In an unprecedented move, federal authorities are reportedly weighing the filing of criminal charges against financial behemoth JP Morgan for its role in Bernard Madoff's massive Ponzi scheme. According to the New York Times, both the Federal Bureau of Investigation and the U.S. Attorney's Office have opened an investigation into whether JP Morgan failed to sound the alarm on Madoff's Ponzi scheme even as red flags emerged amidst the bank's relationship with Madoff. The FBI and USAO are the latest agencies to take a closer look at the bank's two-decade relationship with Madoff, and the bank has also reportedly been notified by the Office of the Comptroller of the Currency ("OCC") that it is likely to face fines for inadequate controls.
Ignoring Warning Signs as Madoff's 'Primary Banker'
Madoff shifted the majority of his banking to JP Morgan back in 1986, which involved the frequent transfers of billions of dollars through Madoff's accounts. Despite these significant transfers, virtually none of the funds were used to purchase securities. However, as Madoff's success continued, JP Morgan began to sell structured products based on Madoff feeder funds, and even became an investor.
Even while JP Morgan became more and more intertwined with Madoff's business, which reaped it an estimated $500 million in fees and commissions, bank employees increasingly voiced their skepticism as to Madoff's ability to generate such consistent returns. This included concerns by JP Morgan's internal due diligence team, as well as employees. Some of these concerns, made by email internally, included:
“The Private Bank chose not to invest with any BLMIS feeder funds because it had never been able to reverse engineer how they made money”; and
"For whatever it[']s worth, I am sitting at lunch with [JPMC Employee 1] 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."
While these concerns were voiced internally, no steps were taken by the bank to alert auditors until October 2008 when it submitted a "filing of suspicious activity" with the U.K. Serious Organized Crime Agency indicating it knew Madoff was "too good to be true." At about the same time, the bank redeemed its $276 million investment in a Madoff feeder fund, and Madoff's fraud was exposed just weeks later.
While the Bank's talks with authorities are in preliminary stages and could ultimately lead nowhere, the New York Times cites unnamed sources that suggest the most likely resolution would be the payment of a fine. The possibility of entering into a deferred prosecution agreement ("DPA") was also mentioned, which would avoid the bank pleading guilty to any changes in lieu of payment of a fine and other corrective measures. However, a DPA in such a situation would be extremely rare, as they are typically used for severe infractions such as Foreign Corrupt Practices Act prosecutions.
It is unknown whether any fine paid by J.P. Morgan would be eligible for distribution to Madoff's victims.
Bank Still Being Pursued By Madoff Trustee
The news comes just weeks after the court-appointed trustee tasked with recovering funds for Madoff's victims, Irving Picard, asked the Supreme Court to review a federal appeals court decision ruling that prevented Picard from pursuing significant claims against JP Morgan.
A copy of Picard's original civil complaint against JP Morgan is below: