So, you think the punishment should fit the revenue rather than the crime? JPM reported Madoff to the SEC in the 90's. They also reported him to the British banking authorities much more recently. The "crime" is actually looking at Madoff's activities and divesting themselves from him.
I have no problem with JPM shorting or otherwise taking advantage of this fraud. Given that the SEC is asleep at the switch, the shorts are the best way to protect the financial system.
JPM reported Madoff to the SEC in the 90's. They also reported him to the British banking authorities much more recently.
Also: the actions for which JPM was recently fined concern primarily the years 2007 and 2008. JPM may have acted differently in the 1990s, but that's practically irrelevant to what happened ten years later -- especially given the extent to which the size, and the number of unsophisticated investors lured into Madoff's scheme (with JPM's help) increased geometrically.
Similarly, whether they reported him to British banking authorities is also of little relevance. U.S. laws concern JPM's obligations to report suspicious activities to the SEC and other domestic agencies -- not the Brits.
It was a UK trading desk at JPM that identified it as suspicious and reported it in the UK. It's pretty blurry about what the reporting requirements should be in such cases.
Should firms be required to report any suspicious activity found by any team in any location to every regulator that covers them ?
(generally the rule at most banks is to report it to the legal team who then figures out who should be notified)
Should firms be required to report any suspicious activity found by any team in any location to every regulator that covers them ?
Don't know about "any activity, any location", but the SEC's position is that JPM failed to report specific activities to U.S. Treasury's enforcement unit (FinCEN), as per the requirements of its charter.
If you need more clarification as this finding, you might want to look into the court documents.
If you believe, say, that Apple has been faking its revenue and profit numbers for the last 10 years, you can go ahead and short them on the expectation that they'll get caught, Tim Cook will go to jail and the stock will tank. In the meantime, the presence of your short will in some small way drive down the price of AAPL, or at least signal to the rest of the market that somebody believes things are not as rosy for the company as the current price indicates.
That's profiting from crime, in a way, but it's all you can do when it's not within your power to subpoena Apple internal memos or what have you.
As I read this article, this is more or less this is what JPM is being punished for doing, because in theory the small exotics group in the UK could have called the US headquarters and inspired them to contact the SEC, which didn't happen.
It's not a very good example, and hardly comparable to the JPM situation, since it was in JPM's power to raise the alarm (and keep raising it when no-one first paid attention).
Your crimes aren't magically washed away because the SEC wasn't doing their job well.
No, the Apple example is excellent. I forget what the name of the blog is but there's an investor who investigates firms for fraud, shorts their stock, then publishes his finding. It's not illegal in the slightest and is a public service.
Now, you seem to think that there should be communication between a trading desk and Madoff's custodian. Any compliance officer would disagree. There is simply too much risk of front running the client's account to allow this (especially when the account is as large as Madoff's).
> No, the Apple example is excellent. I forget what the name of the blog is but there's an investor who investigates firms for fraud, shorts their stock, then publishes his finding. It's not illegal in the slightest and is a public service.
Err... If you're thinking about the handful of self-proclaimed "activist investors" who frequently end up massively short after "investigating" the stocks they abandon, please spend some time reading http://www.deepcapture.com. You'll find their names in rather dubious company -- including Madoff, incidentally -- and associated with mountains of illegal activity.
I've never really looked into shorting, so sorry that this inevitably sounds really dumb, but if a short is public and works as that kind of signal, can it be abused? Say, if a big investment bank shorts a stock, and then advise all their clients to do so, and in some way convince a significant number of others to short that stock. Does it eventually become a sort of self-fulfilling prophecy where the number of shorts can damage confidence so much that they either sell or sell+short themselves and the stock ends up spiralling? If enough people wanted to take down a stock, is there some kind of protection that stops them doing this?
I know generally you can just start selling low or whatever, but shorting would make you a huge profit if this worked while selling low potentially a loss?
Shorting is absolutely open to abuse, especially naked shorting (i.e. you sell the stock without buying it first). Google the CEO of Overstock.com. He had a lot to say about naked shorts being abused. Regular shorts aren't abused as much because the company's dividends have to be paid to the owner by the borrower (i.e. the short) this makes the varying cost of holding a short on a good company high. I also never understood why people lend their stock to shorts. You're just helping them put downward preassure on a position that you're long.
If they are short Madoff, it's in their interest for its value to go to zero - i.e. him getting shut down by law enforcement makes them a lot of money, so their incentives are very much aligned with those of the regulators. (If you're cynical, you might argue that in an ideal world they'd like the rest of the world to remain in the dark for long enough for them to build up a sizeable position first). Conversely, investors would benefit from it finding more investors before being shut down so they could cash out first.
Let's say I had a short equity position in some company. Now, some bad guy comes and murders the CEO of that company, tanking the equity. A crime was committed, and I profited. Did I profit from a crime? Did I do something wrong?
If I know of a criminal conspiracy and don't report it am I a criminal? It sounds unfair, doesn't it? I mean I didn't take part in the conspiracy or the crime...
Does not sound unfair to me, by not reporting it you have taken part in the conspiracy in my mind, that is if you actually believe it is a real conspiracy and not a bunch of talk.
So, you think the punishment should fit the revenue rather than the crime?
It should be whatever the law says it should be.
In an ideal world... it should be in proportion to the pain and suffering caused by JPM's "willfully" (as concluded by investigators) failing to adhere to its legal obligations to report on Madoff's activities, once it became aware of them internally. Perhaps then some, given obvious indifference (on the part those responsible at JPM) to the potential for harm caused to unsophisticated investors while they were busy looking covering their... annual bonuses.
Quoting from yesterday's NYT article[1]:
On two occasions, in 2007 and 2008, JPMorgan’s own computer system raised red flags about Mr. Madoff, according to prosecutors. But both times, prosecutors say, JPMorgan employees “closed the alerts.”
“JP Morgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards,” George Venizelos, a senior F.B.I. official, said in a statement.
The F.B.I. and prosecutors traced the problem to JPMorgan “willfully” failing to create sufficient controls against money laundering. “There was no meaningful effort by the Bank to examine or investigate the Madoff Securities banking relationship,” prosecutors said.
The fact that the SEC was also asleep at the switch does not in any way absolve JPM of its own culpability in this disaster.
Even so, in human terms, the worst of the penalties "suffered" by anyone at JPM is unlikely to begin to compare to the losses suffered by Madoff's non-institutional investors as a result of JPM's actions.
Nobody has a problem with JPM being right; They have a problem with JPM selling wrong while buying right, as that generally suggests negligent advice or fraudulent advice. They can choose, and pay the fine accordingly, like all our citizens.
With the know your customer laws http://en.wikipedia.org/wiki/Know_your_customer it's increasingly the bank's responsibility to do the job of regulators. This is not new. It might be dumb, but it's how the system works(or doesn't work) right now.
KYC is about not doing business with terrorists or other undesirables. Madoff was not one of those. He was running a ponzi scheme but was otherwise an upstanding citizen. No bank would have any reason not to do business with him due to KYC due diligence.
I don't disagree that JPM has a responsibility to share any information they may have about financial fraud. I guess my point is that yeah, the $1.7B fine isn't much to JPM, but at the same time, it seems inline with their degree of negligence.
The basically got fined for not doing the SEC's job.
No, that's not what they were fined for. They were fined for not doing their job, according to the Bank Secrecy Act. Which they agreed to comply with when they decided to become a bank.
You might want to read a couple of news articles about the case, before pulling "facts" out of the air like this.
The SEC's job would have been a lot easier if Madoff had chosen to keep all of his scam's money in an account with the SEC... JPM got to see both sides of the scam and at least one department figured it out and decided to profit on the knowledge.
I thought they settled in order to avoid the felonies they committed by not reporting the suspicious activity? They paid to not go to jail. Obviously, they think $1.7B is cheaper than fighting it with their huge legal team. It's not like the Feds are picking on someone defenseless here.
Revenue is not income. $1.7 bn is a non-trivial amount even for them. Add to that the $13 bn they had to pay on fraudulent mortgage-bonds some weeks ago and things are starting to sum up.
This is the problem. "They" made billions of dollars illegally. Now, "they" are paying back 1.7 billion dollars. The question is- is it still the same "humans" behind the pronoun?
Certainly Madoff is not paying the lifetime of fuck-you money he has blown. At least now he is in jail (or "camp" as he thinks of it).
The rest of "them" wont do a single day in prison.
They paid taxes on the ill-gotten gains, so when the gains are taken away in a judgement, there is no need to pay whatever weird quasi-reverse taxes you are thinking of. If the judgment isn't enough after a tax deduction, then just up the judgement.
Don't complicate the tax code even further making it start taxing losses.
(One fair point might be if they paid capital-gains rates or foreign taxes in Ireland or something on the gains from shorting Madoff and yet could deduct the judgment from full US taxes. I don't think that was the case.)
