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Why the Bernie Madoff Case Is So Dangerous for JPMorgan Chase

JPMorgan Chase (NYSE: JPM  ) is on the verge of agreeing to a historic settlement with federal authorities over its relationship with Bernie Madoff. The bank may pay fines of up to $2 billion, while also agreeing to a deferred prosecution for violating the Bank Secrecy Act.

An earlier lawsuit against JPMorgan filed by Irving Picard, the court-appointed trustee tasked with recovering Madoff's clients' funds, provides a good indication of the charges facing the company. Picard notes that JPMorgan Chase was Madoff's "primary banker for over 20 years, and was responsible for knowing the business of its customers -- in this case very large customers." Additionally, the lawsuit alleges that JPMorgan "had everything it needed to unmask and stop the fraud -- it had unique information from which it could have reached only one plausible conclusion: Madoff was a fraud."

We believe Picard's evidence reflects very poorly on JPMorgan. Not only did the bank's actions possibly violate the law, but its poor due diligence and willingness to profit off Madoff's dubious activities suggest that the company's culture is deeply flawed.

We've summarized some of the most troubling pieces of evidence from Picard's lawsuit. We suspect that whatever evidence the FBI uncovered in its investigation was at least as thorough as what you'll find here.

1. JPMorgan Chase ignored years of red flags in Madoff's Chase bank account that he used for money laundering and Ponzi scheme payouts.

Banks are required to know the purpose of customer accounts and monitor them for suspicious activities, but JPMorgan Chase never halted or reported the suspicious activity in Madoff's so-called "703 account."

  • Over a roughly seven-year stretch from 1998 to 2005, the account made $76 billion in payouts to a single customer.
  • Madoff made odd repetitive transactions, oftentimes in a single day, frequently using handwritten checks. In 2002, the account made 318 payments of exactly $986,301 to a single customer.
  • In December 2001, the account received daily checks of $90 million from that same customer, who was also an important JPMorgan Chase client.
  • From 2004 to 2008, the vast majority of international wire transfers went to high- and medium-risk jurisdictions.
  • JPMorgan Chase earned an estimated half a billion dollars in fee revenue from Madoff's account.

2. JPMorgan Chase seems to have violated basic account monitoring and "know your customer" principles.

The activity in Madoff's account didn't appear to reflect any "legitimate business purpose."

  • Even though JPMorgan's algorithms should have identified lots of suspicious activity, its computers almost never issued any alerts. After Madoff was arrested, JPMorgan Chase compliance employees thought the omission odd, asking "Why didn't the DDA Account (xxxxx1703) alert ... ?"
  • The only time an account alert was issued, the reviewer couldn't even find a "know your customer" file for Madoff and stopped looking into the matter.
  • For more than 10 years, Madoff's Client Relationship Manager, Richard Cassa, was the 703 account's "account sponsor" -- the JPMorgan Chase employee responsible for monitoring Madoff's account and ensuring the bank understood Madoff's business. From the lawsuit, we learn that he essentially pleaded total incompetence:

When asked about his duties as a client sponsor at his Rule 2004 bankruptcy examination, Cassa responded that he did not even know what a client sponsor was, much less that he was the sponsor for Madoff's and BLMIS's [Bernard L. Madoff Investment Securities] accounts. He had received no training regarding his duties as a client sponsor and had taken no action to discharge those duties. When shown a document in which he had recertified that he had performed his duties as a client sponsor, Cassa stated that he did not have any recollection of the duties of a sponsor or of the recertification process.

  • When high-level executive Matt Zames questioned whether Madoff was running a Ponzi scheme (see No. 5 below), no one at JPMorgan Chase seems to have investigated Madoff's big JPMorgan Chase bank account, including Cassa, who knew of Zames' claim.
  • Even after JPMorgan Chase reported Madoff's Ponzi scheme to British authorities so that the bank could retrieve its own money in October 2008 without alerting any American authorities, JPMorgan Chase allowed Madoff to continue operating his account without any restrictions on it. Madoff was eventually arrested in December 2008.

3. JPMorgan Chase knew at least as far back as 2006 that Bernie Madoff funds were suspicious.

Around 2006, JPMorgan Chase began considering selling its own financial products based on Madoff feeder funds. Before selling these products to investors, JPMorgan Chase had to check out Madoff and the funds that the bank wanted to base its own products on.

  • A market risk officer who visited the feeder funds shared his worries,

I do have a few concerns and questions: 1) All trades are generated by Madoff's black box trading model and executed by Madoff. It's not clear whether [the feeder fund] has any discretion or control over the autopilot trading program. ... 2) Is it possible to get some clarification as to how the fund made money during times of market distress? ... how did they manage to get better than 3M T-Bill returns? ... For example, from April to September 2002, the S&P 100 Index is down 30%, cash yielded 1%, and the Fund was able to generate over 6% returns.

  • After quite a bit of stonewalling about a fund's relationship with Madoff, a risk employee found that "They have position level transparency once a month with 1 week delay, but don't run risk analysis and don't have the know-how of how to do this. ... It doesn't look pretty."
  • Here's what they knew about Madoff's auditor, Friehling & Horowitz:

A quick check found that they are not registerred [sic] with the Public Company Accounting Oversight Board, nor are they subject to peer reviews from the American Institute of Certified Public Accountants. Additionally, they have no website to provide background on their organization.

4. Despite its suspicions, JPMorgan Chase went ahead and sold to its customers financial products based on Bernie Madoff feeder funds.

Most of the funds JPMorgan Chase created and sold to investors used borrowed money to magnify the returns from Madoff funds. By March 2007, JPMorgan Chase had $100 million worth of Madoff products it was structuring in the pipeline and was thinking of creating an additional $100 million to $200 million.

The products were to be so profitable that at one point JPMorgan Chase employees calculated that "[b]ased on the overall estimated size of [our Bernie Madoff] strategy, it would take [a] ... fraud in the order of $3bn or more ... for JPMC to be affected."

  • James Coffman, a credit risk manager, told bankers they needed to do more due diligence on Madoff in order to go above a $100 million limit. So on March 30, Richard Cassa, who was responsible for monitoring Madoff's bank account, and members of the Risk Management Division spoke with Madoff. Even though the products JPMorgan wanted to create would have led to increased investments in Madoff's fund, Madoff told them he disliked banks structuring products on his strategy and was not willing to let JPMorgan Chase engage in "full due diligence."
  • Nevertheless, JPMorgan Chase's Equity Exotics team put together a "Transaction Approval Package." Noted transaction weaknesses included "investors, sub-Custodians, auditors etc rely solely on Madoff produced statements and have no real way of verifying positions at Madoff itself," and "[f]raud -- given the significant reliance on BLM for verification of assets held, and no real way to confirm those valuations, fraud presents a material risk."
  • In June 2007, Equity Exotics began preparing proposals for another $825 million in investments in the funds -- raising the total exposure to $1.32 billion -- an amount that the group acknowledged was in "significant excess of both individual as well as aggregate single manager limits." Coffman anticipated "a major head on collision with the business that wants to do an infinite amount of this activity with much less oversight."

5. JPMorgan Chase sold more Madoff-based products to customers after ignoring internal warnings that Madoff was running a Ponzi scheme.

  • On the day JPMorgan's Hedge Fund Underwriting Committee met to consider selling another $825 million in Madoff-related products, John Hogan, JPMorgan Chase Investment Bank's chief risk officer, noted:

For whatever its [sic] worth, I am sitting at lunch with Matt Zames [a high-level trading executive] 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 [P]onzi scheme-he said if we [G]oogle the guy we can see the articles for ourselves-Pls do that and let us know what you find out. 

  • Jane Buyers-Russo, head of the Broker/Dealer Group, didn't seem to make uncovering the truth a major priority: "please have one of the juniors look into this rumor about Madoff that Hogan refers to below." (The junior analyst found and speculated on an irrelevant news article about a proposed change in SEC regulations.)
  • Hogan warned:

Mr. Madoff will not allow us to conduct any due diligence on him directly and we are forced to rely on the diligence of third parties. ... I told Bobby [Magee] and Neil [McCormick] we don't do $1 bio 'trust me' deals and we need to do our own due diligence on Madoff or this wasn't going to happen.

  • But after a phone call with Madoff, Hogan agreed to allow $250 million. Here's how he explained the decision afterwards:

[T]here's no math or magic around it -- you know, a lot of what we do is more art than science, so I would like to tell you that I have prepared a model that told me 250 is the optimum number, but -- you know, that's not the way it works in reality, and so I just use my best judgment to come up with that number.

6. JPMorgan neglected to report Madoff to American law enforcement ... even after it told a British financial authority that the bank was retrieving its own Madoff investments because he was a fraud.

  • When JPMorgan tried to get its money back from one of Madoff's dodgy feeder funds, the fund threatened an investment banker that its "Colombian friends" would "cause havoc," telling him, "we know where to find you."
  • JPMorgan Chase complained to British authorities about the threats and explained that the bank wanted money back because it had long suspected Madoff's business wasn't legitimate:

Ultimately, the bank reached the same conclusion it had reached during its initial due diligence efforts in 2006 and 2007; JPMorgan was unable to obtain [look through] transparency at the Feeder Fund level, did not have access to the identities of the counterparties to Madoff's OTC options, did not fully understand the relationship between the broker-dealer and the investment advisor, and noted the fact that the custodians did not actually hold the assets.

  • In an October 2008 Suspicious Activity Report to the British authorities, JPMorgan wrote:

JPMCB's [JPMorgan Chase Bank] 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.

  • While JPMorgan successfully redeemed all but $35 million of its own investment in Madoff, the bank didn't close down Madoff's JPMorgan Chase bank account that he used for laundering funds and operating his Ponzi scheme, nor did it report Madoff to American authorities or law enforcement.
  • Employees were urged to keep quiet about why they would no longer offer Madoff feeder funds to prospective investors: "Without disclosing too much, [JPMorgan Chase] got rid of all the Madoff feeder[s]."

7. Following Madoff's confession, the JPMorgan Chase employees responsible for due diligence weren't exactly surprised he had been a fraud.

  • "Return seems a little too good to be true," and the fraud "wasn't completely unexpected but the scale of it is still a shock."
  • "We've got a lot wrong this year, but we got this one right at least -- I said it looked too good to be true on that call with you in [September]. Despite suspecting it was dodgy I am still shocked to see this happen so suddenly."
  • Others wrote it was "statistically impossible" for Madoff to have produced such consistent returns.
  • Michael Cembalest, the chief investment officer at JPMorgan Global Wealth Management, emailed Private Bank customers to inform them that the Private Bank had decided not to invest with Madoff because it had "never been able to reverse engineer how they [made] money" and Madoff's fund "did not satisfy [their] requirement for administrative oversight."
  • According to the bankruptcy trustee, Cembalest's email noted a long list of red flags:

(a) Madoff served as his own prime broker, custodian, and investment advisor; (b) Madoff utilized a three-person accounting firm in Rockland County [N.Y.], which was "almost unheard of for a fund of that size"; (c) while Madoff feeder funds were audited by large, well-known accounting firms those audits did not cover BLMIS; (d) the Private Bank's due diligence team was not allowed to meet Madoff; Madoff did not charge fees for his money management services (essentially leaving billions of dollars on the table); (f) the volatility of Madoff's returns was only 2.5% over the preceding seventeen years, a period which included some of the most volatile capital markets history; and (g) Madoff's fund "lost money in only 2 of 214 rolling quarterly periods since 1990.

  • Another credit risk officer added, "Perhaps best this never sees the light of day again!!"

Is JPMorgan worthy of our trust?
If Bernie Madoff has taught us anything, it's that trust is central to the relationship between investors and their financial institutions. Without trust, the whole system falls apart.

In recent months, JPMorgan has seen its trustworthiness called into question by a wide array of investigations and settlements. And the Madoff deal promises to be one of the most damaging of all to the company's reputation. JPMorgan's stakeholders should insist that restoring the bank's reputation becomes the primary goal of the firm in 2014 and beyond. 

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Comments from our Foolish Readers

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  • Report this Comment On December 15, 2013, at 5:38 PM, stillwater9999 wrote:

    and of course the US government had plenty of opportunities and leads provided that should have made the SEC go after Madoff and of course the individuals investing with Madoff should also have done their due diligence as well. Plenty of blame to go around on this one...

  • Report this Comment On December 15, 2013, at 10:52 PM, SkepikI wrote:

    ^AND... the blame will be spread, or "go around" even if that's not what you mean.

    The real question is: How many of these irresponsible and guilty parties will GO TO JAIL and keep Bernie company?

    One of the more interesting commentaries on Madoff's crooked activities was that many people including his "clients" (marks?) understood implicitly that Bernie's methods were crooked in one way or another, for example, implications that he was 'front running his own trades'. They were ok with making money on the crooked methods because it was BERNIE doing the illegal acts, not them. But they were shocked and incensed that Bernie would cheat them.... crook the other guys, but how dare you crook me.... what a surprise.

    It seems JP Morgan was in this camp as well.

  • Report this Comment On December 16, 2013, at 12:29 PM, chorio wrote:

    It is amazing what easy money can make people do. Even steal other peoples money!

  • Report this Comment On December 16, 2013, at 1:52 PM, VieuxCarre wrote:

    Wow, what a damning article. It would be nice to hear some follow-up from a knowledgeable lawyer who could comment on what constitutes criminal behavior by fiduciaries who don't do their due diligence. It seems like at the very least, JPMCB would become a party to the fraud the moment they allegedly know that he is running a Ponzi scheme and don't close down his account or alert American authorities. But I am no lawyer and wouldn't want to state this as a fact. I put it out there as a conjecture in need of illumination by someone with real professional knowledge of the law.

  • Report this Comment On December 16, 2013, at 2:57 PM, PrivInvest wrote:

    No disrespect but you don't know what you are talking about. I was affected by that Ponzi and I did not invest directly with Madoff nor new his name before he was uncovered. I invested through a fund that was recommended through my investment bank and it was supposed to be supervised by them.

    I invite you to try to audit a fund, or one of your banks, by yourselves and let me know how that goes? Yes, I have learned the hard way not to trust anyone with my money but, before, I would expect a fund to bring me better gains than I could when handled by a professional without requiring me to supervise it at all times. But of course, you are right, the logic says that you have to be in a fund that looses money, because that is the norm. Anyone which looks to maximize it's profit is greedy and should move to a loosing fund.

    Truly, I was not making much money on any other fund they offered me so I thought it perfectly normal to at least make money on one -the returns weren't bad but they weren't sky high either, as some may want to make you believe-.

    When Madoff goes under, my bank just calls me to tell me that I have lost all my money because I had invested with him. I had not, I invested with them. 3 Billion is what they lost from investors and they make a plea bargain for 200 mill and get off the hook because they decide to exchange your principal with almost worthless preferred shares.

    Obviously these guys were already prepared and for those of us who try to sue them... the courts send us off to Ireland or Switzerland on "forum inconvenience" grounds -the judge did find them guilty in several grounds though, but that was not good enough to certify the class action-. If I am angry at something, or more, frustrated is at that.

    Why don't you ask for a loan? give it as an investment to a friend and... if he loses it?! Tell your bank it is not your fault, it is theirs, for having trust you with their money and not being watch full of your friend.

    Well, sorry for that, I could go on and on because the unfairness of it all still makes me mad. I hope you never have to go through something like that.

  • Report this Comment On December 16, 2013, at 3:45 PM, SkepikI wrote:

    ^ Its never "fair". If you put your trust in other people instead of yourself, you better have quite a history, conduct due diligence on those people, and hang on to your wallet anyway....

    As one who has run my "own" investments for going on 50 years, I am not without scars and scares from my own incompetence at checking out where the money went and how the investment makes money. And the occasional disappointment or achievement when a riverboat gamble creates a surprise one way or the other,reminds me not to be a mark too frequently.

    My bet is you would expect some of these miscreants to join Bernie's vacation club... I hope we wont be disappointed

  • Report this Comment On December 16, 2013, at 5:16 PM, alan0101 wrote:

    What a surprise! An incompetent and arrogant bank? This cannot be, banks are full of very, very bright people who deserve to be paid enormous bonuses because, well, how did it go? They are critical to our economy? No, that is certainly not it..

  • Report this Comment On December 16, 2013, at 5:40 PM, AK64 wrote:

    JP Morgan Chase is involved in just about every financial scam in history. They are going from one law suit to the next and at their own admission had to drastically increase their "Compliance Cost" also known as their Fraud Fund for next year due to all the pending litigation against this criminal outfit. How anyone can still trust this bank is beyond me.

  • Report this Comment On December 16, 2013, at 5:43 PM, Perry88 wrote:

    This case analysis is proof the US needs to adopt the steps taken by Iceland to support their banking system. Individuals at JPMorganChase responsible for over-site of the Madoff accounts need to go to jail and the bank itself needs to be broken up. No bank should ever be considered "too big to fail." This will be the only way the American people will again have faith in the banking system.

  • Report this Comment On December 16, 2013, at 5:48 PM, TMFMTHead wrote:

    I personally don't trust any of the 'big' banks and frankly few of the small banks.

    I believe that if the government had the integrity they should have, many of the JP Morgan folks and other bankers as well, would go to jail. The bank should pay enormous fines, but more importantly, any involved in allowing the fraud to exist should also pay hefty fines personally.

  • Report this Comment On December 16, 2013, at 5:52 PM, jimd103 wrote:

    I don't know why everyone is picking on JPM/Chase, they are just like all the other big banks who blink their eyes at big money. Most of the "bankers" can't spell integrity or honesty. They never get beyond ME,ME,ME.

  • Report this Comment On December 16, 2013, at 5:57 PM, bearbitten wrote:

    I do hope many of these JP folk share "Bernie's vacation club" and the bank is forced to split into smaller parts and no longer be able to trade their investor's money. Not holding my breath, can't trust the feds to do the right thing.

  • Report this Comment On December 16, 2013, at 6:14 PM, gkirkmf wrote:

    Since the Supremes are so hot on treating corporations as persons, lets carry that thru to the logical conclusion. Last time I checked, a mass murderer could not just get off with a minor fine and continue on with business as usual just because a very small part of his brain prompted him to commit mayhem!! Send JPMC to the firing squad and sell off its dead body piece by piece.

  • Report this Comment On December 16, 2013, at 6:27 PM, zumamike wrote:

    Should we be surprised? JP Morgan history redounds with crookedness, even as early as the Civil War, when he (Morgan) sold rifles known to be defective for huge profits, killed an injured many soldiers and got off scot free. Nothing has changed. Nor will it, until someone gets a hefty jail term. NEVER HAPPEN!

    The Civil War Changes Everything

    The Civil War had begun on April 12, 1861 when General Beauregard fired Confederate artillery on Fort Sumter. Both sides quickly began raising and organizing armies, scrambling quickly to get everything into order. One month later, Morgan, realizing a dire situation was developing, partnered with Arthur Eastman to initiate a scheme that would bilk the United States government out of cash and human lives. Morgan provided the funds to Eastman and 5,000 obsolete carbine rifles were purchased from the U.S. Army arsenal at Governor’s Island, New York. The rifles were barely working, extremely dangerous, and practically worthless. In test firings, the rifles literally blew the thumbs off of testers. The rifles were purchased for $3.50 each – a total of 5,000 carbines were purchased for $17,500 dollars. Eastman then covered the purchase by partnering with Simon Stevens to initiate the next phase of the scheme.

    Stevens next contacted General John Fremont, and offered him 5,000 “new” guns at $22.00 each. The U.S. Army, anxious to supply their arsenal, quickly agreed. The guns were shipped and when the barely working carbines were placed into soldiers hands, it quickly became apparent that soldiers’ lives were going to be lost directly as a result of these faulty weapons. Too late to recall the weapons, the government took J.P. Morgan to court where J.P. won one of his first major legal battles – the court determined that a contract was indeed valid, even though the quality of the weapons were vastly lower than expected by the purchasers. J.P. Morgan pocketed over $100,000 dollars (millions in today’s currency) which served to bankroll the many financial undertakings that lead to his dynasty.

  • Report this Comment On December 16, 2013, at 6:30 PM, HanSoLow wrote:

    Is JPMorgan worthy of our trust?

    If Bernie Madoff has taught us anything, it's that trust is central to the relationship between investors and their financial institutions. Without trust, the whole system falls apart.

    Is our government worth of our trust? The regulators were just as asleep at the wheel and waiting their turn for the gov-industry revolving door payday.

  • Report this Comment On December 16, 2013, at 6:33 PM, eyeknonothing wrote:

    Why aren't they all in prison with Bernie? This seems to be the general consensus.

  • Report this Comment On December 16, 2013, at 6:53 PM, MikeinDenver wrote:

    It amazes me that people would still do business with the likes of JPMC. I guess they just like to be screwed. JP cares for nothing but itself and more pointedly the individual for him/herself. It is clear that parts of the bank have no idea what other parts are doing. It is beyond time to break this thing up and jail a number of their employees(thieves). The fact that is hasn't been so far just shows how well spent their money was in buying the SEC and DOJ.

  • Report this Comment On December 16, 2013, at 7:09 PM, cmalek wrote:

    It seems everyone is forgetting the Golden Rule - "He who has the gold, makes the rules."

  • Report this Comment On December 16, 2013, at 7:13 PM, scitracker wrote:

    So, the question that looms, ever so large, to the "common man", is why haven't any of these individuals been charged, been forced to resign their positions, etc. Just one more example of white collar crime being treated "oh so" differently from a street crime. If someone held you up in the city, and was caught, they would face significant jail time. The "banksters" can rob you of millions of dollars and they barely get a hand-slap, if that.

  • Report this Comment On December 16, 2013, at 7:18 PM, sanjac20 wrote:

    JP Morgan Chase definitely an unholy group of lilly-livered thieves and gangsters which is above all, too big NOT to ever be allowed to engage in banking practices again.

    Why wouldn't the RICO statutes apply in connection with the JPMC-BLM contrived fraud? Bernie Madoff never could have perpetrated his fraudulent scheme(s) to the extent he did without JPMC's complicity. They saw what was obvious to many others and simply ignored what they saw while pocketing some $500,000,000!

    Federal prison is too good for the scumbags....China has us beat to hell in situations like this as they simply EXECUTE the bastards.

  • Report this Comment On December 16, 2013, at 7:37 PM, navvet1967 wrote:

    I still say wall st.pulled a bigger Ponzi scheme than Bernie Madoff.but nobody goes to jail the bonuses and arrogance are still there.

  • Report this Comment On December 16, 2013, at 9:12 PM, nyakanyaka wrote:

    The original JP Morgan said, "I would not do business with a man of no character for all the bonds in Christendom."

    This would have left out Bernie.

  • Report this Comment On December 16, 2013, at 10:13 PM, rocketman67 wrote:

    "If Bernie Madoff has taught us anything, it's that trust is central to the relationship between investors and their financial institutions. Without trust, the whole system falls apart".

    Really? You don't think it has already fallen apart already? Who in their right mind has enough in the System to put money in a 401k, IRA etc. to only have it stolen by the White Collar Criminals on Wall Street. Whom by the way go unpunished because the "Fox Is Guarding The Chicken Coop".

  • Report this Comment On December 16, 2013, at 10:21 PM, matthewluke wrote:


    That's not actually the Golden Rule, although everybody always thinks it is. I blame the Disney movie Aladdin for putting that anti-Golden Rule into the popular culture, haha.

    The actual Golden Rule is "Treat others as you would want to be treated." (Or any number similar phrases.)

  • Report this Comment On December 17, 2013, at 12:40 AM, tomd728 wrote:

    Are there any violations of law or oversight of due diligence that JPM has not run over in the last 5 years ? Yet Jamie Dimon is still perceived as the "rock star" of the big money center banks.

    Off hand I can not cite, in dollars, how much JPM has had to cough up for it's wanton negligence in oversight but that number along with the attendant gross mis-management is the best argument there could be for separation of president and board chairman.......

    The silence of Dimon is deafening !

    Just another day with the authorities men....

  • Report this Comment On December 17, 2013, at 4:17 AM, skywalker wrote:

    In the "Boston Legal" TV Show the judge would go: Its outrageous´. And send them to jail. But in real life no way.

    But you will see, nothing will happen with JP and the other banks. They will go on as if nothing happened. And the authorities and the government will do nothing to stop them. They might even make the fine tax deductible.

    Everyone here in Europe is laughing about the US legal system. With lot´s of money you can get off of almost everything.

    It´s outrageous ;-)

  • Report this Comment On December 17, 2013, at 5:41 AM, wax wrote:

    I admit I am cynical when it comes to financial institutions of any size.

    I have never owned shares in one because there is no way to accurately value the shares.

    Regardless, JP Morgan paid a big fine. Big deal. They made more in profits than the fine which I believe they anticipated paying from the start.

    If the government truly wanted to send a message the fine would have been 100% of corporate profits for the period covered, trebled, and 20 years in jail for the entire management staff.


  • Report this Comment On December 17, 2013, at 8:54 AM, ziq wrote:

    @VieuxCarre: I'm no lawyer either, but my suspicion would be, upon close examination of those laws it will be found that the legislators have been bribed into writing them in a way JPM likes.

  • Report this Comment On December 17, 2013, at 9:11 AM, TMFBane wrote:

    Thanks everyone for your comments! It’s interesting to hear different perspectives on this.

    @VieuxCarre: You asked a great question about “what constitutes criminal behavior by fiduciaries who don’t do their due diligence?” Obviously, I’m not a lawyer and cannot answer that question with any authority.

    I did, however, recently read a piece by Judge Rakoff (who has presided over quite a few cases relating to Wall Street banks) on related issues. You can read it here:

    When looking at the “intent” of the bankers, Rakoff quotes from an important case,

    "The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances."

    Rakoff then concludes that “the claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.”

    Anyway, I thought you might be interested in his perspective on these matters in general. He's a smart guy right at the center of Wall Street legal issues.


    John Reeves

  • Report this Comment On December 17, 2013, at 9:17 AM, cmb49 wrote:

    Don't own Chase stock but do have significant funds invested and in accounts at Chase. Could this ponzi involvement rise to the level of jeopardy for the institution or just to big to have fatal hit?

  • Report this Comment On December 17, 2013, at 9:19 AM, cmb49 wrote:

    I ask the above as I am the fortunate survivor of a Ponzi where I got 100% of my funds back due to similar activities by a very major bank that decided to settle rather than go to court.

  • Report this Comment On December 17, 2013, at 2:17 PM, poach wrote:

    Great article and comments John - willful blindness is not a strong legal defense.

    Rakoff is a pretty shrewd guy.

    Bankers should conduct due diligence or pay up when the fraud was so apparent.

  • Report this Comment On December 17, 2013, at 11:34 PM, SkepikI wrote:

    John Reeves: The real serious question is: "has anything happened that will change the institution/enterprise's behavior?

    Others may answer this question differently, but IMHO both JPM and BOA are training/tolerating their management and employees hosing their customers. If that is so, this cant end well for the customers, or the investors OR THE EMPLOYEES. It may well take years, even a decade or two but the establishment of this kind of culture has one inevitable conclusion. Customers and investors will get hosed.

    It is essentially the same proposition that Bernie made to his investors whether they clued into it or not- crooking my way to profits, but I will treat YOU honestly..... take a good look around at the poker table my grandpa taught me.... if you are invited to a game, and you sit down look about and cant tell who the mark is...ITS YOU!

  • Report this Comment On December 18, 2013, at 4:06 AM, eugene4695 wrote:

    I'm reminded of the sign over the entrance to a bar in Anchorage, Alaska: "We cheat the other guy and pass the savings on to you!"

  • Report this Comment On December 18, 2013, at 8:00 PM, SkepikI wrote:

    Sooo John: What do you think of the AP story regarding JPM lawsuit against FDIC for its promised "indemnity" real? dream? scam?

  • Report this Comment On December 18, 2013, at 10:30 PM, TMFBane wrote:


    Yes, this is an interesting new development. I'm going to read the filing in order to learn more about the merits of their claim. It's definitely a busy time for JPM on the legal front.



    PS. The filing is here is here in case anyone wants to have a look:

  • Report this Comment On December 20, 2013, at 5:25 PM, cmalek wrote:


    SInce you missed the sarcasm in my comment, I suggest you do not leave the cloister you are presently inhabiting.

    The Golden Rule you site was taught drummed into us by the fine, upstanding, child-molesting Catholic priests and it only applies in the millieu of church and religion. In the cold cruel world of reality it is the rich who make the rules that peons have to follow.

  • Report this Comment On December 20, 2013, at 5:59 PM, ainokea2 wrote:

    @TFMbane: Do you really think you will have a grasp the merits of JPM's claim by reading a one sided complaint. Now I know you are not an attorney or even someone that understand litigation.

  • Report this Comment On December 20, 2013, at 6:41 PM, adealba1 wrote:

    @cmalek: I actually agree with your modified Golden Rule post, but if you are going to berate someone I suggest to check your spelling ("site" vs "cite")...

  • Report this Comment On December 20, 2013, at 6:43 PM, mrbbkk wrote:

    Why does the government allow JP Morgan to continue operating as a bank? They should be shut down.

    JP Morgan or Citibank will never get one penny of my money

    I don't understand why customers still do business with these banks

  • Report this Comment On December 20, 2013, at 10:59 PM, dwg72 wrote:

    It's a shame that we can't/won't bring criminal charges against the leaders of these financial institutions. So much blame to go around, so little accountability.

  • Report this Comment On December 20, 2013, at 11:26 PM, rapid72 wrote:

    Great, though disgusting, article. If you are wondering how the bank, and each of its officers, could get away with this, check the financial statements of the Obama campaign and associated super-packs. Then move on to New york;s congressional delegation.

    "But look at the fine they are facing." Oh, the one paid for by borrowing from the Fed at zero percent and loaning to the Treasury at 3-4%? That fine?

    QE si not a stimulus, it is a gift to big banks, to paper-over all the costs of their pursuit of quarterly bonuses,

  • Report this Comment On December 21, 2013, at 12:30 AM, dsiple wrote:

    I believe this is the time of year when many of us watch "It's a Wonderful Life" to see the character played by Mr. Stewart (with a lot of help from an angel) triumph over the evil Mr. Potter. I do think that there will be a day of reckoning for corrupt major financial institutions, but I think it may well bring down the whole financial system with it.

  • Report this Comment On December 21, 2013, at 7:21 AM, alpine2014 wrote:

    This excellent article sent shivers down my spine. I used to be an ardent fan of Mr. Jamie Dimon, and thought all along he was a good man, but now, still continuing as both CEO and Chairman, when the bank's reputation is so much in doubt, I would have thought he would be the first to say split the roles.

    My Christmas wish is that somehow, however painful it may be for JPM shareholders, that JPM is held accountable for the massive fraud that Madoff set off.

  • Report this Comment On December 21, 2013, at 10:26 AM, pwkaplan wrote:

    If we keep electing legislators who lack the resolve to regulate banking, who believe in trickle-down economics then this is what we get--this is the result of increasingly unfettered capitalism. How long will it take before Congress realizes that there is no "invisible hand" guiding the markets? Government is not a perfect regulator, but it does a whole lot better than industry left to its own devices. How many of these scandals have to happen before people realize that the world has changed? The pattern is the same in every deregulated industry: a short period of intense competition followed by consolidation and a few too-big-to-fail companies who raise prices and fix markets in ways that are far more destructive than anything seen before. And yet millions of Americans regularly vote against their economic self-interest and the well-being of the country.

  • Report this Comment On December 21, 2013, at 11:41 AM, SkepikI wrote:

    ^ Why do I get the feeling you have forgotten WHO is in charge? The generic idea that the unfettered power of the executive branch plus the Senate will be checked by the house is fairly crazy. Not to mention practically proven false by recent history. Even less cogent is the idea that a fairly evenly divided electorate with a wishy-washy middle of "independents" swinging to and fro every other or every two elections will suddenly change their ways and vote intelligently.

  • Report this Comment On December 21, 2013, at 12:37 PM, tbrewskie wrote:

    How long is Teflon Dimon going to keep having everything not stick to him? How many billions will JPM pay in fines before the guy at the top is determined to be culpable?

  • Report this Comment On December 21, 2013, at 2:06 PM, stevook21 wrote:

    @pwkaplan I usually keep my opinions to my self but your comment has offended me to the core. This mess is the fault of the American VOTER? I was raised republican but that all changed with Ronnie Raygun's rape of the working middle class freeing the big corporations of their tax obligations and reducing oversight of their operations while signing legislation that allowed them to move their business overseas. The only trickling going on since then has been down the a$$ of the American people. I voted for the current administration on the grounds of their vehement denouncement of the policies of the previous regime. It is now obvious to us all that the democrats are in perfect lockstep with the republican agenda, wasting our resources, money and youth on wars of aggression that benefit no one except Halliburton and Lockheed and their ilk. This is supposed to be "a nation of the people by the people and for the people." If this is no longer true, we are referred to the second amendment. Oh, I forgot. That amendment is currently being annulled.

    Sooo Mr. Kaplan, if you know of any politicians with an ounce of integrity or interest in the welfare of our great nation and the American people that we should be voting for, please enlighten us. The humble ignorant masses await your guidance.

  • Report this Comment On December 21, 2013, at 4:01 PM, SkepikI wrote:

    <I voted for the current administration on the grounds of their vehement denouncement of the policies of the previous regime.>

    I've been wondering who to blame for all this..... ;-)

  • Report this Comment On December 23, 2013, at 2:13 AM, Factkneader wrote:

    J.P. Morgan gives a whole new meaning to the term

    Bank Robbers!!

  • Report this Comment On December 23, 2013, at 3:45 AM, TNjoe wrote:

    I am concerned that several writers have chosen to emphasize that certain players in this tragedy are Jewish. There are many non-Jewish malfeasants involved. The Jewish community took a hard hit in the Madoff collapse a many prominent Jews and Jewish organizations lost a ton of money. The American Jewish Congress had to cut its staff in half if I recall correctly. These casual hints at Jewish conspiracies and Jews controlling finance have a poinsoning effect if left unchallenged. In particular, PeakOilBill's comment on Dec 19 is worrisome and should be taken down by Motley Fool.

    I am a lfe-long Democrat. I believe the Democrats paid a huge price in 2010 elections for the failure of this administration to prosecute the finance industry moguls. Arthur Anderson Accounting did far less in the Enron mess and was destroyed as a company. I share some of the rancor expressed by Steveook27 on Dec 21. I would point out that as far as his war policy, President Obama has done what he said he would- end our Iraq involvement and pursue the military campaign in Afghanistan. While there is much cause for disillussionment with the Obama administration and the congressional Democrats, pursuing the war in Afghanistan should not be one of them.

  • Report this Comment On December 26, 2013, at 2:37 PM, rdchin wrote:

    ^ +1 for you, TNjoe. Thank you for speaking up. I too was bothered by the anti-Jewish comment, but I probably wouldn't have taken any action if you hadn't posted. The anti-jewish comments are ugly and do not belong in the Fool community. I flagged the PeakOilBill comment.

    *** Every one of us,*** regardless of our ethnic heritage, is capable of committing great evil and vast fraud.

    This is why ethics, integrity, honesty, and faith matter.

  • Report this Comment On December 28, 2013, at 1:00 AM, onejetjock wrote:

    Greed knows no color, creed or religion. I worked for Chase (NYC) prior to the many mergers (Manufacture's Hanover.. JP Morgan) and watched corporate global ethics and bank operating cultures change dramatically. Working in the systems department we created from scratch plastic card processing, and ATM 24 hour banking among many other supporting systems. The culture then was to design systems and protect the bank and our customers. One day we were let go and the culture became use the systems, make money, and remove any impediments to client operations. This was an avalanche designed by purpose serving bank and customer greed.. It's that simple.

  • Report this Comment On December 29, 2013, at 1:12 PM, funfundvierzig wrote:

    TIme for the Madame Wellington "Dimon" at the top of this putrescent fraud heap to go!


  • Report this Comment On January 05, 2014, at 8:55 AM, 1bec1 wrote:

    My favorite.....You know you have a lot of money when criminal acts turn into fines instead of going to prison. Unless the fine really hurts the company then its not really a fine or setting an example...

    It's like the swear game with your kids...Costs a quarter....not really a game changer to me paying my bills, making money, buying a car/toys now is it....If the fine was 10k each time then I might want to learn how to shut my mouth and not do this again...

  • Report this Comment On January 07, 2014, at 11:25 AM, TMFBane wrote:

    Just wanted to provide an update. As part of its settlement with U.S. authorities, JPMorgan Chase has agreed to a deferred prosecution. You'll find the documents packet here:

  • Report this Comment On January 08, 2014, at 5:46 PM, skywalker wrote:

    I would advise everyone to stop doing business with that "bank". If you know they are not trustworthy why do business with them or buy any of their products? If the people would behave in an ethical way JPM would already be gone. But since money and greed rules the world nothing will change.

    As MF is concerned, I personally would immediatly stop doing any coverage for JPM because of ethical reasons. Just like they did with SQM. That was ethical behaviour at it's best.

  • Report this Comment On January 10, 2014, at 5:42 PM, Epitimather wrote:

    Teach what everybody in a modern human and educated society resp. civilization should know by him/herself ?

    If the Madoff deal would teach us just “that trust is central to the relationship between investors and their financial institutions and that “Without trust, the whole system falls apart”, this exactly would be the even bigger catastrophe than the loss of some billion of bucks.

    It would be a sign of social decline and cultural demise.

    I remember that there were times it wasn’t necessary to learn from a disaster only the importance of trust for any kind of deal and relationship to make work the deal and everything linked to it.

    Global Infantilism

    I can’t help to judge a society or civilization which allows such things happening by malfunction of it’s institutions and structures for whatever kind of management and transaction of valuables and signals as seriously if not even pathologically infantile.

    There would be much more to learn from cases akin the Madoff deal if one really wanted to

    I think there is much more to learn from the Madoff Deal if one doesn’t watch it as an isolated spectacular case of fraud but tries to understand who and/or what altogether made it happen and how.

    Don’t expect me to compose a detailed, list of all the substantial questions just to be asked, far less to be answered, in order to accomplish what is essential to really draw lessons from the Madoff deal instead of just singing litanies of truisms.

    I can give You for granted that it would be just impossible and useless, to jail everybody who and to forbid or put under permanent supervision what contributed in a somehow considerable and crucial manner to make things like the Madoff deal happen and work.

    Better than to jail such people would be to oblige them to contribute substantially with their experience to the analysis of all aspects of the case and to the work out of better over-all concepts. (The fragmentation of management- and controlling structures often creates hides for opportunities or even for lasting realms for informal and irregular action. This is very often a result of inappropriate concepts of labor division or of omission to adapt the allocation of competences to actual requirements).

    From capitalism to socialism to infantilism

    From my several years observation of global political, ideological, economic, cultural and mass communicational and psychological dynamisms, I got an impression making me suppose that such kind of collective infantilism is hosted mainly by so-called capitalistic resp. capitalistically programmed systems, many of them either wrapped in naïve socialist reverie or in simplistic sentimentalism of liberty camouflage.

    It seems to be plausible (which is different from evident) that the intellectual elements of capitalism, mixed with pseudo-capitalist attitudes, got globally spread by big systems of production and distribution of goods and services, while the mental elements of socialism, mixed up with attitudes of pseudo-socialism, got invented, promoted and installed by local networks and brought into ideological, religious and political systems.

    Basically capitalism is a theory providing tools of design of what is needed to optimize returns on investments under given requirements. It is not an ideology and it gives no pretexts to justify certain objectives, methods or behavior. However it is generally abused as an ideology and even became a global cult of justified infantilism of any variety, habitually entangled with it’s shadow resp. reflection as a phantasm of so-called social justice automatically and undoubtedly granted by everything opposed to capitalism.

    True socialism is opposed to infantilism, not to a theory to help reasonable handling of tangible values to the best of all.

    As aspects of what I name infantilism I’d name e.g.: loss of sense of quality and collective favoring cheap price and easy ways to obtain whatever on the costs of fairness.

  • Report this Comment On January 10, 2014, at 5:57 PM, Epitimather wrote:

    Management patterns of autocratic networks with illicit economy and informal, irregular executive powers and jurisdictions.

    I leave it intentionally to everybody’s imagination to figure out what is meant by this title. Everybody’s interpretation will be – at least approximately or partly - correct. And, as far as I can see, the Madoff deal fits perfectly this mold.

    The pattern I refer to is the intentional manning of seemingly reliable or highly representative but actually functionless positions and/or bodies with professionally inept staff who can get replaced at discretion without any harm for the employer and who is fully dependent from the system, the positions and bodies being created just in order to create a public impression of everything to be o.k. and beyond any reasonable doubt.

    Such positions never would pay in a truly performing system but their costs are peanuts for the profit of hiding what the employed people got no idea of at all to everybody who should or would like to know.

    To this kind of employees, their job seems to be a very easy, privileged and well paid one and as long as they get paid they may have little call to ask questions, even less for complaint.

    To the employers, this kind of dependence is a tried and tested method to secure the loyalty of employees. However, future economic, technical, political and social changes on many levels of coexistence may make the safeness of this concept fade away.

    History, starting from its earliest days, provides loads of samples of such seemingly high ranking, actually functionless positions. It is a history of careerism and nepotism and has very little to do with the pure literal theory of true capitalism, to the contrary!

    On may wonder how far to top ranking positions in whatever management and executive position in business, politics, government, administration and science this pattern of positions shown as high ranking to the public but actually functionless will climb. Given that digitalization covers more and more complex tasks, one can imagine the replacement of CEOs and Presidents of States by electronic equipment. Whether this will make human coexistence more peaceful and pleasant depends on future notions of peace and pleasure.

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