JP Morgan Chase New $2.6B Penalty for Madoff Scam

JP Morgan Chase

JP Morgan Chase will pay a new $2.6 billion penalty as settlement for allegations the bank failed to report stockbroker Bernard L. Madoff’s suspicious activities. JP Morgan Chase accepts that it failed to recognize the scam Madoff did for 15 years while doing business with the bank. This most recent settlement amount came at the heels of last year’s $13 billion penalties the bank paid to “clean” the financial mess it helped create in the financial crisis of 2008-2009.

According to Preet Bharara, the U.S. Attorney in Manhattan, the penalty to be paid by the bank for these lapses is broken down into: $1.7 billion to settle the government’s charges, $350 million for the similar case filed by the Office of the Comptroller of the Currency and another $543 million to settle several private claims. As a financial institution, JP Morgan Chase failed in its responsibility to inform authorities about the possibility of a fraud being committed, added Bharara.

Jason Goldberg, an analyst at Barclays said that the bank as one of the largest banks in the world can afford to pay the hefty penalties. He added, “It makes $25 billion in revenue per quarter and has record capital.” Analysts from Wall Street even estimate for 2014, the bank will earn around $23 billion in profits so generally the recent fines imposed by the government are manageable.

JP Morgan Chase investors and clients remain confident that this recent setback will not hurt the overall financial position of the bank. An analyst at Portales Partners LLC Charlie Peabody said, “The prevalent attitude is that whatever the litigation costs were in 2013, we think the peak is at hand.” Proof of this is the fact that the bank’s shares for the past 12 months went up by as much as 28 percent.

Another reason why JP Morgan Chase can survive this massive $2.6 billion penalty for the Madoff scam is that the amount in the bank has already set aside reserves just for the purpose of financing future legal pay-outs. Based on earlier reports, this fund was estimated to be worth $28 billion since the end of 2009.

Madoff, through his Madoff Securities led a global Ponzi scheme where he stole $64.8 billion in paper wealth and $17.5 billion in cash from people as high as members of royalties to ordinary folks like pensioners. These people thought that their investment money were safe in their accounts but later found out that these were all gone. Madoff was arrested in 2008 and was tried in court and pleaded guilty and was sentenced to a 150-year prison term in North Carolina.

In a statement issued last March 2013, JP Morgan Chase CEO Jamie Dimon said they are working hard to strengthen internal controls, systems, practices, technology, and culture not only to ensure the bank is complying with government’s regulatory requirements but also to operate in the highest standards. The bank last year employed an additional 3,000 employees to strengthen its internal control as well as made changes in the board to help monitor the bank. As of last year, the bank employs a total of 260,000 workers in its global operations.

In his article which appeared at FierceCFO, Jim Kim said many banks including JP Morgan Chase are now complying seriously with the government’s regulatory requirements. This is good news to further protect the public from being scammed.

The new $2.6 billion penalty to be paid by JP Morgan Chase to settle its participation in the Madoff scam is a step in the right direction. Other banks not as large and profitable as JP Morgan Chase may not be able to afford such huge legal costs and the only way for them to prevent paying that amount is to operate in the highest ethical way possible.

By Roberto I. Belda

Sources:
Bloomberg
NY Times
Fox Business
Fierce CFO   

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