“J. P. Morgan as an institution failed, and failed miserably.”
– Manhattan U.S. Attorney Preet Bharara

J.P. Morgan, fraudster Bernard Madoff’s primary banker, agreed to pay more than $2 billion to avoid criminal charges that it failed to alert the U.S. government about Madoff’s Ponzi scheme.

It’s not nearly enough.

The settlement portrays bank employees as alternately too incompetent to notice and too calculating to bother reporting that Madoff was running a gigantic fraud. The bank failed to alert the U.S. government about Madoff’s scheme, despite numerous red flags raised by some of its employees over many years.

Some J. P. Morgan employees repeatedly questioned Madoff’s outsized investment returns. One analyst wrote that the “numbers didn’t add up.”

J.P. Morgan violated Bank Secrecy Act requirements to alert authorities of suspicious activity. Inexplicably, J. P. Morgan did report its suspicions to British bank authorities.

Manhattan U.S. Attorney Preet Bharara, whose office led the government’s investigation, at a news conference cited the bank’s inability to connect warning signs from its departments. “In part because of that failure, Madoff was able to launder billions of dollars in Ponzi proceeds,” Bharara said.

At the time of its collapse in December 2008, Madoff Securities held more than 4,000 client accounts, with a purported combined balance of about $65 billion. Instead, Madoff Securities had only $300 million in assets!

J.P. Morgan’s ineptness contrasts starkly with my custodian experiences at Morgan Stanley, Fidelity, and Wells Fargo. These institutions not only require that the bulk of my trades are executed by them but audit any transference of funds outside the institution. This includes personal follow-up calls requiring me to verify my identity and the purpose of the transaction before any money can be wired out of my accounts.

In stark contrast, J. P. Morgan was asleep at the switch.

It did not require Madoff to conduct any of his business through the bank. Therefore, the bank had no firsthand trading experience to verify Madoff’s purported investment returns.

Even so, it’s difficult to understand how the bank would have remained ignorant about what Madoff was doing.

In 2007, a Madoff account received $757.2 million in customer wires and transfers, 27 times the average daily value of such activity during the prior 90 days. Yet bank employees “closed the alerts with a notation that the transactions did not appear to be unusual.”

J.P. Morgan also failed to disclose a check-kiting operation by Madoff. He would “round trip” checks totaling tens of millions, allowing him to inappropriately collect interest on the “float,” the time it took to get cash balances transferred between accounts. While the other institution involved in the transfers closed the Madoff account and warned U.S. regulators, J. P. Morgan did nothing.

Bharara was right: The bank failed miserably.

J.P. Morgan’s deferred-prosecution agreement gives the Justice Department the right to pursue criminal charges if the bank fails to live up to the terms of the settlement, which include improving its money-laundering prevention practices, over the next two years.

But the Justice Department should renew its investigations to look for criminal intent. It’s ridiculous that no J. P. Morgan employees were charged with criminal wrongdoing. Until its executives are held personally responsible, J. P. Morgan’s transgressions will continue.

Over the past few years, J. P. Morgan has paid out more than $20 billion in fines. It is time for the banks’ executives and its board of directors, not the shareholders, to bear the costs of the bank’s misdeeds.

In hindsight, it is laughable that government officials in 2008 chose J. P. Morgan to perform due diligence on Bear Stearns over a weekend. The bank as a result bank bought Bear Stearns for peanuts, and the Federal Reserve even agreed to cover up to $29 billion of potential Bear Stearns losses.

Originally published in the Sarasota Herald-Tribune