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By David Henry and Emily Flitter
NEW YORK, Jan 7 (Reuters) - JPMorgan Chase & Co agreed to pay $2.6billion to the U.S. government and Bernard Madoff victims to settle allegationsthat the bank failed to tell authorities about its suspicions of fraud atMadoff's fund.
Even as the bank cut its exposure to Madoff's fund to minimize its losses itwhat ended up being a $17.3 billion Ponzi scheme, JPMorgan never shared itsdoubts with U.S. authorities, government prosecutors said.
"The bank connected the dots when it mattered to its own profit but was notso diligent when it came to its legal obligations," Manhattan U.S. AttorneyPreet Bharara said at a press conference.
"In part because of that failure, for decades, Bernie Madoff was able tolaunder billions of dollars in Ponzi proceeds essentially through a single setof accounts at JPMorgan," Bharara added. The bank's $1.7 billion settlement withthe Department of Justice, part of the larger deal announced Tuesday, is thelargest forfeiture a bank has ever had to pay to resolve anti-money launderingviolations. The deal does not include charges against individuals.
The settlement is only the latest of JPMorgan's legal difficulties. InNovember, the bank agreed to a $13 billion settlement with the U.S. governmentover the bank's mortgage bonds. JPMorgan still faces at least eight othergovernment probes, covering everything from its hiring practices in China towhether it manipulated the Libor benchmark interest rate.
These are big payouts, even to a bank whose profit has topped $20 billion ayear. The Madoff settlement underscores how being the largest U.S. bank can be ahindrance as well as a benefit to JPMorgan. Like its Wall Street rivals,JPMorgan a colossus in which internal communication is often imperfect.
"We recognize we could have done a better job pulling together variouspieces of information and concerns about Madoff from different parts of the bankover time," JPMorgan spokesman Joe Evangelisti said in an email. The bank fileda notice of suspicious activity with regulators in London in October 2008, butnot in the United States, he acknowledged.
He added: "We do not believe that any JPMorgan Chase employee knowinglyassisted Madoff's Ponzi scheme."
The Department of Justice agreed to a two-year deferred prosecutionagreement with the bank as part of its settlement. Tuesday's deal also settlesprobes by multiple bank regulators into failures in JPMorgan's anti-moneylaundering policies. The bank agreed to improve its controls.
Experts viewed the $1.7 billion forfeiture as a tough penalty for JPMorgan,but several questioned why no individuals faced charges over the bank's failureto alert authorities for more than a decade to concerns about Madoff.
"Despite those egregious facts, it appears that no person, no bank official,no bank employee, not a single one, is going to be held personally accountablefor the scandal," said former Treasury Department official Jimmy Gurule, now aprofessor at Notre Dame University's law school.
JPMorgan said Tuesday afternoon that the tab for the settlements will reducefourth-quarter results by about $850 million, after the bank had already setaside money to cover most of the expenses. In the third quarter, the bank setaside another $7.2 billion to cover expected legal losses, bringing the totalfunds it had stockpiled for settlements to $23 billion. The settlement paymentsannounced on Tuesday are not tax-deductible, the company said.
The company had been expected to make about $5.13 billion in the quarter,according to analysts' estimates compiled by Thomson Reuters. Shares of JPMorganfell 1.3 percent to $58.26 on Tuesday.
The settlement also includes a $350 million penalty from the U.S. Office ofthe Comptroller of the Currency. In private litigation, the bank will pay $218million to settle the class action suit and $325 million to settle a U.S.bankruptcy trustee's suit. The Department of Justice portion ofthe payout will go to Madoff's victims.
"The bank was clearly willfully blind, I think, to detecting and reportingsuspicious transactions to the Treasury Department," Gurule said.
Even if the transactions had been reported, it is not clear if Madoff wouldhave been shut down. Analyst Harry Markopolos told the Securities and ExchangeCommission multiple times about his suspicions about Madoff's consistently goodreturns, and was ignored by the agency.
'JUST ONE BIG LIE'
Madoff was a quiet force for years on Wall Street, serving at one time asthe chairman of the Nasdaq Stock Market. Through his Bernard L. MadoffInvestment Securities LLC hedge fund, he operated the largest Ponzi scheme thathas ever been uncovered. It collapsed in December 2008 after he told senioremployees at his firm "it's all just one big lie" and turned himself in to theFederal Bureau of Investigation.
Madoff pleaded guilty in 2009 of defrauding thousands of investors and isserving a 150-year prison sentence. Investors lost $17.3 billion in principal,the bankruptcy court trustee has said.
From 1986 until his arrest in 2008, Madoff kept an account at JPMorganChase, or banks it had bought, according to the statement of facts the bankagreed to disclose as part of its settlement with the Justice Department.
The account at the bank received deposits and transfers of about $150billion, almost exclusively from investors in Madoff Securities, yet the moneywas not used to buy securities as Madoff had promised, according to thestatement.
According to the statement, in the 1990's Madoff routinely transferred moneybetween two accounts, one held at an undisclosed bank and one at JPMorgan heldby Norman Levy, one of its most important private banking clients. Levy isdescribed only as a "private bank client" in the government's statement offacts, but he is named in the lawsuit filed against JPMorgan by the Madoffbankruptcy trustee Irving Picard, according to a source familiar with anunredacted copy of the lawsuit.
Levy died in 2005 at the age of 93.
According to the statement of facts, Levy and Madoff wrote checks back andforth to each other each day to take advantage of normal delays in thecheck-clearing process and make it seem as though the accounts had more moneythan they did.
JPMorgan paid interest on the inflated amount in Levy's account andcontinued dealing with Madoff even after the other bank notified it of thescheme, according to the statement.
An employee of JPMorgan's private bank said in a 1994 memo that "the dailycost associated" with Madoff's withdrawals was "outrageous." But when theemployee tried to tell Levy about the scheme, Levy responded: "If Bernie isusing the float, it is fine with me; he makes a lot of money for my account."
While people in some parts of JPMorgan failed to take their suspicions aboutMadoff's results to people in other parts of the giant company and the U.S.government, they moved quickly enough to withdraw money from Madoff-relatedentities and save the company some $200 million right before Madoff wasarrested, according to the statement of facts.
In the first two weeks of October 2008, JPMorgan's "Equity Exotics Desk"sought to reduce its exposure to hedge funds following the collapse of LehmanBrothers and JPMorgan's earlier takeover of Bear Stearns. On Oct. 16, 2008, ananalyst in Equity Exotics assigned to scrutinize investments wrote a long emailcompiling suspicions about Madoff, including his "lack of transparency," use ofsmall and unknown accounting firms and resistance "to provide meaningfuldisclosure" on his exceptionally good returns, according to the statement offacts.
A JPMorgan official in London reviewed the analyst's memo and filed asuspicious activity report with the U.K. Serious Organised Crime Agency sayingMadoff's consistently superior performance seemed "to appear too good to be true-- meaning that it probably is."
The report said JPMorgan was redeeming 300 million euros from two Madofffeeder funds out of a total of 350 million euros. JPMorgan took additional stepsinvolving structured products linked to Madoff funds to limit possible losses.Without these steps, JPMorgan would have lost $250 million instead of the $40million loss it booked, according to the statement of facts.
If JPMorgan's deferred prosecution agreement with prosecutors runs a normalcourse, Bharara will seek to dismiss the criminal charges against the bank atthe end of the two-year period. The settlement does not include detaileddescriptions of how JPMorgan is expected to improve its anti-money launderingefforts.
