Prosecutors Move Towards Madoff Charges Against JPMorgan

Oct 24 2013 | 1:07pm ET

JPMorgan Chase's myriad and massively expensive legal troubles are about to get a good deal worse, thanks to the bank's close relationship with arch-fraudster Bernard Madoff.

Prosecutors may bring charges against the bank for failure to notify regulators about suspicious activities at Madoff's firm, which proved to be a $65 billion Ponzi scheme. JPMorgan was Madoff's primary bank.

The bank is in talks with prosecutors, who have also discussed the matter with the Office of the Comptroller of the Currency, which has said it will not interfere, The New York Times reports. The U.S. Attorney's Office in Manhattan is likely to seek a deferred-prosecution agreement with JPMorgan, in which it would withhold criminal charges if the bank does not misbehave for a period, but could also seek a guilty plea, a much more serious concern.

Even a deferred-prosecution agreement would be essentially unprecedented for a major Wall Street bank.

JPMorgan has said that all of its employees "acted in good faith" in their dealings with Madoff, but prosecutors are not so sure. At issue are a number of e-mails that appear to indicate that JPMorgan staff was skeptical of Madoff's returns, suspicions which never resulted in a report to a regulator.

In one e-mail in February 2006, an employee who had looked at Madoff's trading records wrote that he or she had "a few concerns and questions," noting that "all trades are generated by Madoff's black box." A little more than a year later, as the bank considered whether to expand its business selling derivatives linked to Madoff feeder funds, a senior risk manager wrote that another bank executive had "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. I think we owe it to ourselves to investigate further."

According to Madoff receiver Irving Picard, that probe was limited to a phone call with Madoff and "a Google search with no follow-up." Picard has sued, so far without success, JPMorgan, seeking billions of dollars.

Picard has also produced e-mails that show that many at JPMorgan weren't surprised when Madoff was arrested in December 2008. One referred to the agenda for the 2007 meeting on derivatives, writing, "Perhaps best this never sees the light of day again!!"

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