The Wall Street Journal is reporting that no JPMorgan Chase & Co. (NYSE:JPM) executives will be individually penalized in the $17.5 billion Madoff ponzi scheme as part of a deal between the US Justice Department and the bank.  Rather, the bank is expected to pay $2 billion in fines and sign a “deferred prosecution agreement” with the Justice Department whereby it acknowledges it did not have the proper systems in place to catch Mr. Madoff, according to the report.


History of the JPMorgan / Madoff relationship

For over twenty years, JPMorgan Chase & Co. (NYSE:JPM) had a relationship with Mr. Madoff’s firm. JPMorgan Chase & Co. (NYSE:JPM) provides banking and brokerage services as part of a platform for various hedge funds to conduct business.  With such fanfare regarding the celebrated returns Mr. Madoff was achieving – double digit performance regardless of market environment – and the extensive due diligence typically required for a hedge fund to gain access to a large bank’s platform, some observers had expected individuals to be signaled out in the probe.  It is unknown the extent to which JPMorgan Chase & Co. (NYSE:JPM) had conducted due diligence on Mr. Madoff’s firm to gain access to the bank or the level to which they provided services to Madoff typically reserved from hedge funds, but Mr. Madoff has been clear regarding past involvement of his prime banking and brokerage relationships.

“I have little doubt that the information I could provide would clearly demonstrate the vital role the major banks … played in the carrying out [of] my fraud, including their role in handling the accounts of my major customers,” Madoff was quoted as saying to CNBC’s Scott Cohn in a 2013 email.

During its prime, Mr. Madoff’s investment program was the talk of the hedge fund world, achieving brilliant double digit returns regardless of market environment.  Presentations Mr. Madoff gave to investors required total faith in his system, as he very rarely discussed details of his investing methodology.  Yet behind the scenes many hedge fund professionals were skeptical of a strategy that worked regardless of market environment.  In truth, it was eventually discovered Mr. Madoff’s vaunted double digit returns were nothing more than a ponzi scheme where very little investing activity occurred in the account other than taking new money from investors and paying for his lavish lifestyle and returning funds to older investors as they exited the program.

Laws regarding the safekeeping of customer brokerage accounts are typically strict.  Federal law mandates banks to file a suspicious activity report when they “detect certain known or suspected violations of federal law or suspicious transactions.”  WSJ reports that J.P. Morgan alone typically files 150,000 to 200,000 such reports each year and in 2012 roughly 1.6 million reports were filed.  No such report was filed in the Madoff case.

On February 25, 2013 ValueWalk had reported that Bernie Madoff said he had an account with J.P. Morgan that he had used to recurrently funnel funds between his New York and London offices.  The article says Madoff had mentioned on several occasions that J.P. Morgan had known of the ponzi scheme, a charge the bank denies.

JPMorgan’s deferred prosecution agreement

JPMorgan Chase & Co. (NYSE:JPM) would become the first major U.S. bank in recent years to settle Bank Secrecy Act violations through a deferred prosecution agreement, according to Brandon Garrett, a University of Virgina School of Law professor, who was quoted in the WSJ article. HSBC agreed to settle such violations with a deferred prosecution agreement when it was accused of money laundering for Mexican drug cartels and Iran.  In that case no criminal enforcement action was taken against the individual executives involved and HSBC Holdings plc (NYSE:HSBC) (LON:HSBA) received a $1.26 billion fine and HSBC’s CEO was quoted as saying “we accept responsibility for our past mistakes.”

The bulk of the JPMorgan Chase & Co. (NYSE:JPM) fines are expected to be routed to victims of the Madoff ponzi scheme through the Justice Department, with the balance of the fines paid to the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, according to the WSJ report, which are divisions of the Treasury Department.