U.S. Attorney for the Southern District Preet Bharara speaks at a press conference on the JPMorgan settlement.
U.S. Attorney for the Southern District Preet Bharara speaks at a press conference on the JPMorgan settlement. (NYLJ/Rick Kopstein)

JPMorgan Chase Bank is paying the price for its role as the banker for Bernard Madoff’s multi-billion dollar Ponzi scheme.

The nation’s largest bank and Southern District U.S. Attorney Preet Bharara on Tuesday announced a $1.7 billion forfeiture and a two-year deferred prosecution agreement for violating two counts of the Bank Secrecy Act—a settlement Bharara hailed as sending a critical message about compliance to banks on reporting requirements (See Agreement).

The $1.7 billion represents the largest forfeiture by a U.S. bank and the largest Department of Justice penalty for a Bank Secrecy Act violation, the government said.

In addition, the bank will have to pay a $350 million civil fine to the Office of the Comptroller of the Currency.

People at JPMorgan saw a number of red flags over the years, Bharara said at an afternoon press conference, but failed to take action or file, as required by the act, “suspicious activities reports” concerning Bernard L. Madoff Investment Securities LLC.

“It’s not a tip,” Bharara said of compliance with the act. “It’s not a suggestion. It’s a legal requirement.”

“To be sure, there were failures by lots of people, in lots of places outside the bank,” he said, but the reason for requiring the reports under the act is to alert regulators and investigators and stop a crime in progress.

“The victim’s of Bernard Madoff’s epic fraud are $1.7 billion closer to being made whole,” he said.

Madoff was arrested on Dec. 11, 2008, at a time when he had 4,000 client accounts and claimed to have a balance of $65 billion that turned out to be a mere $300 million.

He pleaded guilty on March 12, 2009 to securities fraud, money laundering, wire fraud and other related offenses. Judge Denny Chin later sentenced him to 150 years in prison.

Under the deferred prosecution agreement JPMorgan cannot seek a tax deduction or tax credit to offset any of the penalty.

The bank agrees to “cooperate fully” with the Southern District U.S. Attorney’s office with the government and “bring to the Office’s attention all criminal conduct by JPMorgan or any of its employees.”

The agreement also states that the Southern District U.S. Attorney’s office “cannot, and does not, make any promises or commitments with respect to the prosecution of JPMorgan for criminal tax violations,” but if the bank is fully compliant, none of the testimony or information it provides will be used against JPMorgan.

The U.S. Attorney’s Office retains the discretion to prosecute the bank if it finds that it has given false, incomplete or misleading information, committed any crime or violated the agreement.

The deal was hammered out for JPMorgan by John Savarese, Stephen DiPrima and Emil Kleinhouse, partners at Wachtell, Lipton, Rosen & Katz and Steven Peikin, a partner at Sullivan & Cromwell. The agreement was also signed by Stephen Cutler, general counsel at JPMorgan.

Assistant U.S. Attorneys Arlo Devlin-Brown and Matthew Schwartz represent the government.

‘Too Good to Be True’

The recitation of facts in the agreement includes an Oct. 16, 2008 memo from a JPMC analyst at the bank’s London-based Equity Exotics Desk that “described JPMC’s inability to validate Madoff’s trading activity or even custody of assets; questioned Madoff’s ‘odd choice’ of a small, unknown accounting firm; and reported that JPMC ‘seem[ed] to be relying on Madoff’s integrity’ with little to verify that such reliance was well-placed.”

It also notes that the bank reported to the United Kingdom Serious Organised Crime Agency on Oct. 29, 2008 that the investment performance of the Madoff securities funds “is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear too good to be true—meaning that it probably is.”

Bharara said Tuesday there were “plenty of reasons to be uniquely suspicious” about Madoff, including the “sheer volume” of “round-tripping transactions”—large checks being withdrawn and placed in the accounts each day to give the appearance of activity and make more money on the interest paid by the bank.

While the October 2008 revelations came late in the game, the statement in the agreement also says that employees in several divisions of JPMC and its predecessor entities raised questions at “various times” between the late 1990s and 2008 about Madoff, “including questions about the validity of Madoff Securities’s investment returns” but no one shared their concerns with the bank’s anti-money laundering compliance personnel and no suspicious activities reports were filed in the United States

The Madoff Securities various accounts at JPMC, organized under a “concentration account,” called the 703 account, received deposits and transfers of about $150 billion between 1986 and Madoff’s arrest. Bharara Tuesday referred to it as the “Ponzi-scheme enabling 703 account.”

The balance in the account peaked at about $5.6 billion in August 2008 and then was drawn down almost immediately as Madoff hurriedly paid off investors pressuring him for their money. On the date of the Oct. 16 memo, the balance was down to $3.7 billion, and it had fallen to $3 billion when the Oct. 29 report was filed.

By the time Madoff was arrested in December, there was a balance of only $234 million.

The deferred charges against the bank are a willful failure to establish an anti-money laundering program, Title 31 U.S.C. §§5318(h) and 5322(a); and Title 12, Code of Federal Regulations §21.21 and failing to file a suspicious activity report, Title 31 U.S.C. §§5318(g) and 5322(a); and Title 12, Code of Federal Regulations §21.11.

And JPMorgan Chase failed to meet its legal obligations, the agreement said, after being warned by another bank about suspicious round-tripping transactions. The second bank that warned Chase, Bharara noted yesterday, filed a suspicious activity report under the Banking Secrecy Act and closed out Madoff’s account.

Between October 2008 and Madoff’s arrest, JPMorgan redeemed $275 million of its own money from Madoff, demonstrating, Bharara said, that “the bank connected the dots when it came to its own profits.”

Chase released a statement saying, “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.”

“We do not believe that any JPMorgan employee knowingly assisted Madoff’s Ponzi scheme,” which the bank called “an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.”

The bank said it had already strengthened its compliance practices as required by the agreement.

The $1.7 billion criminal penalty is only part of what JPMorgan Chase is required to pay out in relation to the Madoff affair.

The Office of the Comptroller of the Currency will collect a $350 million civil fine and the Trustee for the liquidation of Bernard L. Madoff Investment Securities, Irving Picard of BakerHostetler announced settlement agreements with the bank to pay out $543 million for the benefit of customers taken in the Ponzi scheme.

Picard filed two motions in the bankruptcy court seeking approval to settle avoidance claims by the bank as well as common law claims brought separately by Picard and in a class action lawsuit.

The settlement, according to a statement from David Sheehan, chief counsel to the Trustee, brings Picard’s recovery to date to $9.783 billion for the Bernard L. Madoff Investment Securities Customer Fund, or 55.9 percent of the estimated $17.5 billion in principal that was lost by Madoff customers who filed claims.

Unrelated Legal Challenges

The JPMorgan settlement is the latest in a series of major deals it has made to resolve its legal troubles. In November, the bank agreed to pay $13 billion over risky mortgage securities it sold before the financial crisis—the largest settlement to date between the Justice Department and a corporation.

JPMorgan still has several lawsuits pending against it related to the high-risk mortgage bonds that soured after the housing market collapsed in 2007. There’s also an ongoing criminal investigation led by the office of U.S. Attorney Benjamin Wagner in Sacramento, Calif.

The bank may be negotiating or litigating over the issue for years and has set aside $23 billion to cover those costs. JPMorgan told regulators in a filing in October that it may need as much as $5.7 billion more.