“JPMorgan doesn’t have a chance in hell of not coming up with a big settlement...There were people at the bank who knew what was going on.”
Banking giant JP Morgan Chase has reportedly reached an agreement with Justice Department officials to pay a $2 billion fine - and avoid pleading guilty to criminal charges - over allegations it failed to report suspicious activity in accounts held by convicted Ponzi schemer Bernard Madoff. According to the New York Times, settlement talks between JP Morgan and federal prosecutors have resulted in an agreement in principle that not only calls for a fine of approximately $2 billion, but will also include a deferred prosecution agreement allowing JP Morgan to avoid criminal charges upon satisfaction of certain conditions. An official announcement, which could come as early as this week, would mark the first time a DPA was used in a case against a major Wall Street bank.
JP Morgan served as Madoff's primary banker for several decades, overseeing the flow of billions of dollars in and out of Madoff's accounts. Despite the massive flow of money, virtually none of those funds were used to trade securities - an event that may have triggered obligations under the Bank Secrecy Act ("BSA") to file a suspicious activity report ("SAR") with federal regulators. According to Irving Picard, the bankruptcy trustee appointed to oversee asset recovery efforts for Madoff victims, Madoff's use of his JP Morgan accounts to "wash" investor funds violated the bank's anti-money laundering guidelines. In addition to providing banking services to Madoff's firm, Bernard L. Madoff Investment Securities, JP Morgan also sold structured products tied to various BLMIS "feeder funds." In total, JP Morgan's profits from its relationship with Madoff were nearly $500 million.
While the Justice Department's action will mark an important step in holding financial institutions accountable for failing to detect or prevent financial fraud, it comes as trustee Irving Picard is currently appealing his ability to hold the bank civilly liable for its role in Madoff's fraud. The bank, along with other banks with ties to Madoff including HSBC and UBS, has successfully obtained dismissal of the suits from a New York district and appellate court in part based on the theory that Picard lacked legal standing to pursue claims other than clawback claims for return of principal and profit distributions. This meant that Picard's lawsuit seeking nearly $20 billion against JP Morgan was, effectively, moot with the exception of approximately $425 million in clawback claims. Earlier this year, Picard asked the Supreme Court to reverse the lower court decision and allow him to pursue the case against JP Morgan. It is unknown whether the Supreme Court intends to take up the case.
One of the developments that seems to have spurred an agreement is the agreement by authorities not to insist that JP Morgan plead guilty to criminal charges. The decision, which was reportedly a serious consideration by U.S. Attorney Preet Bharara, was likely prompted by the drastic consequences that could result. Indeed, while the use of a deferred prosecution agreement has many of the same punitive effects as a guilty plea, the actual act of pleading guilty to a criminal charges can have significant effects on a company, and even potentially put the company out of business. Under the DPA, JP Morgan will have to comply with certain conditions, including the likely appointment of an independent monitor to ensure compliance, in order to have the criminal charges ultimately dismissed.
While the exact details of the purported $2 billion fine remain unavailable, it is believed that at least a portion of the fine will be used to compensate Madoff victims, who to date hold more than $17 billion in approved claims against the BLMIS bankruptcy estate. One of the determining factors will be the exact composition of the federal agencies included in the settlement. In addition to the U.S. Attorney's office, JP Morgan has also been under investigation by the Office of the Comptroller of the Currency ("OCC") as well as a unit of the Treasury Department. It has been reported that at least $1 billion of the fine will be added to the pool of assets set aside to compensate Madoff victims.
A copy of Picard's lawsuit filed against JP Morgan is below: