- POSTED: 08 Jan 2014 07:41
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JPMorgan Chase will pay US$2.6 billion to resolve charges that its lax oversight enabled the multibillion-dollar Ponzi scheme of Bernard Madoff, which collapsed spectacularly in 2008.
NEW YORK: JPMorgan Chase will pay US$2.6 billion to resolve charges that its lax oversight enabled the multibillion-dollar Ponzi scheme of Bernard Madoff, which collapsed spectacularly in 2008.
The amount, part of a US settlement deal over criminal charges, comprises US$2.24 billion destined for victims of the Madoff scam and another US$350 million in penalties to the Office of the Comptroller of the Currency.
The US$2.24 billion includes a US$1.7 billion settlement to be paid to victims through the Justice Department, the largest penalty ever for a violation of the Bank Secrecy Act.
In addition, US$543 million will be paid to the trustee seeking to recover US$17.5 billion in principal that Madoff Securities clients lost in the scam. So far the trustee has recovered about US$9.8 billion, including the JPMorgan payment.
The cases spotlighted JPMorgan's role as Madoff's main bank in the largest financial fraud to rock Wall Street.
Over more than two decades, some 4,000 clients entrusted Madoff with billions of dollars to manage. Instead of investing the money, he moved it in and out of the JPMorgan accounts, and reported to his clients huge, ultimately illusory gains.
Bank staff harboured suspicions of Madoff's activities dating back to at least 1994, yet never alerted JPMorgan anti-money laundering staff or regulators about their concerns.
"For decades, Bernie Madoff was able to launder billions of Ponzi proceeds essentially through a single set of accounts at JPMorgan," said US Attorney Preet Bharara. "The bank repeatedly ignored warning signs."
Once a prominent Wall Street broker and chairman of the Nasdaq exchange, Madoff was arrested in December 2008 for fabricating account statements for tens of billions of dollars he managed.
His firm, Bernard L. Madoff Investment Securities, collapsed with just US$300 million in assets, after having reported US$65 billion. The savings of many investors, foundations and families were wiped out in the collapse, and efforts continue to claw them back.
After admitting that his firm was a Ponzi scheme, Madoff was sentenced to 150 years in prison.
Justice authorities said that Bernard L. Madoff Investment Securities used JPMorgan "almost exclusively" as its banker for more than 20 years.
During that time it ignored numerous red flags over his activities.
In 2007, the bank's chief investment officer wrote that another bank executive said there was "a well-known cloud" over Madoff's head and that his returns aroused suspicions of a Ponzi scheme.
In another instance, a JPMorgan senior investment officer was asked by a client to query Madoff on how he generated consistently high returns despite a volatile market.
The JPMorgan officer concluded Madoff might have been "smoothing out the returns" by sharing trading profits from other Madoff accounts.
Yet, JPMorgan never filed a "suspicious activity report" with the US Treasury, nor did it alert senior bank compliance staff to the problems, the US said.
In their deferred prosecution agreement with bank, the authorities said they will dismiss the criminal charges after two years if the bank complies with the provisions of the deal: paying the penalties, reforming its anti-money laundering policies, cooperating with ongoing investigations and reporting any wrongdoing by JPMorgan or its employees.
Bharara was asked during a news conference whether such a deal was a less effective deterrent against wrongdoing than seeking to convict the largest US bank.
"You take into consideration all factors," Bharara said, adding that there are "collateral consequences" to pursuing a criminal case against a big financial institution and employer.
A JPMorgan statement characterized the Madoff scheme as "an unprecedented and widespread fraud that deceived thousands, including us."
"We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time," the bank said.
"We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."
Tuesday's penalty comes on the heels of other recent major settlements involving JPMorgan, including a US$13 billion settlement for misleading investors in the sale of high-risk mortgage securities and more than US$1 billion to settle charges it failed to detect and prevent billions of dollars of losses in a fraudulent trading scheme.
JPMorgan shares fell 1.2 percent on a day in which most of its fellow components of the Dow Jones Industrial Average rose.