JPMorgan To Pay $2.6B in Penalties in Bernard Madoff Ponzi Scam Settlements

JPMorgan Chase & Co. (JPM) will pay around $2.6 billion in penalties to settle criminal and civil allegations accusing the bank of failing to warn that Bernard L. Madoff was engaged in a multibillion-dollar Ponzi scam. $2.24 billion will go toward compensating the scheme’s victims-$1.7 billion will be forfeited via the US Department of Justice and $543 million will go to the bankruptcy trustee who is collecting funds for plaintiffs and other Madoff victims. $350 million will settle U.S. Office of the Comptroller of the Currency (OCC) claims.

The penalties are just the latest in the numerous securities settlements that JPMorgan has agreed to pay. The bank recently resolved cases over mortgage bond sales and the “London Whale” trading debacle, among other matters. This latest deal over the Madoff scam would up the total that the firm has paid to resolve government probes to $20 billion in the last year.

Federal prosecutors and the FBI had been trying to determine whether JPMorgan failed to notify regulators about Madoff’s activities even though there were a number of red flags. For example, why did the bank not formally raise worries about Madoff here when it submitted such a complaint in the UK? (The former financial manager kept primary checking accounts at JPMorgan for years.) This, even though US law mandates that banks turn in a SAR (suspicious activity report) when they detect that their might be suspected or definite activities violating federal law.

Now, JPMorgan and federal authorities have reached a deferred-prosecution deal to conclude the government’s probe into the bank’s involvement, even if not directly, in the Madoff Ponzi scam. With such an arrangement, companies agree to pay a penalty and prosecutors submit charges while consenting to drop them once certain conditions are met. As part of this agreement, JPMorgan will have to reform its policies to prevent money laundering.

The bank acknowledges that it lacked the necessary systems to catch Madoff and that there were problems with the procedures that did exist to identify and report suspect behavior. According to Reuters, Madoff’s account at JPMorgan received transfers and deposits of about $150 billion that almost all came from Madoff Securities investors. The funds, however, were not used to buy the securities.

Madoff Ponzi Scam
Madoff, who handled the money of many investors, including high profile rich and famous individuals, ordinary investors, and charities, pleaded guilty to the criminal charges related to his Ponzi scam in which he bilked customers of about $17 billion over decades. He is currently serving 150 years behind bar.

Meantime, five ex-Madoff employees are on trial on criminal charges accusing them of knowing that they were involved in his Ponzi scam. All of them have entered not guilty pleas and contend that Madoff also fooled them.

This settlement doesn’t conclude JPMorgan’s involvement in all Madoff-related matters. Last year, court-appointed trustee Irving Picard submitted a petition to the US Supreme Court asking to be able to go after JPMorgan and a number of other banks, including UBS (UBS), in his bid to recover investors’ financial losses. The nation’s highest court is expected to decide whether to accept Picard’s case later this week. Picard also has a number of US Bankruptcy Court actions against JP Morgan and other banks over $4B in recovery claims.

J.P. Morgan to Pay $2.6 Billion in Madoff Fraud Settlements, Wall Street Journal, January 7, 2014
JPMorgan to Pay Over $2 Billion to DOJ and OCC in Madoff Case, Reuters, January 7, 2014

More Blog Posts:
Madoff Feeder Funds Are Not Required to Arbitrate Claims Against KPMG, Stockbroker Fraud Blog, June 5, 2013
Deutsche Bank, Royal Bank of Scotland Settle & Others for More than $2.3B with European Union Over Interbank Offered Rates, Institutional Investor Securities Blog, December 24, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor, Institutional Investor Securities Blog, December 14, 2013