Bringing to light a previously-undisclosed investigation, the Office of the Comptroller of the Currency ("OCC") has accused financial behemoth JP Morgan Chase ("JP Morgan") of withholding requested documentation pertaining to an investigation of the bank's relationship with infamous Ponzi schemer Bernard Madoff. According to a letter from Treasury Inspector General Eric Thorson to JP Morgan's general counsel, the dispute seems to center on documents that JP Morgan has taken the position are protected by the attorney-client privilege. Thorson, in dismissing the bank's claims, cautioned that further inaction would be viewed as "continuing purposeful impediment" to the OCC that would merit "further action by our office."
Inquiry May Have Been Spawned By Madoff Trustee's Investigation
The OCC's investigation, while not publicly known, is not surprising in light of previous claims made in a lawsuit brought by Irving Picard, the bankruptcy trustee tasked with recovering assets for Madoff's victims. In a 148-page lawsuit filed in June 2011, Picard accused JP Morgan of turning "a blind eye" to Madoff's fraud "as the drive for fees and profits became a substitute for common sense, ethics, and legal obligations." (A federal judge later dismissed a majority of the claims, which Picard has since appealed.)
The lawsuit is rich with numerous examples purportedly demonstrating that JP Morgan was aware of Madoff's fraud for over a decade, including an internal email in June 2007 from JP Morgan's chief investment officer observing that
For whatever it[']s worth, I am sitting at lunch with Matt Zames who 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 [P]onzi scheme.
This knowledge, coming from JP Morgan's role as Madoff's primary banker for decades, allegedly allowed the bank to quietly withdraw nearly $300 million from Madoff's scheme just before it unraveled in December 2008. JP Morgan later claimed the withdrawals stemmed from a routine re-balancing of the bank's hedge-fund exposure.
In addition to avoiding those losses, JP Morgan also benefitted from use of the billions of dollars in Madoff accounts. Indeed, according to a study conducted by a respected finance professor, JP Morgan realized an after-tax profit of at least $483 million. Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette, arrived at this figure using several factors, including JP Morgan's reported net interest margin levels. Wilson's treatise is available for purchase here.
Possible Hints Into Subject Of Inquiry
While the OCC has not specified the focus of its investigation, recent comments made by a JP Morgan spokeswoman suggest that the documents sought concerned communications seeking guidance from the bank's lawyers. Additionally, the presence of the OCC as the lead investigative agency suggests that the inquiry could be related to JP Morgan's obligation under the Bank Secrecy Act of 1970 ("BSA") to file suspicious activity reports ("SAR's") regarding the detection of "certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA." SAR's are typically shrouded in secrecy - indeed, the unauthorized disclosure of an SAR is by itself a criminal offense.
Authorities have bolstered efforts to crack down on financial institutions skirting their duty to file SAR's, with the OCC recently leading an investigation that culminated with banking giant Wachovia agreeing to pay a then-record $160 million fine stemming from a "woefully inadequate" anti-money laundering program.
A copy of the Trustee's lawsuit against JP Morgan is here.