J.P. Morgan CEO Jamie Dimon
J.P. Morgan CEO Jamie Dimon (Photo by Gary Cameron / Newscom)

Madoff scandal. LIBOR conspiracy. London Whale fiasco. The names roll out like the titles of Tom Clancy novels. But this is not the stuff of fiction. This is the real-life rap sheet of JPMorgan Chase & Co. (JPMC)

And these episodes aren’t cheap. The beleaguered bank has paid more than $20 billion in the past year in fines, penalties and legal settlements with both regulators and clients. That doesn’t include the untold millions spent in legal fees defending itself from more than a dozen allegations ranging from mortgage securities fraud to violations of anti–money laundering laws.

For more than 18 months, the bank endured heavy flak from many sides. After traders in London lost $6.2 billion in bad derivatives deals—the so-called London Whale case—the U.S. Securities and Exchange Commission and the Board of Governors of the Federal Reserve System blasted the bank for deficiencies in its risk management and internal audit controls. The Fed also criticized the failure of “senior management’s elevation of issues to the board of directors,” which suggests that executives knew about the losses long before they told their board.

A spokesman said bank officials would not comment for this story. But under pressure from regulators, the bank hired more than 3,000 employees last year to enhance its risk and compliance efforts. It also hired a new compliance chief and removed the compliance function from the purview of general counsel Stephen Cutler. In statements to shareholders and employees, chairman and chief executive Jamie Dimon expressed humiliation over bank mistakes. He said the bank spent over $1 billion in 2013 on reforms, and he vowed, “Our control agenda is now priority No. 1.”

That’s just not enough for some critics. Take, for example, William Black, a law and economics professor at the University of Missouri–Kansas City, who has attacked the bank’s misconduct. “JPMorgan Chase has been running the largest financial crime spree in world history,” Black charges. “It’s not even close.”

Black speaks from experience. He is a former general counsel of the Federal Home Loan Bank of San Francisco, ex–senior deputy chief counsel for the Office of Thrift Supervision, and former litigation director of the Federal Home Loan Bank Board. He played a key role in investigating and bringing to justice hundreds of crooks during the savings and loan scandal in the 1980s and 1990s. The title of a book he authored makes clear how he feels about financial institutions. It’s called “The Best Way to Rob a Bank Is to Own One” (University of Texas Press, 2005).

So it’s understandable that Black is livid that no individuals were charged in any of JPMC’s wrongdoing. He says the U.S. Department of Justice not only fails to hold bank officers accountable under criminal law, it refuses to bring civil fraud actions against individuals at JPMC or other big banks. “Rather than go after the London Whale, [prosecutors] go after the minnows. They should die of embarrassment,” the professor says.

Black is not alone in his criticism. The New York Times recently editorialized against the “prosecutorial weakness” shown against JPMC and other large banks—a weakness that has led to “a distortion of justice.” In another Times article, Massachusetts Institute of Technology business professor Simon Johnson blamed JPMC’s compliance failures on the bank’s size—it is the country’s largest bank by assets. Johnson wrote, “Force the biggest banks to break up, and you will get better-run operations with much tighter control over ethics and business practices.”

And Los Angeles Times columnist Michael Hiltzik was even harsher. He skewered the bank for failing to report suspicious activity in the Bernie Madoff Ponzi scheme. “JPMorgan has been racking up multibillion-dollar settlements over white-collar misdeeds on an almost monthly basis lately,” Hiltzik noted. “It hasn’t been operating like a bank, but like a criminal enterprise.”

The Madoff issue is the most recent of JPMC’s problems to be settled. In January federal prosecutors charged the bank with two felonies, saying it turned a blind eye as Madoff used a primary account in New York, known as account #703, for nearly two decades to run the world’s largest known Ponzi scheme. The government deferred prosecution on the charges while the bank agreed to forfeit over $2 billion in penalties and restitution. For the charges to be dismissed, the bank must cooperate with ongoing probes, enhance compliance and avoid any further criminal charges for two years.

Oddly, the charges might never have been brought were it not for a “French connection.” It involves a reporter who dug into a case and wrote about it, a lawyer in France who read the story and another lawyer who sued over it in New York.

This international tale actually begins in England. Court documents filed with the deferred prosecution agreement show that JPMC employees in London became suspicious of Madoff’s dealings in the fall of 2008. They wrote a memo saying they were unable to validate Madoff’s trading activity or custody of assets. They cited a “resistance on the part of Madoff to provide meaningful disclosure.”

This memo, according to the documents, was forwarded to unidentified in-house and external counsel in the United Kingdom, as well as to the bank’s London-based head of anti–money laundering for the European region. A compliance officer and a bank lawyer, both based in the U.K., said they contacted the U.S.–based “global head of equities” to say they were about to file a suspicious activity report on Madoff with U.K. regulators. The global executive supported “taking any necessary steps with regard to disclosure to U.S./U.K. regulators” and said he “assumed JPMC’s general counsel would be involved in the ultimate decision,” according to the documents.

But this unidentified executive apparently dropped the ball. “No disclosure was made to U.S. regulators and no report was made to JPMC’s general counsel,” the documents say. Two weeks later, on October 29, 2008, JPMC’s Bank Secrecy Act officer in London filed the suspicious activities report with U.K. regulators. The report said Madoff’s returns on investments were “too good to be true” and that Madoff was “reluctant to provide necessary information” on his operations.

The bank was so suspicious, in fact, that it withdrew nearly $300 million of its own investments from Madoff funds. That led Manhattan U.S. Attorney Preet Bharara to say, “In this case, JPMorgan connected the dots when it mattered to its own profit, but was not so diligent otherwise.”

At least one other time bank employees in the United States had a chance but failed to act. The U.K. bank told the senior U.S. compliance officer that it had filed a suspicious activities report on Madoff, and it sent along a copy of the employee memo. But that unidentified compliance officer didn’t “take any steps to examine JPMC’s banking relationship with Madoff,” the documents say. The officer also neglected to refer the memo’s concerns to any U.S.–based anti–money laundering personnel, nor did the bank file a suspicious activities report with its U.S. regulators as required by law, according to the documents.

Here’s where the French connection comes in. These bank failures came to light thanks to the French weekly newsmagazine L’Express. In the summer of 2010, it printed a story based on confidential JPMC documents that its reporter obtained while covering a Madoff-related case in France. The story revealed the London employees’ memo and quoted from the U.K. suspicious activities report. “The American crook was not the only one to know,” the story began, before launching into the confidential details of what the bank had known.

In a crucial turning point, a lawyer in France saw this story and immediately contacted attorneys in New York. That’s where Irving Picard was working as the court-appointed trustee in Madoff’s bankruptcy case. Picard successfully fought to use the confidential report in his case seeking damages from JPMC, arguing that the newsmagazine’s article rendered the documents no longer confidential. Picard’s law firm, Baker & Hostetler, filed a 275-page complaint in the fall of 2011 against JPMC. It accused the bank of enriching itself while ignoring a warning from another bank more than 10 years before about the Ponzi scheme. It also alleged the bank was aware of unusual account activity that was inconsistent with Madoff’s purported business, ignored its duty to investigate suspicious activity, abetted investor fraud, committed fraud on its regulator and more.

Federal prosecutors essentially agreed. Using Picard’s complaint as a road map, they eventually charged the bank with two felonies: failing to maintain an effective anti–money laundering program and failing to file a timely suspicious activities report with U.S. regulators. JPMC did file a report in the U.S., but only after Madoff was arrested in December 2008. And only after Madoff had drained the account of more than $5 billion in a few months’ time. The bank settled Picard’s suit for $543 million.

All the bank’s highly publicized problems have given JPMC’s legal department a whopper of a black eye. Notably, it was general counsel Stephen Cutler who signed the deferred prosecution agreement that forced the bank to “acknowledge and accept” its failures in compliance. This is the same Stephen Cutler who served as director of the SEC’s Division of Enforcement from 2001 to mid-2005 before joining JPMC in 2007. Before working at the SEC, and for two years between leaving the SEC and joining the bank as head of its legal and compliance operations, Cutler was a partner at the law firm now called Wilmer Cutler Pickering Hale and Dorr.

At the SEC, he became known for his speeches that warned general counsel about their “gatekeeping” responsibilities. At the second Annual General Counsel Roundtable in December 2004, Cutler spoke about giving mixed signals to employees. “Too many times in our cases, we’ve seen instances of senior managers demanding ‘results,’” Cutler said. But what employees heard, he said, was a demand for “results at any cost—including noncompliance with the rules.” Now observers wonder: What did employees at JPMC hear?

Then there’s the issue of holding executives accountable. Although JPMC has changed leadership in several departments, some critics wonder why regulators haven’t demanded that the bank’s top execs be replaced. Black, the law professor, says at the very least they should have demanded that JPMC split the chief executive and chairman of the board roles; Dimon holds both titles. “It’s an elementary violation of common sense,” Black insists. “You don’t put that kind of power in a single person’s hands, much less in the country’s largest bank.”

Cutler’s speeches at the SEC also urged holding executives accountable. He told general counsel at the Roundtable that it was important for top managers to set the right tone. And part of setting the right tone “means disciplining or even firing [managers] when they have failed to create a culture of compliance … even in the absence of direct involvement in violations,” he said. “It speaks volumes when a company fires or suspends a rainmaker or other important employee for an ethical breach; and just as importantly, it speaks volumes when a company doesn’t.”

Whether Cutler’s words smack of irony or hypocrisy, he still has many defenders. Even some lawyers who recently have opposed him and the bank in suits (and asked not to be named) do not believe he or his CEO did anything fraudulent or criminal. And one attorney who worked with him at the SEC calls him “one of the most honest and ethical lawyers I’ve ever known.”

But everyone acknowledges the bank had serious compliance issues. “JPMorgan is the new Mr. Magoo,” chides law professor Cornelius Hurley, referring to the myopic character who stumbled and bumbled his way through cartoons. Hurley, the director of Boston University’s Center for Finance, Law & Policy, was formerly general counsel of Shawmut National Corporation, a New England banking company, and served as an assistant general counsel for the Federal Reserve in Washington, D.C.

Cutler, however, has offered the public no defense or excuses on behalf of his legal department. But he has raised questions about the large financial penalties that the government has slapped on his and other banks. He spoke on a panel last November—right after the bank agreed to pay $13 billion to settle allegations involving the sale of bad mortgage securities. “At what point does this stop?” Cutler asked about the penalties, according to an article in The Wall Street Journal. He continued, “We should all be concerned, because at some point people become immune to the numbers.”

The financial penalties also vex critics like Black, but not because they are too high. In Black’s view, money penalties are only effective if they are large enough to truly damage or close a bank. Instead JPMC simply reports lower quarterly profits due to the penalties. But what’s really needed, he argues, is for regulators and prosecutors to go after individuals, or to stop settling cases and take a big bank to trial.

In fact, prosecutors considered demanding that JPMC plead guilty to a felony count, according to a report in The New York Times. But they opted for the deferred prosecution agreement because a guilty plea could have jeopardized its charter as a national bank. Black says he doesn’t think it would be so terrible if JPMorgan lost its charter, adding, “We should have declared a new national holiday to celebrate that act of restoring the rule of law.”

But some experts disagree. Gregory Brower, a former U.S. attorney in Nevada and now a Snell & Wilmer partner there, understands the frustration with big bank misconduct. But he defends the idea of a deferred prosecution agreement and reasonable financial penalty in the JPMC case. There seems to be a lack of evidence that the bank knowingly conspired to commit fraud, explains Brower, who was not involved in the case. “The government seems to have evidence of bank negligence in not detecting the fraud and in enabling the fraud,” he adds, but that is quite different from having evidence of affirmatively knowing or conspiring.

Despite the criticism, what the regulators and prosecutors have accomplished is to force many changes in JPMC’s structure and policies. In January 2013, around the time it signed two consent orders with the Fed and the Office of the Comptroller of the Currency, the bank began shaking up its compliance staff. It named attorney Cynthia Armine, formerly co–chief control officer, as chief compliance officer. Armine replaced Martha Gallo, who headed global compliance for two years. The bank already had replaced its chief risk officer, chief financial officer and head of its chief investment office after the London Whale fiasco, according to press releases and news reports.

Dimon, the chief executive, didn’t escape totally unscathed. The board of directors cut his 2013 pay from $23.1 million to $11.5 million. (In January the board voted to restore most of it.) No compensation information is available for Cutler. But when Armine took over compliance, the bank removed the function from the legal department and transferred it to a pair of co–chief operating officers, who oversee a new firmwide “oversight and control group.” Every line of business now has its own business control officer who reports jointly to a business CEO and to the new oversight group, according to a letter Dimon sent to shareholders last April.

Among other changes, the letter said JPMC also:

  • Provided 750,000 hours of regulatory and control-related training to employees;
  • Deployed what Dimon calls “unprecedented resources” to build and maintain a model anti–money laundering program;
  • Increased spending on technology for regulatory and control issues, including a state-of-the-art control room in corporate headquarters that provides streamlined data analysis as well as details on control and operational risk.

Dimon praised the company’s efforts in a January statement releasing fourth-quarter 2013 earnings. “We are pleased to have made progress on our control, regulator y and litigation agendas and to have put some significant issues behind us this quarter,” he said. The bank’s quarterly earnings dipped from $5.7 billion a year earlier to $5.3 billion, including a decrease of $1.1 billion spent on legal expenses.

And it’s not over. More legal problems loom, including civil suits stemming from the bank’s misconduct. On the regulatory front, the Office of the Comptroller of the Currency in January proposed new guidelines setting heightened standards for large banks. The standards would increase demands on a bank’s risk governance and on the oversight by the bank’s board of directors. In addition, New York Attorney General Eric Schneiderman recently named Gary Fishman, a veteran financial crimes prosecutor, to serve as chief of the newly formed Criminal Enforcement and Financial Crimes Bureau in New York to prosecute complex and large-scale financial crimes.

But perhaps most vexing for JPMC is an ongoing federal investigation into possible foreign bribes. The New York Times reported in November that the bank paid $1.8 million to a small consulting firm run by the daughter of former Chinese Premier Wen Jiabao, who had oversight of that country’s financial institutions. The newspaper said U.S. authorities were investigating the bank’s hiring practices in China as part of a larger probe into whether JPMC used contracts and jobs for relatives in order to win financial business throughout Asia, which would be a violation of the Foreign Corrupt Practices Act. A bank spokesperson has said it is cooperating fully with investigators.

Hurley, the law professor, says the bank must be careful. That’s because its deferred prosecution deal in the Madoff case requires it to “commit no subsequent federal crimes” for two years or the deal could be voided and the bank prosecuted. “The threat of any [other] criminal prosecution places JPMorgan in a more precarious state than most think,” Hurley warns. “The financial consequences of the firm tripping the deferred prosecution wire would be significant. Given JPMorgan’s history of random and illegal acts,” he adds, “this is a distinct possibility.”