By Pam Martens: December 31, 2013

Since December 16, major business media have failed to dig deeper into a potentially blockbuster story involving the Justice Department’s refusal to honor a Wall Street regulator’s request for a subpoena against JPMorgan Chase to obtain Madoff related documents the firm was refusing to turn over. JPMorgan Chase was Madoff’s banker for the last 22 years of his fraud. The Trustee in charge of recovering funds for Madoff’s victims, Irving Picard, said in a filing to the U.S. Supreme Court this Fall that JPMorgan stood “at the very center of Madoff’s fraud for over 20 years.”

It’s a big story when a serial miscreant like JPMorgan – which has promised its regulators to change its jaded ways in exchange for settlements – risks obstruction of justice charges by denying one of its key regulators internal documents. It becomes an explosive story when the Justice Department, the highest law enforcement agency in the land and the regulator’s only source of help in enforcing a subpoena for the documents, sides with the serial miscreant instead of the regulator.

The story began on December 16 when Scott Cohn of CNBC posted a story with this headline: “Feds Probe JPMorgan Interference in Madoff Case.” The article revealed that the Office of the Comptroller of the Currency (OCC), a JPMorgan Chase regulator and part of the U.S. Treasury Department, had been so riled by JPMorgan’s refusal to turn over documents related to what its employees knew about the Madoff fraud that it referred the matter to the Treasury Department’s Inspector General.

The article quotes Richard Delmar, legal counsel to the Inspector General, who explains that “This office was looking into allegations made by JPMC’s regulator, the Office of the Comptroller of the Currency (OCC) that its oversight of the bank was being impeded, specifically with respect to the bank’s provision of banking services to Madoff.”

The Inspector General’s office clearly believed there was merit to the OCC’s claim because it issued its own administrative subpoena for the documents, according to the CNBC story. JPMorgan refused that request as well, leading the Inspector General to ask the Justice Department to enforce the subpoena – a request it refused to honor.

When the Justice Department refused to enforce this subpoena, it went against not one, or two, but three sets of investigators who had found a serious basis for suspecting JPMorgan of wrongdoing in the Madoff fraud.

Irving Picard, the Madoff victims’ fund trustee, had already filed a lower court lawsuit mapping out his case against JPMorgan. Picard told the court:

“Evidence of Madoff’s fraud permeated every facet of JPMC [JPMorgan Chase].  It ran from the Broker/Dealer Group, where BLMIS [Bernard L. Madoff Investment Securities LLC] maintained a bank account that no one honestly could have believed was serving any legitimate purpose, to Equity Exotics, where JPMC learned of the red flags inherent in BLMIS’s investment strategy, to JPMC’s London office, which learned that individuals might be laundering money through BLMIS feeder funds, to the Private Bank, which maintained intimate relationships with one of BLMIS’s largest customers, to Treasury & Security Services, which was responsible for investing the balance of the 703 Account in short-term securities.”

In a more recent filing with the U.S. Supreme Court seeking to overturn lower court findings that he lacked standing to sue JPMorgan and other banks, Picard further detailed his case against JPMorgan, explaining that JPMorgan was well aware that Madoff was claiming to invest tens of billions of dollars in a strategy that involved buying large cap stocks in the Standard and Poor’s 500 index while simultaneously hedging with options. But the Madoff firm’s primary bank account at JPMorgan, which the bank had intimate access to review for over 20 years, was devoid of evidence of stock or options trading.

Picard’s petition to the Supreme Court reads: “As JPM [JPMorgan] was well aware, billions of dollars flowed from customers into the 703 account, without being segregated in any fashion. Billions flowed out, some to customers and others to Madoff’s friends in suspicious and repetitive round-trip transactions. But in the 22 years that JPM maintained the 703 account, there was not a single check or wire to a clearing house, securities exchange, or anyone who might be connected with the purchase of securities. All the while, JPM knew that Madoff was using the account to run an investment advisory business with thousands of customers and billions under management and knew that Madoff was using its name to lend legitimacy to his enterprise…”

Picard also informed the Court that employees inside JPMorgan were well aware of the suspicions surrounding Madoff. JPMorgan’s Chief Risk Officer, John Hogan, had warned his colleagues 18 months prior to Madoff’s confession of his Ponzi scheme that “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a ponzi scheme.”

Rather than reporting their concerns to the Justice Department, according to Picard, JPMorgan invested over $250 million of its own money with Madoff feeder funds while it simultaneously created structured investment products that allowed its own investors to make leveraged bets on the returns of the feeder funds invested with Madoff.

In September 2008, just two months before Madoff would confess to running an unprecedented fraud that bilked investors out of over $17 billion in real money and $65 billion in assets shown on customer statements, JPMorgan conducted a new round of due diligence and decided it was time to get out of its $250 million investment involving the feeder funds to Madoff.

One week ago, David Cay Johnston picked up on the subpoena story for Newsweek, writing: “Bernard Madoff’s principal bank, JPMorgan Chase, has for years obstructed federal bank examiners trying to ascertain what it knew about his gigantic Ponzi scheme, an official document obtained by Newsweek shows.”

Johnston cited an internal document he had obtained from the Government Attic, a public interest website that posts documents it obtains from Freedom of Information Act requests. Johnston said that “The JPMorgan memos Justice declined to pursue are almost certain to show that years earlier the bank had grounds to suspect Madoff was running a fraud.”

The most critical aspect of this subpoena story has thus far been overlooked. It may well be that there is an official position at the U.S. Department of Justice not to issue any subpoenas against the largest Wall Street firms.

On January 22 of this year, the award-winning producer, Martin Smith, aired a Frontline program for PBS titled “The Untouchables.”  Smith had this to say on air:

“We spoke to a couple of sources from within the Criminal Division, and they reported that when it came to Wall Street, there were no investigations going on. There were no subpoenas, no document reviews, no wiretaps.”

One day after that program aired, the Washington Post reported that Lanny Breuer, head of the Criminal Division of the U.S. Department of Justice was stepping down from his post.

Now it would appear that the Justice Department’s problem of quashing subpoenas against Wall Street did not end with the departure of Lanny Breuer.