By David Henry and Emily Flitter
NEW YORK (Reuters) - JPMorgan Chase & Co agreed to pay $2.6 billion (1.5 billion pounds) to the U.S. government and Bernard Madoff victims to settle allegations that the bank failed to tell authorities about its suspicions of fraud at Madoff's fund.
Even as the bank cut its exposure to Madoff's fund to minimize its losses it what ended up being a $17.3 billion Ponzi scheme, JPMorgan never shared its doubts with U.S. authorities, government prosecutors said.
"The bank connected the dots when it mattered to its own profit but was not so diligent when it came to its legal obligations," Manhattan U.S. Attorney Preet Bharara said at a press conference.
"In part because of that failure, for decades, Bernie Madoff was able to launder billions of dollars in Ponzi proceeds essentially through a single set of accounts at JPMorgan," Bharara added. The bank's $1.7 billion settlement with the Department of Justice, part of the larger deal announced Tuesday, is the largest forfeiture a bank has ever had to pay to resolve anti-money laundering violations. The deal does not include charges against individuals.
The settlement is only the latest of JPMorgan's legal difficulties. In November, the bank agreed to a $13 billion settlement with the U.S. government over the bank's mortgage bonds. JPMorgan still faces at least eight other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate.
These are big payouts, even to a bank whose profit has topped $20 billion a year. The Madoff settlement underscores how being the largest U.S. bank can be a hindrance 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 various pieces of information and concerns about Madoff from different parts of the bank over time," JPMorgan spokesman Joe Evangelisti said in an email. The bank filed a notice of suspicious activity with regulators in London in October 2008, but not in the United States, he acknowledged.
He added: "We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."
The Department of Justice agreed to a two-year deferred prosecution agreement with the bank as part of its settlement. Tuesday's deal also settles probes by multiple bank regulators into failures in JPMorgan's anti-money laundering 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 failure to 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 accountable for the scandal," said former Treasury Department official Jimmy Gurule, now a professor at Notre Dame University's law school.
JPMorgan said Tuesday afternoon that the tab for the settlements will reduce fourth-quarter results by about $850 million, after the bank had already set aside money to cover most of the expenses. In the third quarter, the bank set aside another $7.2 billion to cover expected legal losses, bringing the total funds it had stockpiled for settlements to $23 billion. The settlement payments announced 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 JPMorgan fell 1.3 percent to $58.26 on Tuesday.
The settlement also includes a $350 million penalty from the U.S. Office of the Comptroller of the Currency. In private litigation, the bank will pay $218 million to settle the class action suit and $325 million to settle a U.S. bankruptcy trustee's suit.
"The bank was clearly willfully blind, I think, to detecting and reporting suspicious transactions to the Treasury Department," Gurule said.
Even if the transactions had been reported, it is not clear if Madoff would have been shut down. Analyst Harry Markopolos told the Securities and Exchange Commission multiple times about his suspicions about Madoff's consistently good returns, and was ignored by the agency.
'JUST ONE BIG LIE'
Madoff was a quiet force for years on Wall Street, serving at one time as the chairman of the Nasdaq Stock Market. Through his Bernard L. Madoff Investment Securities LLC hedge fund, he operated the largest Ponzi scheme that has ever been uncovered. It collapsed in December 2008 after he told senior employees at his firm "it's all just one big lie" and turned himself in to the Federal Bureau of Investigation.
Madoff pleaded guilty in 2009 of defrauding thousands of investors and is serving 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 JPMorgan Chase, or banks it had bought, according to the statement of facts the bank agreed to disclose as part of its settlement with the Justice Department.
The account at the bank received deposits and transfers of about $150 billion, almost exclusively from investors in Madoff Securities, yet the money was not used to buy securities as Madoff had promised, according to the statement.
According to the statement, in the 1990's Madoff routinely transferred money between two accounts, one held at an undisclosed bank and one at JPMorgan held by Norman Levy, one of its most important private banking clients. Levy is described only as a "private bank client" in the government's statement of facts, but he is named in the lawsuit filed against JPMorgan by the Madoff bankruptcy trustee Irving Picard, according to a source familiar with an unredacted 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 and forth to each other each day to take advantage of normal delays in the check-clearing process and make it seem as though the accounts had more money than they did.
JPMorgan paid interest on the inflated amount in Levy's account and continued dealing with Madoff even after the other bank notified it of the scheme, according to the statement.
An employee of JPMorgan's private bank said in a 1994 memo that "the daily cost associated" with Madoff's withdrawals was "outrageous." But when the employee tried to tell Levy about the scheme, Levy responded: "If Bernie is using 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 about Madoff'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-related entities and save the company some $200 million right before Madoff was arrested, 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 Lehman Brothers and JPMorgan's earlier takeover of Bear Stearns. On October 16, 2008, an analyst in Equity Exotics assigned to scrutinize investments wrote a long email compiling suspicions about Madoff, including his "lack of transparency," use of small and unknown accounting firms and resistance "to provide meaningful disclosure" on his exceptionally good returns, according to the statement of facts.
A JPMorgan official in London reviewed the analyst's memo and filed a suspicious activity report with the U.K. Serious Organised Crime Agency saying Madoff'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 Madoff feeder funds out of a total of 350 million euros. JPMorgan took additional steps involving structured products linked to Madoff funds to limit possible losses. Without these steps, JPMorgan would have lost $250 million instead of the $40 million loss it booked, according to the statement of facts.
If JPMorgan's deferred prosecution agreement with prosecutors runs a normal course, Bharara will seek to dismiss the criminal charges against the bank at the end of the two-year period. The settlement does not include detailed descriptions of how JPMorgan is expected to improve its anti-money laundering efforts.
(Reporting by Emily Flitter and David Henry, additional reporting by Aruna Viswanatha, Karen Freifeld Jonathan Stempel and Joseph Ax,; Editing by Jeffrey Benkoe, Bernadette Baum and Lisa Von Ahn)