Written by Biloxi
Dr. Linus Wilson, finance professor at University of Louisiana at Lafayette, released data of Bernie Madoff's Ponzi scheme and revealed some interesting data on JP Morgan Chase. JPMorgan Chase made over $900 million in pretax profits from the Madoff scam.
Mr. Wilson's paper looked at total Madoff-linked account balances at JPMorgan Chase, account 703, from 1986 to 2008:
The Madoff Ponzi scheme was sitting on a cash hoard in excess of a billion dollars by the 1990s. Yet, much of that money did not stay in the Ponzi account, account 703 at JPMorgan Chase, or make it into the hands of other Madoff investors. For many years, in excess of a billion dollars was missing from the 703 account as money drained out of the eleven other accounts, which received transfers from the Ponzi account.
And here is how it worked:
The Madoff investors put their money into a checking account at JPMorgan Chase since 1986, according to Picard (2011). In this paper, the author estimates the profits generated from that account. Using the data in Harbeck (2011) and the methodology of Davis and Wilson (2011), the paper estimates that the pre-tax profits to JPMorgan Chase from the Ponzi account balances from 1986 to 2008 totaled $907 million if reinvested in the JPMorgan Chase’s stock until February 18, 2011. If a zero percent reinvestment rate is assumed, those pre-tax profits are estimated to be $398 million.
Mr. Wilson concluded based on prior research, that enough 'red flags' existed for JP Morgan Chase to be suspicious of activity in Madoff's transactions and a very size and regularity of Madoff's returns :
Picard (2011) writes:
In addition, JPMC failed to report any of the repetitive transactions, spikes in activity, and unusual check activity in the 703 Account, including the activity between BLMIS and [BLMIS/JPMC Customer 1] in December 2001—suspicious activity constituting approximately $6.8 billion worth of transactions and conducted primarily through checks.
Interesting enough JP Morgan Chase never conducted any serious investigation of the activity in the 703 Account or filed a suspicious activity reports [SAR] with the government under the Bank Secrecy Act or the later Patriot Act.