Let’s get a few points straight regarding the federal government’s “big” $2-billion-plus settlement with JPMorgan Chase over the bank’s complicity in the Madoff case.

-- First, JPMorgan, where Madoff kept his major bank accounts and which profited handsomely off its relationship in numerous ways, knew Madoff was crooked. Bank executives had him figured out as early as 1998 -- possibly earlier -- or 10 years before his arrest and public exposure as the mastermind of a record-breaking Ponzi scheme.

The U.S. banking system relies on banks themselves as the first line of defense against fraud -- that’s why they’re required to file “suspicious activity reports,” or SARs, with financial regulators. No institution had a clearer view of Madoff’s fraud than JPMorgan, which had “plenty of reasons to be uniquely suspicious,” as U.S. Atty. Preet Bhahara said at a news conference announcing the settlement. But JPMorgan never filed a SAR with the U.S. As a result, Madoff continued working his black magic for years after he could have been stopped.

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-- Second, it’s a scandal and an affront to the principle of equal and fair justice that the federal prosecutors handling this case named no individuals as bearing criminal responsibility, and even deferred criminal prosecution of the bank itself for two years, contingent on its keeping its nose clean.

-- Third, regarding JPMorgan’s public statement about the outcome of this investigation: How shall we put this politely? It resembles hay after it’s been passed through the digestive system of a horse.

For example, the bank says, “We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank.” Better job? JPMorgan made no effort whatsoever at “pulling together” the information its various units had. Every time some executive there had a reasonably complete picture of Madoff’s scam in his or her hands, someone vetoed making a disclosure to the public or the U.S. government.

Who issued those vetoes? We don’t know. The prosecutors don’t say. More appallingly, they may not have asked.


The bank states: “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us.” Based on the statement of facts issued today by the prosecutors, to which the bank assents, this is an out-and-out lie. JPMorgan reduced its investments in Madoff’s funds by 80% -- $288 million -- from October 2008 to Dec. 11 that year, when Madoff was arrested. They would have sold off more, if they could.

Earlier, a top bank executive vetoed a $1-billion investment, placing a cap of $250 million on Morgan’s exposure, because he smelled a rat. Madoff, it seems, had refused to let Morgan’s experts look at his books. “We don’t do $1-billion trust me deals,” the executive decreed. Speculation that Madoff’s business was a Ponzi scheme was rife at JPMorgan headquarters.

After Madoff’s arrest, JPMorgan executives congratulated themselves on their foresight. “We got this one right at least,” one executive emailed another. The bank’s chief risk officer, who had vetoed the $1-billion investment, emailed his senior colleagues to report that draining the funds out of the Madoff accounts means “we actually look like we have some clue of what we’re doing.”

Other evidence of JPMorgan’s guilty knowledge abounds in the government documents. The most striking was an Oct. 29, 2008, report that the bank’s London office filed with British regulators listing their concerns about Madoff. Among the concerns was his consistently sterling reported investment returns in good markets and bad. This performance appears “too good to be true -- meaning that it probably is,” the report said.


U.S. law required the bank to file the same sort of report of suspicious activity with U.S. regulators. JPMorgan did not do so, apparently because Morgan’s lawyers blocked it. And why? One clue lies buried in the government statement of facts: because Madoff was such a big broker-dealer that he might represent “significant business” in the U.S. for JPMorgan.

That underscores the folly of the government’s wrist-slap approach to financial fraud. Even with the penalties and restitution of more than $2 billion, JPMorgan can reasonably view the outcome as the cost of doing business. It almost got away with letting Madoff skate.

It’s hard to imagine a better illustration than this case of governmental dereliction identified by U.S. Judge Jed Rakoff in his recent essay about the lack of prosecutions resulting from the 2008 financial crisis. As we reported a week ago, Rakoff took special aim at the policy of prosecuting companies rather than individuals for white-collar wrongdoing.

“Companies do not commit crimes,” he observed; “only their agents do ... So why not prosecute the agent who actually committed the crime?” He complained that prosecutions of corporations usually yield only fines and an agreement that the company set up an internal “compliance” department. “The future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.”


Sure enough, the JPMorgan settlement requires just such window-dressing. It’s mandated to “continue ... to implement and maintain an effective ... compliance program” with the requirements of the Bank Secrecy Act. You mean it wasn’t in compliance already, as required by law? If JPMorgan meets this requirement, then the government will drop its threat of an indictment against the bank in two years.

The deterrent effect of this requirement is zero. If the government were really determined to root out white-collar crime and prevent outfits like JPMorgan from condoning lawbreaking that unfolds in front of its own eyes, it had the tools to do so: Indict the bank executives and officials who knew Madoff was crooked and did nothing, and threaten to revoke the bank’s charter. Would that be a great loss to the financial system? JPMorgan has been racking up multibillion-dollar settlements over white-collar misdeeds on an almost monthly basis lately. It hasn’t been operating like a bank, but like a criminal enterprise. And as this case now shows, it has been aiding and abetting its fellow criminals along the way.