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JPMorgan Chase agreed to pay a record-breaking $2.6 billion fine to settle criminal charges related to the Bernie Madoff fraud case. Authorities charged the bank had turned a blind eye to Madoff's massive Ponzi scheme. Jeffrey Brown gets more detail from Patricia Hurtado of Bloomberg News.
We return to the J.P. Morgan story and the historic penalty it will pay for the bank's connection with the Madoff Ponzi scheme. The settlement and fine were announced five years after Bernie Madoff's scheme collapsed around him and investors worldwide.
Jeffrey Brown picks up the details about those connections.
At the time that Madoff's crimes were unveiled, J.P. Morgan's name wasn't publicly connected with the case in a significant way, but federal prosecutors said today the bank knew something was wrong well before the Ponzi scheme collapsed.
U.S. attorney Preet Bharara spelled out some of that history at a press conference this afternoon.
PREET BHARARA, U.S. Attorney:
Today's charges have been filed because, in this regard, J.P. Morgan as an institution failed, and failed miserably. In part because of that failure, for decades, Bernie Madoff was able to launder billions of dollars in Ponzi proceeds, essentially through a single set of accounts at J.P. Morgan.
As far back as 1998, a bank fund manager concluded that the Madoff's returns were — quote — "possibly too good to be true" — close quote — and that there were too many red flags.
Patricia Hurtado has been covering this for Bloomberg News and was at the prosecutor's press conference today. She joins me now.
Well, Patricia, thanks for joining us.
Let's fill in the picture little bit. What exactly is J.P. Morgan admitting that it did?
PATRICIA HURTADO, Bloomberg News: Well, they're basically accused of being the private banker for Bernie Madoff and enabling his Ponzi scheme to continue, merely for the mere fact that even though they were concerned and they got their own personal investments out of Madoff and thought they were suspicious, something was wrong, they allowed other people to continue to be victimized.
So, we heard this phrase just now too good to be true, that that's how it looked at least at the time. But the problem is, nobody said anything?
Yes, the government basically alleges that for years, dating back to 1986, Madoff had an account at J.P. Morgan Chase and its predecessor entities, and allowed hundreds of billions of dollars to go through, and allowed very unusual, suspicious transactions to go through, and yet the bank never raised any red flags and never raised any concerns and — but that the bank was savvy enough to get its own money out when it became concerned, just before the fraud was uncovered in December 2008.
Now, no individuals are cited, I see.
So, the company says — am I right, the company still says it doesn't believe employees knowingly assisted Madoff's scheme?
Basically, the U.S. attorney's office conceded today they're not charging an individual, that this is an constitutional failure. Many, many people, this is a big, a huge bank — different parts of the bank didn't communicate well with each other and didn't share their concerns, so it sort of isolated or fragmented — the concerns are fragmented.
So not one individual was aware of the Ponzi scheme and allowed it to continue.
So, Patricia, give us some examples of the kind of red flags that were ignored.
Well, the government, in a very unusual statement of facts, basically, it's an admission of responsibility, a mea culpa, if you will, of what the bank employees were talking and saying to each other privately about Madoff, which are kind of incriminating.
For example, there's one point in June 2007 where one employee speculated that — quote — "Madoff and his returns are speculated to be part of a Ponzi scheme." And in December '98, one of the J.P. Morgan fund managers said that his returns are — quote — "possibly too good to be true" and that there were — quote — "too many red flags" — end quote.
And that — and the last, most significant thing was in four months before Madoff basically admits that he has conducted a Ponzi scheme that has gone on for decades in December 2008, J.P. Morgan in October 2008 was really concerned and redeemed $275 million of its own money from its investing with Madoff.
And at one point, one of the traders said on October 16, 2008, weeks before Madoff's fraud was uncovered in December, "There are many elements in this story that could make us nervous." And later when Madoff was arrested on December 11, 2008, one Madoff employee remarked to another one: "Can't say I'm surprised. Can you?" And the other guy said, "No."
Now, this is referred to as a deferred prosecution agreement with the U.S. attorney. What — what exactly does that mean? Is there still potential for prosecution?
If the bank continues — basically agrees to behave itself. It's like kind of like what you — we might remember as triple secret probation. They're told they have to behave. They're under the government's thumb for two years.
They have to report to the U.S. attorney's office, to prosecutors, to federal regulators, to banking officials, as well as the FBI. And they have to alert the government as soon as they're aware of anybody is misbehaving and not complying with the banking regulations. Then they are on notice to notify the government ASAP. Otherwise, they will be prosecuted.
So it's deferred for two years until they are off probation, basically.
So, explain to us something about the money involved here. How much and where is it going to? Much of it is — much or all of it going to victims?
Yes, basically, Manhattan U.S. attorney Preet Bharara said today that, with the addition of the $1.7 billion that they're getting from — extracting from J.P. Morgan today, on top of hundreds of millions of dollars and billions — $4 billion basically collected through another Madoff case, forfeiture case, there's going to be $4 billion that are going to be basically gotten into the pockets of all of the Madoff victims.
So some of this is going through the — it's a little confusing. There's $1.7 billion going through the — on the criminal side and then more gathered separately paying hundreds of millions to settle private claims?
Basically, all of the money from this case is basically the government's agreement with the bank. So this is $1.7 billion that is going to be disbursed to Madoff accounts — Madoff victims. Then there's $350 million that is going to be disbursed in a separate payment that the bank is making to the Office of Currency and Comptroller, and then $543 million is being collected by the trustee that is overseeing the bankruptcy of Madoff.
And the other part of this, you say, is that the bank agrees to some kind of monitoring or something, various steps to make sure it doesn't happen again?
It also — in addition, it has to acknowledge responsibility, which went on for pages, of years and years and years of systemic failures to pay attention to these basic red flags that Madoff wasn't totally kosher.
So how unusual is all of this? How big of a deal did the U.S. attorney see it?
It is very rare. And it is pretty significant.
It's the second largest forfeiture that the government has ever been able to extract and the Department of Justice has been able to get from a banking institution. Only, the larger one was — involved HSBC. So it's significant and it's quite at a big dent. It's a cold day outside in New York and it was kind of a cold day for J.P. Morgan today.
All right, Patricia Hurtado of Bloomberg, thanks so much.
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