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Feds Blame JPMorgan in Failure to Catch Madoff

Feds Blame JPMorgan in Failure to Catch Madoff

5 Mins
December 23, 2013

The New York Times headline leapt off the front page: “Criminal Action Is Expected for JPMorgan in Madoff Case.” According to a leak, the United States Attorney’s Office for the Southern District of New York, after considering a criminal indictment, is about to extract $2 billion in penalties and a deferred prosecution agreement from JPMorgan. Why?

For failure to provide adequate warnings about the $65 billion Bernie Madoff Ponzi scheme . Five years after Madoff’s arrest, he’s still making headlines and governments are still passing blame for their own miscue.

Surely if someone is responsible for catching securities fraud, it’s the SEC, not JPMorgan.

The Wall Street Journal explained that the government’s case against one of the world’s best-known banks — JPMorgan — would most likely center on its failure to file a so-called suspicious activity report about Mr. Madoff. Supposedly, JPMorgan alerted the authorities in Britain to concern about Mr. Madoff, but surprisingly it did not sound the alarms with American regulators. That’s some oversight on the bank’s part. Yet, it should be noted that the Wall Street Journal recently reported that this “British alert” was filed by JPMorgan’s London office on October 28, 2008 — just forty-four days before Madoff was finally found out and arrested.

The New York Times notes that the bank had concerns earlier, but didn’t file a suspicious activity report . That might be a bigger oversight.

But if you think a report like that would have saved Madoff’s investors, there’s some evidence you shouldn’t overlook.

On May 7, 2001, Barron’s published a story titled, “Don’t Ask, Don’t Tell – Bernie Madoff is so secretive, he even asks investors to keep mum.” Does no one in the Justice Department assigned to financial crimes read Barron’s? It’s only one of the world’s premier financial publications, and it’s based in Manhattan. Then again, maybe it wouldn’t help: at least one SEC lawyer did see that article in 2003 .

Harry Markopolis, an independent forensic accountant and financial fraud investigator , sent the SEC formal warnings about Madoff, with supporting documents, thrice, in 2000, 2001 and 2005. This seems to be a very public, nine-year, red flag. Mr. Markopolis wrote a book on the saga, titled No One Would Listen: A True Financial Thriller – The Madoff Whistleblower . The book title about sums it up.

Markopolis repeatedly warned the SEC about Madoff, only to be ignored.

Then there is the SEC’s own record. I quote a Sept. 3, 2009, Washington Post article: “The SEC opened inquiries five times in a 16-year period . But in each instance, inexperienced officials, at times ignorant of other agency probes into Madoff, took his explanations at face value and did little to verify them.” The SEC’s own inspector general was floored: " Despite numerous credible and detailed complaints , the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.” Even Madoff himself was “astonished.”

This raises two sets of questions for the government’s case against JPMorgan:

First, in light of the alarms that in fact were raised and the government’s response to them, how is anyone to believe that an October 2008 warning from JPMorgan, or even a 2006 one, would have done any good? And if it wouldn’t have done any good, why is JPMorgan in the crosshairs?

[D]id anyone in the federal legal system charge anyone at the SEC for what looks like at least a decade and a half of incompetence around the Madoff mess?And second, did anyone in the federal legal system charge anyone at the SEC for what looks like at least a decade and a half of incompetence around the Madoff mess? For that matter, does it see itself in any way culpable? If failing to sound an alarm is a crime, why isn’t failing to investigate adequately once an alarm is sounded? Surely if someone is responsible for catching securities fraud, it’s the SEC, not JPMorgan.

Just last month, JPMorgan agreed to surrender $13 billion to settle a case stemming from sales of troubled mortgage securities before the 2008 financial crisis. This deal brought new meaning to the phrase “today’s favor is tomorrow’s obligation,” as two institutions JPMorgan absorbed at the government’s request, Bear Stearns and Washington Mutual, had actually done much of the trading involved. Now it looks like JPMorgan has become the government’s go-to patsy and piggy bank—first because it helped the government with two failing financial institutions, and now because it didn’t help the government catch a fraud.

But if the Department of Justice wants to go after the people who are really responsible for failing to catch Bernie Madoff, it needs to start with the SEC.

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James J. Treacy
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James J. Treacy
Law / Rights / Governance
Economics / Business / Finance