JPMorgan Chase (JPM) shareholders can cross one more thing off their list of uncertainties: Preet Bharara, U.S. Attorney for the Southern District of New York, has announced a resolution with the bank over its relationship with convicted Ponzi scheme mastermind Bernard Madoff. The price tag will be $1.7 billion, the largest-ever bank forfeiture, according to Bharara’s office. The money is expected to go to Madoff’s victims.
The most interesting aspect of the agreement is that it’s not quite a settlement, but a deferred prosecution agreement (PDF), which means that the U.S. Department of Justice agrees not to charge the bank criminally for a period of time—two years—while JPMorgan agrees to reform its policies and practices.
A deferred prosecution is a powerful and, with banks, rarely used weapon that authorities reserve for cases in which the facts underlying the case are severe but a criminal indictment might destroy the company. It was an option floated by attorneys for Steven Cohen’s hedge fund SAC Capital in the summer, but the DOJ chose to indict SAC instead, leading to the destruction of Cohen’s hedge fund business. Presumably, the financial devastation that a criminal charge against JPMorgan, the nation’s largest bank, would have caused was an important consideration in the discussions.
In exchange for this supposed forbearance on the part of the government, JPMorgan has agreed to cooperate fully with the Justice Department’s ongoing investigation into Madoff’s operations and to improve its compliance and anti-money laundering policies. It also agreed to the facts underlying the government’s case, including that it had maintained accounts for Madoff Securities from 1986 to 2008, during which time it received $150 billion in deposits and transfers from Madoff investors. None of that money was used to buy stocks, and the account raised all sorts of questions. Yet JPMorgan did not report any suspicions to U.S. regulators until Madoff was arrested on Dec. 11, 2008.
This means that JPMorgan officials aren’t likely to be file additional reports that include lines like this one, sent to financial authorities in the U.K. on Oct. 29, 2008, with no mention to other investors: “The investment performance achieved by [the Madoff funds] … is so consistently and significantly ahead of its peers year-on-year, even in the prevailing market conditions, as to appear to be too good to be true—meaning that it probably is.”
After sending that, the government alleges, JPMorgan asked to withdraw $300 million of its own money from Madoff’s funds.