The Corporation Made Me Do It

January 8, 2014 at 8:30 am Leave a comment

This country’s ability and/or willingness to properly regulate the financial institutions that own it hit a new low point yesterday, and once again it is credit unions and true community banks that are left holding the bag.

Yesterday, the United States Attorney for the Southern District of New York settled charges against JP Morgan Chase for its systematic and decades long violation of the Bank Secrecy Act, violations that were crucial to the Bernard Madoff Ponzi scheme, by imposing a $1.7 billion fine and entering into a “deferred prosecution” agreement against the corporation. Ostensibly, these are tough penalties, but there is much less here than meets the eye.

First, let’s not kid ourselves. If any credit union did what JP Morgan did to facilitate the Madoff Ponzi scheme since 1994 it would be out of business, we’d all be reviewing a scathing report from the NCUA’s inspector General, and preparing testimony for appearances before Congress. In contrast, for a company that generates a little more than $20 billion a quarter with a healthy stock valuation, the penalty amounts to little more than the nettlesome cost of doing business.

Won’t a penalty like this embarrass the corporation to clean up its own house? I’m joking, of course. I used to be a big Jaime Dimon fan but the fact that he still has a job this morning speaks volumes about his character and the deterioration of corporate board rooms that are willing to excuse any conduct no matter how shameful and incompetent so long as the money keeps rolling in. These guys make A-Rod look like a good corporate citizen.

The only thing that would really change JP Morgan’s conduct is the spectre of huge class action lawsuits and specific individuals going to jail for choosing to violate the law. The bank, of course, knows this, which is why one of the most comical quotes I read this morning from a JP Morgan spokesman was that “Our senior people were trying to do the right thing and acted in good faith at all times.” The spokesman went on to acknowledge in an example of classic understatement: “We recognize we could have done a better job of pulling together various pieces of information. . .” (NYT article linked above). In other words, our valued employees may be incompetent, but my god they’re not knowingly incompetent.

Why is the distinction so important to JP Morgan? Because by admitting violations of the Bank Secrecy Act, the bank does not expose itself to increased liability. The courts have consistently held that the BSA wasn’t designed to give individuals the right to sue for its violation. This means that for the individual who lost his or her life savings after investing money in the Madoff Ponzi scheme, JP Morgan’s acknowledgement yesterday amounts to little more than a “my bad.”

What it’s really concerned about are civil fraud suits which would open it up to third party liability. But fraud against banks related to the actions of an individual who opens up an account is and should be extremely difficult to prove. Very generally speaking, a Madoff victim seeking to sue JP Morgan will not only have to show that the bank knew that a fraud was being perpetrated, but that the bank was actively engaged in carrying it out.

This is why most suits against banks involved in previous Ponzi schemes have been dismissed. For example, in one case brought against Bank of America in federal court in New York by victims of a Ponzi scheme alleging fraud by the bank, the case was dismissed even though the bank opened up a one-peson branch office to accomodate the Ponzi scheme operator. See In Re Agape litigation, 681 F. Supp. 2d 352 (2010). Can anything be done about this and should credit unions really care?

I think the answer to both questions is a resounding yes, if only because we want our kids to grow up in a world where they play to win but play within the rules. I’ll have more on this in a future blog.
. . . . .

CFPB Director Richard Cordray gave a great speech stressing that credit unions should not change their underwriting practices as a result of the new qualified mortgage rules. I would seriously suggest printing out a copy of it to save for the renegade examiner, you know he’s out there, who doesn’t get this point.

Entry filed under: Compliance, Legal Watch. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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