The U.S. Treasury Department’s inspector general has threatened to punish JPMorgan Chase & Co. (JPM) for failing to turn over documents to regulators investigating the bank’s ties to Bernard Madoff’s Ponzi scheme.
Inspector General Eric Thorson gave the largest U.S. bank a Jan. 11 deadline to cooperate with the Office of the Comptroller of the Currency probe or risk sanctions for impeding the agency’s oversight. JPMorgan, according to the Dec. 21 letter, contends the information is protected by attorney-client privilege.
Thorson’s letter didn’t spell out what documents the OCC is seeking or the focus of its investigation. Madoff is serving a 150-year sentence after confessing to the fraud that once claimed to have $65 billion in customer assets.
The previously undisclosed OCC probe adds to the lender’s troubles in Washington, where several agencies and lawmakers are investigating the bank’s loss of at least $6.2 billion on botched derivatives trades. The losses have prompted regulators including the Federal Reserve to consider tightening proposed restrictions on proprietary trading.
Jennifer Zuccarelli, a JPMorgan spokeswoman, said the bank “will of course continue to work together with our regulators” on the investigation.
“This dispute does not go to the merits of the matter but it does raise an important issue of principle: Whether we and other banks, large and small alike, have the fundamental right long recognized in this country to communicate freely with and seek confidential guidance from their lawyers,” Zuccarelli said in an interview.
Bryan Hubbard, an OCC spokesman, declined to comment on the agency’s inquiry.
In the letter sent to JPMorgan general counsel Stephen Cutler, the inspector general -- the Treasury’s internal watchdog -- dismissed JPMorgan’s arguments on attorney-client privilege, saying the OCC “could not do its work” if banks were allowed to withhold information on that basis. The OCC, an independent bureau of Treasury, asked the IG office to review the situation, Thorson said in the letter.
Failure to produce the records “will have to be seen as a continuing purposeful impediment to the authority of the OCC,” Thorson said in the letter, and would require “further action by our office.”
The trustee liquidating Madoff’s firm, Irving H. Picard, sued JPMorgan in December 2010, accusing the bank of aiding Madoff’s fraud. The lawsuit, eventually demanding $19 billion, the largest of Picard’s claims, has since been dismissed. Picard has appealed the ruling.
JPMorgan “had financial reports in its possession that clearly evidenced fraud,” David J. Sheehan, lead counsel for Picard and a partner at Baker & Hostetler LLP, said in a February 2011 statement. JPMorgan was the Madoff firm’s “primary banker for more than two decades,” Sheehan said.
JPMorgan benefited from Madoff accounts while it “helped perpetuate Madoff’s fraud by ignoring the red flags, and continuing to structure products and collect fees for their own enrichment,” according to the trustee’ lawsuit.
The bank would have made $398 million in pretax profit from Madoff deposits from 1986 to 2008, conservatively assuming no reinvestment gain, according to a 2011 study by Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette. The firm declined to comment on the study at the time.
The trustee’s claim also accused the bank of withdrawing $276 million in its own investments in Madoff-related feeder funds about three weeks before Madoff’s Dec. 11, 2008, arrest. JPMorgan described the withdrawals as part of “an across-the- board review of its exposure to hedge funds,” according to its court filings.
In responding to Picard’s suit, the bank issued a statement in 2011 saying it “did not know about or in any way become a party to the fraud” and called it an “unfounded claim” that JPMorgan earned substantial fees from Madoff’s account. JPMorgan also objected in court when the trustee sought more freedom to use confidential Madoff documents provided by the bank.
The OCC is also investigating the trading losses in the bank’s chief investment office and is preparing an enforcement action, according to a person briefed on the situation who asked not to be named because the matter isn’t public. The cease-and- desist order would require the bank to fix internal risk controls, the person said.
In a second dispute involving demands from federal regulators for documents, a federal magistrate judge in Washington ruled in November that JPMorgan could invoke attorney-client privilege to keep private e-mails requested by the Federal Energy Regulatory Commission.
The agency had accused a JPMorgan unit of making “factual misrepresentations” and omitting material information in communications with the California Independent System Operator, which operates the state’s power grid, and in filings to the commission. The FERC suspended the unit’s electricity-trading authority for six months starting April 1.