JPMorgan Chase has tentatively agreed to pay around $2B to resolve a claim that it ignored signs of illegal activity on the part of Bernie Madoff, its former client. The settlement will include more than $1B in penalties to resolve the criminal case. Additionally, some portion will also go toward compensating Madoff’s victims.
This settlement centers on breakdowns of JPMorgan’s compliance system, and how the bank ignored red flag warnings relating to suspicious activity in Madoff’s accounts. Irving Picard, a trustee for Madoff’s victims, sued JPMorgan for $19.9B, accusing the bank of ignoring warning signs about Madoff. A judge dismissed all but $425 million in Picard’s lawsuit. An appeal of the ruling to the U.S. Supreme Court is pending.
Under the deal, JPMorgan will avoid criminal charges, but will enter a “deferred prosecution agreement,” where JPMorgan will agree that it broke criminal laws and that any criminal action will be deferred as long as the bank keeps a clean slate. No bank executives will be indicted. Manhattan prosecutors, including U.S. Attorney for the Southern District of New York, Preet Bharara, considered and rejected the idea of forcing the bank to plead guilty to criminal charges.
Some analysts wonder whether U.S. prosecutors think banks are too big to jail. This is, at least, the third time in the past two years that JPMorgan has managed to dodge an indictment. U.S. Attorney General Eric Holder admitted earlier this year that some banks are too big to prosecute. Attorney General Holder was concerned that the size of these institutions is so large that “if you do bring a criminal charge, it will have a negative impact on the national economy, and perhaps the world.”
Earlier this semester we reported that JPMorgan Chase suffered its first quarterly loss under CEO Jamie Dimon, due in large part to the $9.2B it set aside to cover mounting legal expenses. The bank did expect its legal fees to continue to rise, and one has to wonder whether JPMorgan will report quarterly losses for a second straight quarter. Despite facing another billion-dollar penalty, JPMorgan’s shares were not affected by news of the settlement, closing at $56.31, up 24 cents [on Thursday December 12].