Will the New Criminal Probe Against JPMorgan Trigger Its Two-Year Probation Agreement?

By Pam Martens and Russ Martens: November 5, 2014

Jamie Dimon, Chairman and CEO of JPMorgan Chase, Testifying Before Congress

Jamie Dimon, Chairman and CEO of JPMorgan Chase, Testifying Before Congress

On January 6 of this year, JPMorgan Chase entered into a two-year probation agreement known as a “deferred prosecution” agreement with the U.S. Justice Department. The deal allowed JPMorgan to avoid prosecution for two felony counts related to its failures in serving as Bernard Madoff’s bank as tens of billions of dollars were laundered between accounts while it made none of the required suspicious activity reports – except one to the United Kingdom.

The deferred prosecution agreement, signed on January 6, 2014, required that for the next two years, JPMorgan had to bring to the attention of Federal prosecutors any knowledge of wrongdoing inside the bank, cooperate fully and in good faith, and agree to “commit no crimes under the federal laws of the United States subsequent to the execution of this agreement…” If JPMorgan broke its end of the bargain, it could not only be prosecuted for new crimes but for the Madoff deferred felony counts as well.

When JPMorgan filed its quarterly report with the SEC on Monday, known as the 10Q, it owned up to the following:

“DOJ is conducting a criminal investigation, and various regulatory and civil enforcement authorities, including U.S. banking regulators, the Commodity Futures Trading Commission (‘CFTC’), the U.K. Financial Conduct Authority (the ‘FCA’) and other foreign government authorities, are conducting civil investigations, regarding the Firm’s foreign exchange (‘FX’) trading business. These investigations are focused on the Firm’s spot FX trading activities as well as controls applicable to those activities. The Firm continues to cooperate with these investigations and is currently engaged in discussions with DOJ, and various regulatory and civil enforcement authorities, about resolving their respective investigations with respect to the Firm. There is no assurance that such discussions will result in settlements.”

Translation: Some of the same global banks that are being investigated for rigging the international interest rate benchmark known as Libor, are simultaneously being investigated for rigging another international market – foreign exchange currency trading.

Adding to JPMorgan’s legal angst was a speech delivered by U.S. Attorney General Eric Holder on September 17 at NYU School of Law in Manhattan. Holder came right out and told the audience, that included plenty of outside counsel for Wall Street, that he has moles planted all over the street who are helping him in his criminal investigation of foreign currency rigging. Discussing an insider trading case, Holder said:

 “It was only because the government had a cooperating witness inside the company – a witness who had agreed to wear a wire – that the department was able to record a verbal account of these actions, to illuminate other obstruction, and to uncover illegal conduct that otherwise might never have come to light.

“Similarly, in our full-court press to investigate and prosecute the ongoing LIBOR matter – which is being led by the Criminal and Antitrust Divisions, and involved a wide-ranging scheme to rig one of the world’s benchmark interest rates – witnesses from inside some of the world’s leading financial firms have played important roles.  They have strengthened our ability to follow leads; to obtain guilty pleas from subsidiaries of major banks like UBS and RBS; and to pursue individual charges against nine former traders and managers at these institutions.

“Our ongoing investigation into the manipulation of foreign exchange rates has relied on similar investigative techniques involving undercover cooperators, as well.” [Italics added.]

“Undercover cooperators” is DOJ speak for moles. JPMorgan, therefore, has the choice to cooperate or run the risk that a mole may be wearing a wire and hand over evidence to the Justice Department that the bank attempted to obstruct justice.

In the same 10Q filing with the SEC, JPMorgan said it believes that as things stand as of September 30, 2014, it may need $5.9 billion for legal matters. It said it had established reserves for “several hundred” of its outstanding legal proceedings but only listed specific allegations for about two dozen.

In addition to the two felony counts and deferred prosecution agreement in the Madoff matter, JPMorgan paid more than $2.6 billion to settle various government investigations related to Madoff. The government’s treatment was harsher than the typical slap on the wrist and fine because of written evidence that JPMorgan suspected a fraud, told U.K. regulators of their suspicions, while withholding the same evidence from the U.S. government – its home country.

On October 28, 2008, less than two months before Bernard Madoff would confess to his decades-long Ponzi scheme, JPMorgan sent a suspicious activity report to the United Kingdom’s Serious Organized Crime Agency (SOCA). The document reads:

JPMorgan’s “concerns around Madoff Securities are based (1) on the investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true – meaning that it probably is; and (2) the lack of transparency around Madoff Securities’ trading techniques, the implementation of its investment strategy, and the identity of its OTC option counterparties; and (3) its unwillingness to provide helpful information.”

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