In a further resolution of its legal issues,
JPMorgan Chase & Co.
) agreed to pay nearly $2.6 billion to settle several charges
pertaining to lapses in reporting suspicious activities at
Bernard L. Madoff Investment Securities LLC (BLMIS). Following
this announcement, the company's share price fell during
intra-day trading due to negative investors' sentiments. The
company's share price closed at $58.32 on Jan 7, down 1.2% from
the previous day.
Madoff had accounts with JPMorgan more than two decades before
being arrested in 2008 for running a Ponzi scheme that duped
investors of billions of dollars. The penalty of $2.6 billion is
related to the bank's settlement with various governmental
regulators as well as other private parties to resolve civil
litigation related to BLMIS.
As part of the settlement, JPMorgan entered in to a Deferred
Prosecution Agreement (DPA) with the U.S. Attorney's Office for
the Southern District of New York, under which the U.S. Attorney
will defer any prosecution of JPMorgan for a two-year period.
Hence, the company agreed to pay $1.7 billion to the government
as a non-tax-deductible payment.
Additionally, under the terms of DPA, JPMorgan admitted the
allegations leveled against it, namely its failure to maintain a
proper anti-money laundering program. Further, the company
violated the Bank Secrecy Act as it did not file a suspicious
activity report (SAR) in the U.S. in Oct 2008 with respect to
Further, the Financial Crimes Enforcement Network slapped
JPMorgan with a penalty of $461 million for not detecting and
reporting suspicious transactions related to BLMIS. However, this
amount is not required to be paid as the company is already
making similar payments to the U.S. government.
Moreover, JPMorgan will pay $350 million as Civil Money Penalty
to the Office of the Comptroller of the Currency (OCC) in
connection with various Bank Secrecy Act/Anti-Money Laundering
Separately, JPMorgan will pay $325 million to the trustee
appointed by the court for BLMIS. This will absolve the company
of all claims that could crop up from transfers received directly
or indirectly from BLMIS. Also, the company will make payments of
$218 million to the class action plaintiffs for exchange for a
release of all damages claims related to BLMIS. Both these
settlement amounts (subject to court approvals) will be
distributed to BLMIS fraud victims.
Though significantly reserved to meet the financial terms of the
settlement, JPMorgan will likely be adding $400 million (pre-tax)
of litigation reserve when it announces the fourth quarter
results on Jan 14. Notably, the settlement will lower the
company's fourth-quarter net income by $850 million as the
settlement amount is non-tax-deductible.
Notably, JPMorgan had set aside nearly $9 billion to cover legal
costs in the third quarter. This had led the company to report a
rare loss 17 cents per share in the said quarter.
Despite having settled the Madoff case, we believe that
JPMorgan's run-in with regulators and other investigation
agencies will likely continue in the near term. The company
continues to face roughly eight government probes. Hence, higher
litigation costs continue to weigh on the company's performance,
With the announcement of this settlement, the Madoff trustee will
be recovering more than $10 billion or 59% of the total amount
lost, for victims. However, the trustee is still pursuing claims
worth roughly $3.5 billion from
HSBC Holdings Plc
) and UniCredit SpA, all of which have been accused of benefiting
from the Madoff fraud.
Currently, JPMorgan carries a Zacks Rank #3 (Hold). A
better-ranked finance stock worth considering is
Bank of America Corp.
) with a Zacks Rank #2 (Buy).
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