Friday, January 10, 2014

JPMorgan Chase, Bernard "Bernie" Madoff, Sub-Prime Mortgages, and the Prominence of Deferred Prosecution Agreements

The New York Times has an interesting discussion of the process by which JPMorgan Chase decided to accept a deferred prosecution agreement from the government with regard to allegations that the bank ignored warning signs regarding the conduct of infamous Pozi schemer Bernard Madoff.  The DPA, announced this week, will require the bank to pay over $2 billion in penalties. 
Two men who occupy coveted roles in Manhattan’s power elite, one the city’s top federal prosecutor and the other its top banker, sat down in early November to discuss a case that was weighing on them both.

Preet Bharara, the United States attorney in Manhattan, and Jamie Dimon, the chief executive of JPMorgan Chase, gathered in Lower Manhattan as Mr. Bharara’s prosecutors were considering criminal charges against Mr. Dimon’s bank for turning a blind eye to the Ponzi scheme run by Bernard L. Madoff. Mr. Dimon and his lawyers outlined the bank’s defense in the hopes of securing a lesser civil case, according to people briefed on the meeting.

But at the cordial meeting in Mr. Bharara’s windowless conference room lined with law books, the prosecutors would not budge. Mr. Bharara — flanked by his own lieutenants, including Richard B. Zabel and Lorin L. Reisner — made it clear that he thought the wrongdoing was significant enough to warrant a criminal case.

On Tuesday, Mr. Bharara announced the culmination of that case, imposing a $1.7 billion penalty stemming from two felony violations of the Bank Secrecy Act, a federal law that requires banks to alert authorities to suspicious activity. The prosecutors, calling the amount a record for violating that 1970 federal law, will direct the money to Mr. Madoff’s victims.

The outcome of the case and the tenor of the settlement talks underscore the significant leverage prosecutors wield when negotiating with Wall Street’s biggest firms. Even though JPMorgan had defeated a similar private lawsuit just months earlier, bank executives were unwilling to gamble against the government.

Within weeks of meeting Mr. Bharara and recognizing their limited bargaining power, JPMorgan’s lawyers accepted the $1.7 billion penalty, the people briefed on the meeting said, which was within the range that prosecutors initially proposed. The bank also agreed to pay $350 million to the Office of the Comptroller of the Currency, accepting the agency’s only offer, one of the people said.

It could have been worse for the bank. At one point, prosecutors were weighing whether to demand that the bank plead guilty to a criminal charge, a move that senior executives feared could have devastating ripple effects. Rather than extracting a guilty plea, prosecutors struck a so-called deferred-prosecution agreement, suspending an indictment for two years as long as JPMorgan overhauls its controls against money-laundering.
The entire New York Times article is available here.

ABC News also had an article discussing the recent DPA between the government and JPMorgan Chase.  The article asks whether the bank is "Too Big to Jail?" and references the November settlement by JPMorgan of allegations related to the sub-prime mortgage issue thought to have contributed to the financial crisis in 2008.
In another major victory for JPMorgan Chase and its CEO Jamie Dimon, prosecutors said today the bank will be able to avoid criminal charges under a deferred prosecution agreement despite having "turned a blind eye" to evidence of the Ponzi scheme of Bernie Madoff, whose principal accounts were held by the bank for 22 years and were central to his multi-billion dollar fraud.

Instead, prosecutors announced today that the bank will pay $1.7 billion to defer for two years criminal charges that the bank failed to report suspicious activity that might have tipped off investigators to Madoff's scheme years earlier, $350 million to cover civil money penalties for violations of the Bank Secrecy Act and another $543 million to settle civil suits filed by victims of the Ponzi scheme.

It was the second time in three months that the Obama administration Department of Justice declined to push JPMorgan Chase, the country's largest bank by assets, to trial on criminal charges. In November, the DOJ accepted a payment of $13 billion from the bank to avoid criminal charges growing out of the sub-prime mortgage scandal that helped drive the American economy into a recession.
The entire ABC News article is available here.
 
Given the prominence of deferred prosecution agreements today, it should not be surprising that the Bernard Madoff allegations resulted in such a settlement.  Below is a short excerpt from my upcoming article regarding Deferred Prosecution Agreements.  The article will be published in the American Bar Association Criminal Justice Section White Collar Crime Committee Newsletter. 
In the United States, DPAs have evolved over the last two decades into the dominant method of adjudicating corporate criminal investigations by the Department of Justice (“DOJ”). This is particularly true in the years since the collapse of Arthur Andersen in 2002. Andersen, which was under investigation for the alleged obstruction of justice by a handful of employees during the government’s investigation of Enron, did not enter into a deferred prosecution agreement. Instead, choosing to challenge the government’s case, Andersen proceeded to trial and lost. Though the accounting firm eventually won the case on appeal to the United States Supreme Court, the damage was done and the accounting firm wound up operations after almost a century in business. The collapse led to almost 85,000 employees around the world losing their jobs.

After Andersen, the DOJ’s power to convince corporations that the risks of proceeding to trial and challenging the government’s case are simply too onerous became exponentially greater. Today, it is an anomaly to see a corporate entity challenge the government at trial. While DPAs have traditionally been viewed as an American instrument of adjudication, it appears that the success of the DOJ in utilizing DPAs to secure significant fines and concessions from corporations has not gone unnoticed abroad.
The newsletter article, which goes on to examine the introduction of DPAs in the United Kingdom this year, will be available here later this spring.

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