By Pam Martens and Russ Martens: July 6, 2021 ~
Jamie Dimon, Chairman and CEO of JPMorgan Chase
After reading the documents released by the Justice Department in January 2014 in connection with JPMorgan Chase’s settlement over its role in the Bernie Madoff Ponzi scheme, the Los Angeles Times asked this question: “Bernie Madoff: Was he part of the JPMorgan ring, or was JPMorgan part of his ring?” Given the facts of the case, the question was more than fair.
In January of 2014 JPMorgan Chase paid $2.6 billion in fines and restitution, signed a deferred prosecution agreement with the Justice Department and walked away from further criminal charges over its 22-year involvement with Bernie Madoff’s Ponzi scheme. The Madoff Ponzi scheme was the largest in U.S. history with fictitious investment account statements showing his clients held $64.8 billion in securities with his firm. (Madoff never actually bought any stocks or other securities for his investment clients.)
The Madoff case commanded headlines for years. But a recent review of federal court filings by Wall Street On Parade shows that at the same time that JPMorgan Chase was deeply involved with Madoff, it was simultaneously entangled with another multi-billion dollar Ponzi scheme being orchestrated by Thomas Petters. JPMorgan Chase’s involvement in the Petters case has been largely ignored by mainstream media.
Both the Petters’ Ponzi scheme and the Madoff Ponzi scheme collapsed in 2008 during the financial crash on Wall Street. The Petters’ fraud collapsed after one of his employees contacted law enforcement. Federal agents raided Petters’ offices and arrested him on October 3, 2008. Madoff confessed to his sons in early December 2008 and he surrendered to Federal authorities on December 11, 2008 – just a little more than two months after the arrest of Petters.
On June 29, 2009 Madoff was sentenced to 150 years in federal prison. Madoff died on April 14 of this year in the medical facility of the federal prison in Butner, North Carolina.
In December 2009 a Minnesota jury found Petters guilty on all 20 counts of wire fraud, mail fraud, money laundering and conspiracy. Petters is serving a 50-year sentence in federal prison in Leavenworth, Kansas.
How is it possible that the largest federally-insured bank in the United States, with thousands of employees engaged in risk management, anti-money laundering and compliance, could become involved in two of the largest Ponzi schemes in U.S. history – over the same span of time? (For what JPMorgan Chase has been up to since these Ponzi schemes were revealed, see JPMorgan Chase Admits to Two New Felony Counts – Brings Total to Five Felony Counts in Six Years – All During Tenure of Jamie Dimon.)
In the Madoff matter, JPMorgan Chase used unaudited financial statements and skipped the required steps of bank due diligence to make $145 million in loans to Madoff’s business, according to Irving Picard, the Trustee of the Madoff victims’ fund. Lawyers for the Trustee 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 reason for the JPMorgan Chase loans was because Madoff’s business account was “reaching dangerously low levels of liquidity, and the Ponzi scheme was at risk of collapsing.” JPMorgan, in fact, “provided liquidity to continue the Ponzi scheme,” according to Picard.
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. According to Picard, Levy had $188 million in outstanding loans in 1996, which he used to funnel money into Madoff investments. Picard’s lawyers wrote in court filings 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.”
A critical piece of evidence against JPMorgan was that despite funneling loans to both Madoff and Levy, the bank “advised the rest of its Private Bank customers not to invest with Madoff,” according to Picard.
On paper, according to Picard, Levy was worth $1.5 billion in 1998. He was such an important customer to JPMorgan and its predecessor firms that he was given his own office at the bank – a situation that perhaps fueled the Los Angeles Times’ question of just who was a part of whose gang.
What was happening in Madoff’s account was so unprecedented at a federally-insured bank that it is impossible to reconcile it with a legitimate compliance department. 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.”
That kind of activity should have generated legally-mandated Suspicious Activity Reports (SARs) filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). But even after another bank detected the activity in the late 90s and reported the transactions to FinCEN, JPMorgan Chase and its predecessor banks failed to file their own mandated SARs. The bank not only allowed the activity to continue but allowed it to increase dramatically in dollar terms.
While Madoff at least had some credentials that might justify a banking relationship at JPMorgan Chase (he was the previous Board Chairman of the Nasdaq stock market and served on an advisory committee at the Securities and Exchange Commission) Thomas Petters had a record of convictions for forgery, larceny and fraud.
Notwithstanding that criminal history, according to the court-appointed receiver in that case, Douglas Kelley, Petters moved more than $83 million in Ponzi cash through his JPMorgan accounts between 2002 and 2007. According to Kelley’s court filings, JPMorgan loaned Petters large sums of money and facilitated his $426 million purchase of Polaroid Corp. even though it knew, or should have known, of his run-ins with the law in the past. According to Kelley’s lawsuit, JPMorgan acted as an adviser to Polaroid in the deal and provided a $185 million credit facility, receiving $40 million in fees for its work.
Kelley wrote in his lawsuit that “During the course of its due diligence, [JPMorgan] uncovered or should have uncovered numerous red flags that should have put [JPMorgan] on notice of the Petters Ponzi scheme.” Kelley said that the fees that the bank was going to earn on the transaction gave it “an incentive to ignore red flags that would have revealed the massive Ponzi scheme that Petters used to fund the Polaroid purchase.”
After years of litigation, Kelley and the bankruptcy trustee for Petters’ various businesses reached a settlement with JPMorgan Chase on April 25, 2018 according to a court document. The parties involved wrote to the court that they had “voluntarily participated in confidential mediation with Robert A. Meyer on May 17, 2017 and continuing into October 2017. After extensive negotiations, the mediator presented a proposal of global settlement which was accepted by all parties.”
That settlement looks like JPMorgan got off on the cheap considering what Kelley had alleged in his lawsuit. According to the settlement document filed with the court:
“The settlement includes two separate settlements: the Receiver Settlement Agreement and the Trustees Settlement Agreement. Under the Receiver Settlement Agreement, the JPMC Defendants agreed to pay $2,500,000.00 in settlement of the Receiver claims. Under the Trustees Settlement Agreement, the JPMC Defendants agree to pay $30,725,000.00 to settle the Trustees’ Joint Adversary Proceedings and the PGW adversary proceeding.”
Particularly eyebrow-raising in that settlement document is the revelation on page 10 that Kelley or his office negotiated a release of criminal charges against JPMorgan Chase from the U.S. Attorney’s Office, District of Minnesota, writing that it was a “material inducement” to get the settlement deal with JPMorgan Chase. (Since when does a receiver step into the shoes of a lawyer for JPMorgan Chase and negotiate a waiver of criminal charges with the Justice Department?)
While all of this was playing out in federal court in Minnesota, the hedge fund Ritchie Capital Management LLC brought suit against JPMorgan Chase and others in the same court to recoup $189 million in funds it had lost to Petters and his related entities. Ritchie brought claims against JPMorgan for aiding and abetting tortious conduct; fraudulent transfers; breach of fiduciary duty; negligence; and unjust enrichment.
The Ritchie case was dismissed by Minnesota U.S. District Court Judge Donovan Frank on December 14, 2017. It was partially reinstated by the 8th Circuit Court of Appeals in June of last year. Just last week the same Judge, Donovan Frank, tossed the suit again, this time writing that the plaintiffs lacked standing to bring the allegations and had failed to state an actionable claim.
