It remains one of Wall Street’s most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff’s Ponzi scheme?
A newly obtained government document explains why — five years after Mr. Madoff’s arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded.
The document, obtained through a Freedom of Information Act request, reveals a behind-the-scenes dispute that tested the limits of JPMorgan’s legal rights and raised alarming yet unsubstantiated accusations of perjury at the bank. More broadly, the document highlights the legal hurdles federal authorities can face when investigating a Wall Street giant.
That dispute, which positioned JPMorgan against the government and ultimately one government agency against another, traced to the point after Mr. Madoff’s arrest in December 2008. Around that time, JPMorgan’s lawyers interviewed dozens of bank employees who potentially crossed paths with Mr. Madoff’s company.
Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, the government document and other records show, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, according to the records, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”
Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers.
But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.
Even after the comptroller’s office referred the issue to the Treasury Department’s inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.”
In other words, if the accusations were true, JPMorgan employees either duped lawyers into covering up wrongdoing, or, worse, the lawyers themselves helped obstruct the investigation.
The accusation, the government document showed, led to a debate in Washington over how far to press JPMorgan when the bank was sure to fight and a judge would be free to set a harmful precedent for future cases.
Those concerns, and skepticism about the Treasury inspector general’s accusations, drove the Justice Department to reject the move to revoke attorney-client privilege. In the government document — a letter to the Treasury inspector general, or O.I.G., dated Sept. 12, 2013 — the civil division ruled that “unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that” the interview notes were “made for the purpose of facilitating a crime or a fraud.”
While the ruling applied to the Madoff case alone, it could have broader implications as regulators weigh the costs of future fights and the likelihood of passing muster with the Justice Department. And despite being an exceptional case — banks and their regulators typically settle disputes over attorney-client privilege without the Justice Department getting involved — the ruling illustrated a persistent tension over the privilege that continues to shape the government’s pursuit of financial fraud.
Even though the Justice Department is loath to undermine the privilege between a bank and its lawyers, a move that could prompt a reprimand from Congress and the courts, it also wants to appear tough on crime after the financial crisis. In the letter to the Treasury Department’s inspector general, the civil division’s leader declared that “I share your commitment to using all available tools to combat financial fraud,” noting that the division had sued Standard & Poor’s and Bank of America over their roles in the crisis.
And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.
“Why hire a lawyer to do an internal investigation? It’s because you get the privileges,” said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. “Otherwise, you’d save a little money and hire a consultant or accountant.”
In a statement, a spokesman for the Treasury Department’s inspector general said the office was “still considering if additional steps are warranted.”
The Justice Department’s civil division, which last year helped reach a record $13 billion settlement over JPMorgan’s sale of questionable mortgage securities, said in the Madoff letter that it stood “ready to work with you to develop an alternative that might better address the relevant regulatory concerns.”
JPMorgan, which served as the primary bank for Mr. Madoff’s company, declined to comment for this article.
In the past, a JPMorgan spokesman, Joe Evangelisti, has noted that the bank poured significant resources into bolstering its controls since Mr. Madoff’s arrest. He also remarked that “we do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme,” which was an “unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.”
The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan’s potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank’s assertion that attorney-client privilege protected certain emails.
Regulators also have pushed for access to handwritten interview notes and other findings that arose from an internal investigation conducted by a bank’s lawyers. While that push raises concerns about undermining the work product doctrine — and some bank lawyers have already reported a growing reluctance to be candid in private correspondence with bank employees — regulators say they are often unsatisfied with only a summary of the lawyers’ findings.
“We remind the banks that we’re your supervisor, you’re not our supervisor,” Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York, said at a recent panel discussion on attorney-client privilege held by Fordham Law School and the Cardozo School of Law.
Mr. Baxter added, however, that “we’re reasonable people.”
There are limits on what regulators can do if a bank balks at a demand for documents. If a fight ensues, the decision to challenge the privilege rests with the Justice Department.
In organized crime and terrorism cases, legal experts say, the Justice Department often exercises the so-called crime-fraud exception to the privilege. To do so, the Justice Department must show facts at the outset “to support a good faith belief by a reasonable person” that a judge’s review of the communications in question might establish that the crime-fraud exception would apply.
The JPMorgan case was not so clear cut. When the inspector general argued for the crime-fraud exception to invalidate the privilege, the Justice Department concluded that the evidence did “not suffice to justify” pursuing that claim.
In the letter outlining its decision, the Justice Department noted that memory lapses among JPMorgan employees “occurred in only a handful of the dozens of interviews conducted” by the comptroller’s office. The interviews, according to the letter, were conducted three-plus years after the events in question occurred. It is unclear why it took the comptroller’s office so long to interview bank employees.
The letter further says that the inspector general “has not identified any evidence affirmatively suggesting that the lapses in memory resulted from perjury,” adding that the “accusation of criminal collaboration depends entirely on speculation.” If the Justice Department were to pursue the subpoena, the letter said, the action would “risk developing negative precedent that could result in harm to the long-term institutional interests of the United States.”
Although the decision limited the view inside JPMorgan, the comptroller’s office and federal prosecutors in Manhattan still penalized the bank for its failure to sound the alarms about Mr. Madoff. The settlements, announced in January, amounted to roughly $2 billion.