities and others burned by the $17.3 billion fraud. Only about $11.9 billion of that total has been recovered to date.
The settlement will include a deferred-prosecution agreement that would require JPMorgan to acknowledge the findings of federal investigations and beef up the bank's internal monitoring procedures.
The financial penalties would raise the bank's total tab for settling government investigations to $20 billion during the past 12 months.
Federal regulations require banks to report suspicious activity by their account holders to U.S. authorities. JPMorgan did file Suspicious Activity Reports about Madoff's operation with United Kingdom authorities in late 2008, but not in the U.S. Madoff was arrested in December 2008.
"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," the bank said in a statement Tuesday.
"We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme," the statement said. "Madoff's scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses."
The bank said it is working to improve its internal monitoring and compliance procedures and "the lessons we have learned will make us a stronger company."
According to legal documents released by federal prosecutors, a JPMorgan trading analyst in London wrote a lengthy internal email in October 2008 that raised concerns about Madoff's investment returns but those concerns were never communicated to U.S. authorities nor did the bank make any meaningful effort to investigate its relationship with Madoff's firm.
The analyst worked on JPMorgan's London-based Equity Exotics Desk, which created complex investment securities known as derivatives that were linked to the returns of feeder funds invested in Madoff Securities.
Quoting from the memo, the filing said, "The October 16 memo, among other things, described JPMC's inability to validate Madoff's trading activity or custody of assets, questioned Madoff's 'odd choice' of a small unknown accounting firm; and reported that JPMC 'seem(ed) to be relying on Madoff's integrity' with little to verify that such reliance was well-placed."
The memo, according to prosecutors' filing, "ended with the observation that: '(t)here are various elements in the story that could make us nervous,' including the "feeder" funds managers' "apparent fear of Madoff, where no one dares ask any serious questions as long as the performance is good."
Madoff's Ponzi scheme was conducted almost exclusively through accounts held at JPMorgan from October 1986 through Madoff's arrest in 2008, prosecutors said in their filing.
Madoff pleaded guilty to fraud and other charges in March 2009 without standing trial. He is now serving a 150-year prison term.
Five former Madoff employees are now on trial in Manhattan federal court on charges they knowingly participated in the fraud. They have pleaded not guilty and said they were hoodwinked by their ex-boss.
Richard Cassa, a former JPMorgan client relationship manager, testified in that case last month that he previously supervised Madoff's account but had little knowledge about the investment advisory business - the business division where it turned out the fraud was secretly centered. There were "probably tens of millions" of dollars in the account during his tenure, Cassa testified.
The expected settlements won't end JPMorgan's involvement in Madoff-related legal issues. Irving Picard, the court-appointed trustee trying to recover funds from the fraud for investors, filed a U.S. Supreme Court petition last year seeking authorization to pursue financial recovery from JPMorgan and several other banks, including London-based HSBC and Swiss giant UBS.
The Supreme Court is scheduled to hold a conference on Friday in which its justices will decide whether to accept the case. Only a handful of such petitions are typically accepted for full review.
However, the Madoff trustee still has several U.S. Bankruptcy Court actions pending against JPMorgan and other banks, collectively involving an estimated $4 billion in recovery claims.
Any agreement reached between JPMorgan and the Department of Justice "would be independent" of the trustee's claims against the bank, Amanda Remus, a spokeswoman for Picard, said Monday.
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