Why Prosecutors Let JPM Skip 'Jail' with $2.6B Settlement

A top federal official on Tuesday defended his decision not to prosecute JPMorgan Chase (JPM) for allegedly facilitating Bernie Madoff's Ponzi scheme, calling a deferred-prosecution agreement and monetary penalty an "appropriate" resolution of the bank's alleged failings.

The country's largest bank on Tuesday agreed to pay roughly $2.6 billion to settle criminal and civil allegations over its role in Madoff's $17 billion fraud. That amount includes $1.7 billion that JPMorgan will pay under a deal with the U.S. Attorney's Office for the Southern District of New York. Under the agreement, JPMorgan admitted the government's charges and accepted responsibility for the lapses; however, the settlement does not hold any individual JPMorgan employees responsible for the failures, and will allow the company to avoid prosecution if it complies with all of the terms of a two-year deferral period.

Preet Bharara, the U.S. Attorney for the Southern District of New York, defended his office's decision to pursue a deferred-prosecution agreement at a press conference on Tuesday, calling the deal "a serious penalty" that was "the appropriate charge against the bank" at this time.

Government officials have spent the past year facing criticisms about their ability or willingness to pursue prosecutions of banks and bankers for misdeeds relating to the financial crisis and its era. Attorney General Eric Holder said a year ago that prosecutors are reluctant to take action against the largest banks, for fear of the impact on the greater economy, though he later claimed that he was not suggesting that big banks are "too big to jail."

As Bharara faced several questions in the same vein on Tuesday, he disputed the contention that JPMorgan was "too big to jail," or that its prominence makes it a difficult target for prosecution. But he acknowledged that the government must consider "potential collateral consequences," including the possibility of layoffs, shareholder losses or even bank failure, when bringing charges against a company of JPMorgan's size.

Instead, the Justice Department has increasingly relied on large monetary penalties and deferred-prosecution agreements, which allow companies to avoid charges by paying fines and agreeing to certain reforms, to resolve investigations of large banks. In 2012, HSBC agreed to pay $1.9 billion over anti-money laundering lapses.

JPMorgan also said Tuesday that it would pay $350 million to the Office of the Comptroller of the Currency and $543 million to cover separate private claims over its role in the Madoff scheme. The $2.6 billion total is the latest but hardly the largest in such settlements for JPMorgan Chase, which has spent more than a year facing government probes and regulatory scrutiny over everything from its debt collections activities and its China hiring practices to its sales of mortgage-backed securities leading up to the financial crisis. In November, the bank agreed to pay $13 billion to settle mortgage-related claims.

In an emailed statement Tuesday, a JPMorgan spokesman acknowledged that "we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time. … We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."

The government charged that JPM suspected that Madoff was running a Ponzi scheme, but did not take the necessary steps to sound the alarm.

"The bank connected the dots when it came to its own profit, but was not so diligent when it came to fulfilling its legal obligations," Bharara said at the press conference.

JPMorgan was the primary bank that Madoff used for his fraud, Bharara said. From 1986 through 2008, approximately $150 billion passed through Madoff's accounts with the bank, none of which was used for securities purchases, Bharara said.

Various JPMorgan executives suspected that Madoff was running a Ponzi scheme, but the company failed to file any Suspicious Activity reports in the U.S., according to the government's charges. Nonetheless, JPMorgan sought to reduce its exposure to the Ponzi scheme, redeeming more than $275 million of its own money in the months before Madoff's scheme collapsed, the government claimed.

The deferred-prosecution agreement did not mention by name Jamie Dimon, the much-scrutinized Chief Executive of JPMorgan Chase, and Bharara declined to comment on the settlement's implications for individual bank executives. Asked whether JPMorgan's recent legal troubles signaled the need for new leadership at the bank, Bharara demurred.

"I have enough trouble doing my own job," he said.