More flack on the JP Morgan settlement from Wall Street on Parade (A Citizen Guide to Wall Street). Contrast this to the time, folks, when you sought a home loan to buy your first house. Did you in fact have to just about put up your first-born? But banking, like the law, is not meant to impede our overlords:
Last week JPMorgan Chase paid $2.6 billion in fines and restitution, signed a deferred prosecution agreement and walked away from their 22-year involvement with Bernie Madoff’s Ponzi scheme. But according to court documents filed in 2011 by the Trustee of the Madoff victims’ fund, Irving Picard, this was not a simple case of poor risk management at JPMorgan. This was an operation structured like those Russian nesting dolls, with the Ponzi scheme as the outside doll with many more frauds layered inside the big one.
* * *
According to the Securities Investor Protection Corporation (SIPC), the Justice Department prosecutors who settled the case against JPMorgan Chase used the investigative material from Picard to bring their charges and settle the case. Those court filings show layers upon layers of frauds within the Ponzi scheme.
For starters, JPMorgan Chase used unaudited financial statements and skipped the required steps of bank due diligence to make $145 million in loans to Madoff’s business, according to Picard. Lawyers for the Trustee write that from November 2005 through January 18, 2006, JPMorgan Chase loaned $145 million to Madoff’s business at a time when the bank was on “notice of fraudulent activity” in Madoff’s business account and when, in fact, Madoff’s business was insolvent. The reason for the JPMorgan Chase loans was because Madoff’s business account, referred to as the 703 account, was “reaching dangerously low levels of liquidity, and the Ponzi scheme was at risk of collapsing.” JPMorgan, in fact, “provided liquidity to continue the Ponzi scheme,” according to Picard.
Clearly, this is fraud number two on the part of someone – loan fraud.
Fraud number three occurred when JPMorgan Chase and its predecessor banks extended tens of millions of dollars in loans to Norman F. Levy and his family so they could invest with the insolvent Madoff. (Levy died in 2005 at age 93 without being charged with any crimes. Levy’s accountant, Paul J. Konigsberg, was indicted in September of last year and charged by the Securities and Exchange Commission in a civil action. Konigsberg has pleaded not guilty in both cases.)
According to Picard, Levy had $188 million in outstanding loans in 1996, which he used to funnel money into Madoff investments. Picard’s lawyers told the court that JPMorgan Chase (JPMC) “referred to these investments as ‘special deals.’ Indeed, these deals were special for all involved: (a) Levy enjoyed Madoff’s inflated return rates of up to 40% on the money he invested with Madoff; (b) Madoff enjoyed the benefits of large amounts of cash to perpetuate his fraud without being subject to JPMC’s due diligence processes; and (c) JPMC earned fees on the loan amounts and watched the ‘special deals’ from afar, escaping responsibility for any due diligence on Madoff’s operation.”
A critical piece of evidence against JPMorgan was that despite funneling loans to both Madoff and Levy, the bank “advised the rest of its Private Bank customers not to invest with Madoff,” according to Picard.
Many more details in this post from a Wall Street veteran of 21 years. The depth of fraud is breathtaking. Hold your nose and read the entire post.
What was happening in Madoff’s account was so over the top that it is virtually impossible to reconcile it with a legitimate compliance department unless some higher up simply shut down the normal bank controls. Picard told the court that “during 2002, Madoff initiated outgoing transactions to Levy in the precise amount of $986,301 hundreds of times — 318 separate times, to be exact. These highly unusual transactions often occurred multiple times on a single day.”