The Ponzi Scheme Blog’s JANUARY POLL asked how fines should be calculated for financial institutions engaged in wrongful conduct in Ponzi schemes. While much has been written recently about banks being “too big to jail,” they are clearly not too big to fine. But how do government agencies calculate the dollar amount of the fines they impose when a bank fails to comply with existing regulations?
Bank fines and Ponzi schemes are in the news a lot these days. And some of the dollar amounts are extraordinary. In connection with the Bernard Madoff Ponzi scheme, JP Morgan reached agreements with various governmental agencies and others to pay $2.6 billion in fines and settlements to resolve criminal and civil allegations that it failed to stop Madoff’s Ponzi scheme and that it failed to comply with the Bank Secrecy Act. In a deferred prosecution agreement, JPMorgan agreed that it ignored red flags in the Madoff banking arrangement for about 15 years. JPMorgan will pay $1.7 billion to settle the government’s charges, $350 million to the Office of the Comptroller of the Currency, $325 million to the Madoff trustee, and $218 million to settle class action claims.
So how did the Department of Justice arrive at the figure of $1.7 billion and the OCC arrive at the figure of $350 million? What are the variables that the government considers in assessing fines and what objectives does the government hope to accomplish?
To deter the wrongdoing institution?
To deter financial institutions generally?
To reimburse victims?
In the case of JPMorgan, is $2 billion – a number that seems exorbitant to the non-behemoth bank – sufficient to provide a specific deterrent to JPMorgan? Is that number a general deterrent to the players in the financial industry? While that number would put many banks out of business, did it even make a dent in JPMorgan’s bottom line?
The Ponzi Scheme Blog’s JANUARY POLL asked readers to vote on how to calculate fines in circumstances like these. The choices and responses in terms of percentages were
The percentage of the bank's profits from the scheme?
A percentage of the bank’s annual net profits?
An amount sufficient to pay all victim losses?
For the “Other” category, here are some of the comments received:
The poll results reflect opinions ranging from a hurt-the-bank-financially viewpoint to a compensate-the-victims viewpoint. A look at the facts in the case of JPMorgan’s failures in the Madoff scheme reveal that neither one of those objectives was met. To assist in trying to quantify the impact of the fines in the JPMorgan case, some benchmark numbers are as follows:
These facts reveal that the $2 billion in fines are not at all related to: JPMorgan’s profits; the amount of money that it handled for Madoff; the amount of losses of the victims, or any other relevant data point. Looking at these figures, one is left with the distinct feeling that the $2 billion fine may be of no consequence to JPMorgan at all. Here is what the $2 billion fines failed to do:
If banks are “too big to jail,” why at least can’t we hold them financially responsible in a meaningful and impactful way for their wrongful conduct?
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Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with Hon. Steven Rhodes. The Ponzi Book, recently reviewed by the ABI Journal and Commercial Crime International, is available for purchase at www.lexisnexis.com/ponzibook, and more information about the book can be found at www.theponzibook.com.
Kathy is also the author of is Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams. For more information, or to purchase the book, click here.
Watch Kathy’s interview on The Not So Legal Show.For more information about LexisNexis products and solutions connect with us through our corporate site.
For more information about LexisNexis products and solutions connect with us through our corporate site.