U.S. federal authorities prepare criminal charges against JP Morgan, in an investigation into the bank turning a blind eye to the Ponzi scheme operated by investor Bernard Madoff. This case, which comes after a preliminary settlement for $13 billion to settle civil investigations related to JP Morgan practices in mortgage operations represents a new major threat to the reputation of the largest U.S. bank by assets.
JP Morgan has already had preliminary discussions with representatives of the prosecutor for an agreement to close the investigation, said sources close to the situation. Such an agreement would suspend criminal charges against the bank in exchange for a fine and concessions; JP Morgan will be charged in case of further misconduct .
Prosecution may ask JP Morgan, which repeatedly claimed that its staff acted in good faith in working with Madoff, to hire an independent supervisor.
This type of settlement called “deferred-prosecution agreement, is preferred by the Department of Justice to punish large corporations, as it allows the prosecution to have a tough stance without affecting the soundness of companies. These agreements are entered only in case of serious offenses and have never been applied to a large U.S. bank .
In the context of concerns that a guilty plea could destabilize the bank, prosecutors discussed the ramifications of the criminal charges against JP Morgan with one of the regulators, the Office of the Comptroller of Currency, which gave assurances that it will not be involved in the case.
Representatives of JP Morgan, Comptroller and prosecutors’ office declined to comment.
Prosecutor could also launch criminal charges against JP Morgan employees who worked directly with Madoff. It is not clear who would be the employees investigated. The investigation, conducted by the FBI and prosecutors in Manhattan, focuses on the fact that JP Morgan has not alerted federal authorities about Madoff ‘s business conduct. JP Morgan was the main bank that Madoff worked with for over 20 years.
Criminal indictment against JP Morgan would be a great demonstration of the power of the prosecutor. Since the indictment of the audit firm Arthur Andersen and Enron, the energy company which went bankrupt, federal authorities have been reluctant to bring criminal charges against large corporations, for fear that it may have adverse effects on the economy.
According to federal rules , prosecutors must consider the collateral consequences of such actions as job losses and economic implications. HSBC, for example, paid $1.9 billion to close a case of money laundering, but the Justice Department has not indicted the bank. JP Morgan also faces other inquiries related to employment of sons and daughters of Chinese government officials and the possible manipulation of energy transactions.
Madoff case is particularly difficult. Any charge of the bank would tie it to the best known financial crime in the last period. Madoff orchestrated a Ponzi pyramid scheme over several decades and investors have lost $17 billion. Total losses exceeded $64 billion.
Madoff is serving a sentence of 150 years in a federal prison in North Carolina after pleading guilty in March 2009. He said that banks that did business with him “had to know” what was happening.
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