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JPMorgan to Pay $1.7B in Madoff Case

The Justice Department announced Tuesday a $1.7 billion settlement with JPMorgan Chase to resolve allegations that the behemoth bank did not warn the government of Bernard Madoff’s Ponzi scheme.

Federal prosecutors say JPMorgan, which served as Madoff’s bank for two decades, failed to comply with a federal law that requires banks to file a “suspicious activity” report when a transaction raises alarm. The nation’s biggest bank reported its suspicions of Madoff’s business to British authorities in 2008 but did not alert anyone in the United States.

Manhattan U.S. Attorney Preet Bharara, whose office led the government’s investigation, is holding JPMorgan criminally liable for violating the Bank Secrecy Act, a law that calls on financial firms to maintain anti-money-laundering controls.

JPMorgan has entered into a deferred-prosecution agreement that would give Justice the right to pursue criminal charges against it if the bank fails to live up to the settlement. As part of the deferred prosecution, the bank must acknowledge the facts of the government’s case.

The billions of dollars in penalties will be distributed to the victims of Madoff’s fraud. Five years ago, authorities arrested the Manhattan money manager for duping clients in a $50 billion Ponzi scheme. Since then, Justice and the Office of the Comptroller of the Currency have been examining whether Madoff’s long-time banker was aware of his duplicitous behavior.

The OCC, which regulates the largest banks, is set to announce its own agreement with JPMorgan later on Tuesday.

For its part, JPMorgan has long maintained that it was not aware of Madoff’s scheme, much like the regulators and clients he deceived.

“We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme,” said company spokesperson Brian Marchiony, in an email. “We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.”

Marchiony said the firm is making “significant efforts” to strengthen its anti-money laundering controls. Indeed, JPMorgan chief executive Jamie Dimon told employees in a memo last year that the bank was spending about $1 billion to improve compliance operations.

The Madoff agreement is the latest in a long line of settlements to put to rest JPMorgan’s legal woes. In November, the bank gained the dubious distinction of paying the largest penalty dealt to a single company with its $13 billion settlement to resolve allegations that it sold faulty mortgage securities.

The financial goliath is also embroiled in federal investigations into tactics used to collect credit card debts and its role in the manipulation of a key interest-rate benchmark that affects trillions of dollars of bonds, among other matters.

There are dozens of private lawsuits against JPMorgan stemming from its acquisition of Bear Stearns, its relationship with Enron and its role in Lehman Brothers’ bankruptcy proceedings. JPMorgan, like many Wall Street firms, is also fighting off lawsuits from Madoff investors that claim the bank aided and abetted his fraud.

One key lawsuit, brought by Irving Picard, the trustee liquidating Madoff’s firm, revealed what it called internal communications suggesting that bank executives were aware of Madoff’s schemes as far back as 1997. At the time, according to the complaint, another financial institution raised concerns about his transactions.

According to the lawsuit, a Madoff employee would deposit a $1 million to $10 million check into his account at JPMorgan almost every day, after drawing down the same amount at the other institution.

The next day, the same amount would be wired back from Madoff’s JPMorgan account to the other institution to make it appear he had twice as much money during that period.

The lawsuit cited a 2007 email from John Hogan, then a senior risk officer at JPMorgan, discussing the suspicions of another bank executive.

“For whatever it’s worth, I am sitting at lunch with Matt Zames who just told me 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,” Hogan wrote, according to the lawsuit.

Despite nagging questions about Madoff’s operations, JPMorgan did not alert regulators and continued to handle billions of dollars for his brokerage firm, according to the complaint. Picard claims JPMorgan earned an estimated $500 million in fees, interest payments and revenue from the firm.

A federal appeals court dismissed some of Picard’s claims in June, but the trustee has requested a Supreme Court review. Picard sued JPMorgan for $6.4 billion. He has recouped $9.5 billion for Madoff’s victims and has filed similar lawsuits against Swiss banking giant UBS and HSBC.