Complicity in Madoff Scheme Costs JPMorgan $2.6 Billion

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JPMorgan Chase ( JPM ) will cough up $2.6 billion to settle all charges leveled against it by Federal authorities for allegedly turning a blind eye to Bernard Madoff as he used his account with the bank to carry on suspicious activities for about two decades. The country's largest bank was named in a class action lawsuit by victims of the infamous Madoff Ponzi Scheme back in November 2011, and the settlement involves a $1.7 billion non-tax-deductible payment to the Department of Justice, which will be distributed to the victims in addition to fines and other charges totaling $893 million.

With this, the tally of all settlements by JPMorgan for the year 2013 stands at a whopping $22 billion - a bulk of it coming from the $13 billion-deal with several Federal and state authorities last November over legacy mortgage issues (see Key Takeaways From JPMorgan's Mammoth Settlement Of Legacy Mortgage Issues ). The bank took a significant hit to its Q3 results by setting aside $9.3 billion as legal reserves, but the larger-than-expected Madoff settlement will require the bank to add another $400 million in reserves for Q4. Combined with the fact that a large part of this settlement does not entail a tax benefit, JPMorgan will see a $850 million reduction in its results for the fourth quarter and full-year 2013, which it releases on January 14.


We have a $60 price estimate for JPMorgan , which is slightly above current market prices.

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The Ponzi scheme orchestrated by Madoff for 20 years starting in 1986 siphoned off nearly $65 billion from thousands of investors. In November 2011, these investors filed a class-action suit against JPMorgan claiming that the bank was complicit in its role as the primary banker for Bernard L. Madoff Investment Securities LLC (BLMIS). In the lawsuit, investors alleged that all their money was channeled through a JPMorgan account referred to as "the 703 account," and irregularities in this account should have been caught by the bank. The lawsuit also mentioned that JPMorgan did not take action on numerous occasions when it should have questioned BLIMS's role as an investment firm.

The issue escalated soon after that, as Federal authorities stepped in and upheld claims of JPMorgan's wrongdoing in the matter stating the Bank Secrecy Act. Every financial institution is required by law to report transactions that are likely to stem from money laundering activities.

After holding out for nearly two years, JPMorgan finally bit the bullet and agreed to the $2.6 billion settlement. The figure includes a $1.7 billion payout to the Department of Justice for subsequent disbursement to victims of the elaborate fraud, a $350 million fine to the Office of the Comptroller of the Currency ( OCC ), a $325 million payment to the BLIMS Trustee for settling the lawsuit and a direct $218 million payment to plaintiffs in the lawsuit.

The settlement will result in a one-time increase in expenses by $400 million for JPMorgan's consumer banking business in Q4. As you can see by making changes to the chart below, the impact of this on the bank's share price is negligible.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BAC , C , JPM , OCC , WFC

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