Updated at 2:55 p.m. ET
NEW YORK - JPMorgan Chase & Co. (JPM), already beset by other costly legal woes, will pay over $2 billion for ignoring obvious warning signs of Bernard Madoff's massive Ponzi scheme, authorities said Tuesday.
The bank will pay $1.7 billion to
settle criminal charges and a $350 million civil penalty for what the Treasury
Department called "critical and widespread deficiencies" in its
programs to prevent money laundering and other suspicious activity.
George Venizelos, head of the FBI's
New York office, said the company failed to carry out its legal obligations
while Madoff "built his massive house of cards."
"It took until after the
arrest of Madoff, one of the worst crooks this office has ever seen, for J.P.
Morgan to alert authorities to what the world already knew," he said in a
JPMorgan, the primary bank through
which Madoff operated since 1986, withdrew about $300 million of its own money
from Madoff feeder funds in late 2008, soon after the bank's London desk
circulated a memo describing JPMorgan's inability to validate Madoff's trading
activity or custody of assets and his "odd choice" of a one-man
accounting firm, the government said.
U.S. Attorney Preet Bharara said in
a release that "JPMorgan connected the dots when it mattered to its own
profit, but was not so diligent otherwise."
He added that financial
institutions "must exercise due care not only with their own money but
with other people's money also."
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.
The settlement includes a so-called
deferred prosecution agreement that requires the bank to acknowledge failures
in its protections against money laundering but also allows it to avoid
criminal charges. No individual executives were accused of wrongdoing.
The agreement resolves two felony
violations of the Bank Secrecy Act in connection with the bank's relationship
with Bernard L. Madoff Investment Securities, the private investment arm of
Madoff's former business.
The civil penalty was imposed by
the Treasury Department's Office of the Comptroller of the Currency.
The government said the civil
penalty was assessed because the bank failed to pass along to U.S. authorities
suspicions about Madoff it had reported to Britain's Serious Organised Crime
Agency, and because the bank failed to detect and report other cases of
suspicious activity, including more than $2 billion in transactions involving
the Puerto Rican affiliate of an unidentified Venezuelan bank.
Under the agreement, criminal
charges will be deferred for two years as JPMorgan admits to its conduct, pays
the $1.7 billion to victims of Madoff's fraud and reforms its anti-money
laundering policies, prosecutors said.
A statement of facts included in
the agreement describes internal communications at JPMorgan expressing concerns
about how Madoff was generating his purported returns. It says executives were
disturbed by the fact that Madoff wouldn't let the bank examine his books.
"How much do we have in Madoff
at the moment?" a bank analyst wrote in a 2008 email. "To be honest,
the more I think about it, the more concerned I am."
In a statement, JPMorgan said it
recognized it "could have done a better job pulling together various
pieces of information and concerns about Madoff from different parts of the
bank over time."
It noted that in late October 2008
it filed the U.K. suspicious activity report but didn't file one in the United
States. The fraud was revealed with Madoff's arrest in December 2008.
"We do not believe that any
JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme," the
bank said. "Madoff's scheme was an unprecedented and widespread fraud that
deceived thousands, including us, and caused many people to suffer substantial
It said it was making
"significant efforts" to strengthen its anti-money-laundering
practices and believed "the lessons we have learned will make us a
Its shares fell 55 cents to $58.45
in morning trading Tuesday.
The deal was similar to one reached
in late 2012 with the British bank HSBC, which agreed to pay $1.9 billion to
settle claims it laundered money for Iran, Libya and Mexico's murderous drug
cartels. Some observers called the HSBC settlement - which included a $1.25 billion
forfeiture and $655 million in civil penalties - an example of the government
stopping short of bringing criminal charges against a big bank or its
executives because such prosecutions could be devastating enough to cause the
institution to fail.
JPMorgan was Madoff's primary bank
in the later years of a multi-decade fraud that ended in 2008 when he revealed
to the FBI that his investment advisory business was a Ponzi, or pyramid,
Account statements for thousands of
clients showing $60 billion in assets were fiction. Of the roughly $17.5
billion in principal that was real, most of it was gone.
Since then, a court-appointed
trustee has recovered more than $9.5 billion to redistribute to burned clients.
The trustee sued JPMorgan for $6.4
billion in 2010, accusing the bank of being "willfully blind" and
"thoroughly complicit" in the fraud, but an appeals court found in
2012 that he had no legal standing to make the claim.
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,
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.
Madoff, 75, pleaded guilty and is serving a 150-year prison term.