By Pam Martens and Russ Martens: April 22, 2016
Buried in a report released yesterday by the Government Accountability Office (GAO) was a stunning piece of news. Customers of JPMorgan Chase, the bank that Wall Street analyst Mike Mayo has preposterously called the “Lebron James of banking,” were major victims of Bernie Madoff’s Ponzi scheme – to the tune of $5.4 billion – because of negligence on the part of the bank. The report states the following:
“In 2014, DOJ [Department of Justice] assessed a $1.7 billion forfeiture – the largest penalty related to a BSA [Bank Secrecy Act] violation – against JPMorgan Chase Bank. DOJ cited the bank for its failure to detect and report the suspicious activities of Bernard Madoff. The bank failed to maintain an effective anti-money-laundering program and report suspicious transactions in 2008, which contributed to their customers losing about $5.4 billion in Bernard Madoff’s Ponzi scheme.”
The JPMorgan Chase settlement with the Justice Department came in January 2014, more than two years ago, but thus far, according to the GAO, Madoff victims haven’t seen a dime of the money. According to the Special Master for the Justice Department, he’s still wading through 64,000 claim forms. The Justice Department’s Madoff Victim Fund functions separately from the victims fund being operated by the bankruptcy trustee, Irving Picard. That fund has already distributed $8.6 billion out of $11.1 billion recovered to date. The forfeiture laws under which the Justice Department’s fund will be operated allowed Madoff victims who invested through feeder funds, as well as through a direct account with Madoff, to submit a claim.
JPMorgan Chase and banks it had purchased had held the Madoff business account for more than two decades. According to the Securities Investor Protection Corporation (SIPC), the Justice Department prosecutors who settled the criminal case against JPMorgan Chase in the Madoff matter used the investigative material that Picard had already unearthed. That investigative material showed that JPMorgan Chase had relied on unaudited financial statements and skipped the required steps of bank due diligence to make $145 million in loans to Madoff’s business.
Lawyers for Picard wrote that from November 2005 through January 18, 2006, JPMorgan Chase loaned $145 million to Madoff’s business at a time when the bank was on “notice of fraudulent activity” in Madoff’s business account and when, in fact, Madoff’s business was insolvent. The JPMorgan Chase loans were needed because Madoff’s business account, referred to as the 703 account, was “reaching dangerously low levels of liquidity, and the Ponzi scheme was at risk of collapsing, ” according to Picard. JPMorgan, in fact, “provided liquidity to continue the Ponzi scheme,” the Picard investigators found.
According to the Picard investigation, JPMorgan Chase and its predecessor banks also extended tens of millions of dollars in loans to Norman F. Levy and his family so they could invest with the insolvent Madoff. (Levy died in 2005 at age 93 without being charged with any crimes.) According to Picard, Levy had $188 million in outstanding loans in 1996, which he used to funnel money into Madoff investments. Picard’s lawyers said in a court filing that JPMorgan Chase (JPMC) “referred to these investments as ‘special deals.’ Indeed, these deals were special for all involved: (a) Levy enjoyed Madoff’s inflated return rates of up to 40% on the money he invested with Madoff; (b) Madoff enjoyed the benefits of large amounts of cash to perpetuate his fraud without being subject to JPMC’s due diligence processes; and (c) JPMC earned fees on the loan amounts and watched the ‘special deals’ from afar, escaping responsibility for any due diligence on Madoff’s operation.”
According to Picard’s court filings, Levy’s relationship with JPMorgan’s predecessor banks predated his relationship with Madoff by 31 years. After Levy became a Madoff client, what was transpiring in the Levy and Madoff accounts at JPMorgan Chase or its predecessor banks should have triggered legally-mandated Suspicious Activity Reports (SARs) to be filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Even after another bank detected the activity in the late 1990s and reported the transactions to FinCEN, JPMorgan Chase and its predecessor banks failed to file the mandated SARs reports. Instead, the bank not only allowed the activity to continue but permitted it to increase dramatically.
Picard told the court that “during 2002, Madoff initiated outgoing transactions to Levy in the precise amount of $986,301 hundreds of times — 318 separate times, to be exact. These highly unusual transactions often occurred multiple times on a single day.”
In November 2013, Picard asked the U.S. Supreme Court to review an appellate court’s ruling that would bar him from suing JPMorgan and other banks for aiding the Madoff fraud in order to recover additional funds for victims. In his petition for review, Picard told the Supreme Court that JPMorgan Chase stood “at the very center of Madoff’s fraud for over 20 years.” Picard based this claim on his previous filing to a lower court that demonstrated that the bank was 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 business account at JPMorgan, which the bank had access to review for over 20 years, showed no evidence of payments for stock or options trading.
Picard’s petition to the Supreme Court stated:
“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 told the Court that employees inside JPMorgan were well aware of the suspicions surrounding Madoff. Its own Chief Risk Officer, John Hogan, had warned his colleagues 18 months prior to Madoff’s revelation 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.”
In a lower court lawsuit, Picard wrote: “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.”
Despite its serious suspicions about Madoff, JPMorgan Chase 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, according to Picard.
In September 2008, just two months before Madoff would confess to running an unprecedented investment fraud, JPMorgan conducted a new round of due diligence and decided it was time to get out of its own $250 million investment with the Madoff feeder funds.
Perhaps the largest smoking gun in the government’s case against JPMorgan Chase was the fact that on October 28, 2008, JPMorgan Chase sent a “suspicious activity report” not to the U.S. government but to the United Kingdom’s Serious Organized Crime Agency (SOCA). The document stated:
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. As a result, JPMCB has sent out redemption notices in respect of one fund, and is preparing similar notices for two more funds.”
In addition to paying the forfeiture of $1.7 billion to the Justice Department, JPMorgan Chase was charged by the DOJ with two felony counts and given a deferred prosecution agreement. It promised to do better. The following year, on May 20, 2015, JPMorgan Chase was charged with a new felony count, which it admitted to, for involvement in rigging foreign currency markets. Four other banks were charged as well.
After a series of ignored written warnings to the SEC by Harry Markopolos, a financial professional, that Madoff was highly likely to be running a Ponzi scheme, what finally brought Madoff down was his own admission to the epic fraud in December 2008. Madoff pleaded guilty and is serving a 150-year sentence in Federal prison. None of the individuals at JPMorgan Chase who ignored the red flags for years was ever charged.
Two lawyers have now written the seminal book on the nexus between Madoff and JPMorgan Chase, JPMadoff: The Unholy Alliance Between America’s Biggest Bank and America’s Biggest Crook. It takes a far different view of JPMorgan Chase than Mike Mayo’s characterization of the bank as the Lebron James of banking, comparing the bank’s serial charges of crimes to the Gambino crime family and providing the legal foundation for why the bank should be charged under RICO statutes.