JPMorgan gets off easy in Madoff case


The Los Angeles Times

Let’s get a few points straight regarding the federal government’s “big” $2-billion-plus settlement with JPMorgan Chase over the bank’s complicity in the Madoff case.

First, JPMorgan, where Madoff kept his major bank accounts and which profited handsomely from its relationship in numerous ways, knew Bernard L. Madoff was crooked. Bank executives had him figured out as early as 1998 – possibly earlier – or 10 years before his arrest and public exposure as the mastermind of a record-breaking Ponzi scheme.

The U.S. banking system relies on banks themselves as the first line of defense against fraud – that’s why they’re required to file “suspicious activity reports,” or SARs, with financial regulators. No institution had a clearer view of Madoff’s fraud than JPMorgan, which had “plenty of reasons to be uniquely suspicious,” as U.S. Attorney Preet Bhahara said at a news conference announcing the settlement. But JPMorgan never filed a SAR with the United States. As a result, Madoff continued working his black magic for years after he could have been stopped.

Second, it’s a scandal and an affront to the principle of equal and fair justice that the federal prosecutors handling this case named no individuals as bearing criminal responsibility, and even deferred criminal prosecution of the bank itself for two years, contingent on its keeping its nose clean.

Third, regarding JPMorgan’s public statement about the outcome of this investigation: How shall we put this politely? It resembles hay after it’s been passed through the digestive system of a horse.

For example, the bank says, “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.” Better job? JPMorgan made no effort whatsoever at “pulling together” the information its various units had. Every time some executive there had a reasonably complete picture of Madoff’s scam in his or her hands, someone vetoed making a disclosure to the public or the U.S. government.

Who issued those vetoes? We don’t know. The prosecutors don’t say. More appallingly, they may not have asked.

The bank states: “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us.” Based on the statement of facts issued Tuesday by the prosecutors, to which the bank assents, this is an out-and-out lie. JPMorgan reduced its investments in Madoff’s funds by 80 percent – $288 million – from October 2008 to Dec. 11 that year, when Madoff was arrested. They would have sold off more, if they could.

Earlier, a top bank executive vetoed a $1 billion investment, placing a cap of $250 million on Morgan’s exposure, because he smelled a rat. Madoff, it seems, had refused to let Morgan’s experts look at his books. “We don’t do $1 billion trust-me deals,” the executive decreed. Speculation that Madoff’s business was a Ponzi scheme was rife at JPMorgan headquarters.

After Madoff’s arrest, JPMorgan executives congratulated themselves on their foresight. “We got this one right at least,” one executive emailed another. The bank’s chief risk officer, who had vetoed the $1 billion investment, emailed his senior colleagues to report that draining the funds out of the Madoff accounts means “we actually look like we have some clue of what we’re doing.”

Other evidence of JPMorgan’s guilty knowledge abounds in the government documents. The most striking was an Oct. 29, 2008, report that the bank’s London office filed with British regulators listing their concerns about Madoff. Among the concerns was his consistently sterling reported investment returns in good markets and bad. This performance appears “too good to be true – meaning that it probably is,” the report said.

U.S. law required the bank to file the same sort of report of suspicious activity with U.S. regulators. JPMorgan did not do so, apparently because Morgan’s lawyers blocked it. And why? One clue lies buried in the government statement of facts: because Madoff was such a big broker-dealer that he might represent “significant business” in the U.S. for JPMorgan.

That underscores the folly of the government’s wrist-slap approach to financial fraud. Even with the penalties and restitution of more than $2 billion, JPMorgan can reasonably view the outcome as the cost of doing business. It almost got away with letting Madoff skate.

It’s hard to imagine a better illustration than this case of governmental dereliction identified by U.S. Judge Jed Rakoff in his recent essay about the lack of prosecutions resulting from the 2008 financial crisis. As we reported a week ago, Rakoff took special aim at the policy of prosecuting companies rather than individuals for white-collar wrongdoing.

“Companies do not commit crimes,” he observed; “only their agents do … So why not prosecute the agent who actually committed the crime?” He complained that prosecutions of corporations usually yield only fines and an agreement that the company set up an internal “compliance” department. “The future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.”

Sure enough, the JPMorgan settlement requires just such window-dressing. It’s mandated to “continue … to implement and maintain an effective … compliance program” with the requirements of the Bank Secrecy Act. You mean it wasn’t in compliance already, as required by law? If JPMorgan meets this requirement, then the government will drop its threat of an indictment against the bank in two years.

The deterrent effect of this requirement is zero. If the government was really determined to root out white-collar crime and prevent outfits like JPMorgan from condoning lawbreaking that unfolds in front of its own eyes, it had the tools to do so: Indict the bank executives and officials who knew Madoff was crooked and did nothing, and threaten to revoke the bank’s charter. Would that be a great loss to the financial system?

JPMorgan has been racking up multibillion-dollar settlements over white-collar misdeeds on an almost monthly basis lately. It hasn’t been operating like a bank, but like a criminal enterprise. And as this case now shows, it has been aiding and abetting its fellow criminals along the way.

Michael Hiltzik is a columnist for the Los Angeles Times.

©2014 Los Angeles Times

Read more From Our Inbox stories from the Miami Herald

  • Why I let my children walk to the corner store — and why other parents should, too

    Of all the adventures my lucky children had this summer — swimming in two oceans, hanging out on their bearded uncle’s commercial salmon fishing boat, endless popsicles — the biggest one, they told me, was just 495 feet away in their own Washington, D.C., neighborhood.

  • Censoring Islamic State on Twitter Is useless

    When a powerful denial-of-service attack brought down Sony’s PlayStation Network on Sunday, a group that claimed responsibility said it had acted on behalf of the Islamic State, the rapidly growing terrorist organization in the Middle East. Even if the “Lizard Squad” had nothing to do with it, the story was just another example of Islamic State’s devilish skill at promoting itself on social networks.

  • I demonstrated as an angry mob destroyed the U.S. embassy. I’m sorry.

    On Dec. 19, 1998, U.S. embassies across the Arab world felt the ire of residents outraged by U.S.-British airstrikes on Iraq. The most violent demonstrations occurred in Syria, where protesters stormed the U.S. and British embassies in Damascus. Protesters also destroyed the residence of U.S. Ambassador to Syria Ryan Crocker, who lodged vigorous objections with the Syrian government in response. I was among those protesters.

Miami Herald

Join the

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category