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US stock market daily report (December 12, 2013, Thursday)
At the five-year anniversary of the arrest of Bernard Madoff - BLMIS, Bernard L. Madoff Investment Securities - for his massive Ponzi scheme, JPMorgan Chase & Co. (JPM-NYSE) faces a $2 billion settlement in a criminal case tied to Madoff. Madoff is currently serving 150 years in prison for bilking clients out of billions of dollars that fed his exuberantly lavish lifestyle. Federal authorities are charging JPM with turning a 'blind eye' to Madoff as the firm never questioned his quarterly reports and failed to perform “even minimal due diligence” about the cash withdrawals and deposits in this vast account. Reportedly, JPMorgan will not be required to plead guilty as part of the deal, expected to be finalized by the end 2013. U.S. Attorney’s office in Southern District of New York, tried to force JPM to “plead guilty to a criminal violation of the Bank Secrecy Act.”
For seven years, JPMorgan failed to report a huge cache of checks going back and forth between Madoff’s Investment Account 703 and Bank Customer Number One, belonging to now deceased real estate developer Norman Levy, to neither the U.S. Treasury or Federal Reserve. JPMorgan Chase operations involved in arranging for feeder funds to invest in Madoff, providing credit to BLMIS, responsible for managing Madoff's account and to structure its own investments involving Madoff included Equity Exotics Hybrids Desk, the Broker-Dealer Group under the Financial Institutions Group and Equity Derivatives Group.
Michael Cembalest, Chief Investment Officer of JP Morgan Global Wealth, part of JP Morgan’s Private Bank, refused to do business with Madoff. A year after the Madoff scandal broke, Cembalest sent an email to all clients of the Private Bank, explaining his reasoning for not investing with Madoff. Cembalest reasons included that, Madoff's staff had “never been able to reverse engineer how [Madoff] made money and because BLMIS did not satisfy JP Morgan's requirement for administrative oversight.” Other 'red flags' from Cembalest included that his due diligence team were not allowed to meet Madoff and discuss his investment strategy. During a 17-year period of intensely sharp movements in the stock market, Cembalest could not believe that the volatility of Madoff’s fund was only 2.5%. Since 1990, Cembalest found no good explanation of how Madoff could have lost money in only 2 of 214 rolling quarterly periods.
Richard Casa, former client supervisor in broker-dealer operation for JP Morgan, received quarterly reports from BLMIS but admitted he didn’t “know what (Madoff’s) checking account was used for” nor did Casa’s department do “even minimal due diligence” on Madoff’s 3-man auditing firm in upstate New York from 2001 until 2006. Neither Casa, nor any senior executive or legal counsel inside or outside the bank cared to explore the following inordinately suspicious exchange of extraordinary sums of money between two clients of the same bank.
No questions were asked by JP Morgan when hundreds of checks in the same amounts in excess of $986,000 each were handed over by Customer Number One, Norman Levy, to the 703 account of Bernie Madoff’s security firm.
Madoff’s right-hand executive Frank DePascali told investigators that the Ponzi scheme had been going since at least the 1980's making way that Madoff’s claim that he was a legitimate investment manager until the early 1990s, is far from the truth.
As part of the deal, JP Morgan will enter what's known as a deferred prosecution agreement, where everybody will agree that the biggest U.S. bank broke criminal laws and prosecutors plan to do nothing about it, as long as the bank keeps its nose clean. JPMorgan maintains it innocence of any wrongdoing and said their employees acted in good faith with Madoff's accounts.
GLG Partners $9 Million Settlement
GLG Partners, London-based hedge fund owned by Man Group, has been charged by the Securities and Exchange Commission on Thursday for internal controls failures for a settlement of $9 million. The fund is accused of the controls leading to the overvaluation of a fund's assets and inflating fee revenue. According to the SEC, despite GLG receiving information bringing valuation into question, GLG overvalued a fund's 25% private equity stack in an emerging markets coal mining company. Antonia Chion, an associate director in the SEC's Division of Enforcement said, "Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated."
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