JPMorgan To Pay More Than $2 Billion To U.S. In Penalties In Bernie Madoff Case

– J.P. Morgan to Pay More Than $2 Billion to U.S. in Penalties in Madoff Case (Wall Street Journal, Jan 5, 2013):

U.S. prosecutors and regulators are expected to announce this week that J.P. Morgan Chase JPM +0.95% & Co. will pay slightly more than $2 billion in penalties for alleged failures to warn about Bernard L. Madoff’s massive fraud, said people familiar with the negotiations.

The federal actions, which are expected to include a deferred- prosecution agreement with Manhattan U.S. Attorney Preet Bharara, could be announced as early as Tuesday, these people said.

The bulk of the fines are expected to be routed to victims of Mr. Madoff, who pleaded guilty to charges he ran a decades-long Ponzi scheme that bilked investors out of billions of dollars. Penalties paid to the Justice Department are expected to form the largest chunk of the total— an amount greater than $1.5 billion, these people said.

The rest will be paid to the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, both of which are part of the Treasury Department.

The OCC action is expected to highlight larger control weaknesses beyond the bank’s dealings with Mr. Madoff, who had a two-decade-long relationship with J.P. Morgan before his arrest in December 2008. The OCC is the bank’s primary regulator.

The Justice Department, OCC, Financial Crimes Enforcement Network and J.P Morgan declined to comment.

The penalties would be the latest in a string of legal settlements for the largest U.S. bank, which agreed in late 2013 to pay out nearly $20 billion to end an array of lawsuits and investigations relating to past mortgage bond sales and the 2012 “London whale” trading debacle. It set aside third-quarter 2012 legal reserves of $9 billion and told investors that $23 billion was on hand to absorb future settlements and lawsuits.

J.P. Morgan is due to report fourth-quarter 2013 earnings on Jan. 14. Bank officials were hoping to get the Madoff settlements done before the release of earnings, said a person close to the bank. Final agreements with prosecutors and regulators weren’t complete as of Sunday night, said another person close to the talks.

Last month, J.P. Morgan Chief Executive Officer James Dimon referenced the Madoff case while discussing the strategy behind the recent spate of settlements. “You read about Madoff in the paper the other day,” he said at a Goldman Sachs Financial Services Conference in New York. “We have got to get some of these things behind us so we can do our job. Our job is to serve clients around the world. That’s our job. So I want to get it behind us.”

Prosecutors with the U.S. Attorney’s Office and the Federal Bureau of Investigation have been looking into whether J.P. Morgan failed to alert regulators about Mr. Madoff’s activities despite numerous red flags. A central component of their case is why the bank didn’t provide a formal report raising concerns about Mr. Madoff in the U.S. despite filing such a document with authorities in the U.K. An FBI spokesman declined comment.

Federal law requires banks to file a suspicious-activity report, or SAR, when they “detect certain known or suspected violations of federal law or suspicious transactions.” There were roughly 1.6 million such reports filed in 2012, the most recent year for which federal data are available. J.P. Morgan alone typically files 150,000 to 200,000 such reports each year.

The definition of suspicious activity is vague and forces banks to use discretion in filing these reports, according to legal experts.

J.P. Morgan has said previously that it didn’t know about or participate in the Madoff fraud. But in recent months the bank began discussing a deferred-prosecution agreement with the U.S. Attorney’s Office that would resolve the investigation, said people close to the talks. Under such a pact, companies typically pay a penalty and prosecutors file charges that are dismissed after a set period if the company lives up to certain conditions.

Typically the parties agree on a statement of facts about what occurred. Late last week the bank and prosecutors were still negotiating over the final wording, said one person close to the discussions.