Madoff-related fraud to cost JPMorgan $2.5 billion

NEW YORK — For more than 15 years, there were signs something was amiss with what federal prosecutors in Manhattan call the "703 account" at JPMorgan Chase & Co.

Money was being transferred back and forth for no reason. The account holder was recording double-digit returns on investments that were too good to be true. The bank itself was worried enough about possible fraud to withdraw its own investments from him.

The name on the account was Bernard Madoff and on Tuesday JPMorgan paid a steep price for keeping quiet about its suspicions.

Federal authorities announced the nation's largest bank will add to its other costly financial woes by forfeiting a record $1.7 billion to settle criminal charges alleging it turned a blind eye to the Madoff fraud, plus pay an additional $543 million to settle civil claims by victims. It also will pay another $350 million civil penalty for what the Treasury Department called "critical and widespread deficiencies" in its programs to prevent money laundering and other suspicious activity.

The bank failed to carry out its legal obligations to guard against money laundering while Madoff "built his massive house of cards," George Venizelos, head of the FBI's New York office, said at a news conference.

Madoff banked at JPMorgan through what court papers referred to as the "703 account." In 2008, the bank's London desk circulated a memo describing JPMorgan's inability to validate his trading activity or custody of assets and his "odd choice" of a one-man accounting firm, the government said.

In late October 2008, it filed a suspicious activity report with British officials. In the weeks that followed, JPMorgan withdrew about $300 million of its own money from Madoff feeder funds. The fraud was revealed when Madoff was arrested in December 2008.

"Despite all these alarm bells, JPMorgan never closed or even seriously questioned Madoff's Ponzi-enabling 703 account," said U.S. Attorney Preet Bharara. "On the other hand, when it came to its own money, JPMorgan knew how to connect the dots and take action to protect itself against risk."

In a statement, JPMorgan said it recognized it "could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time."

It added: "We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."

Prosecutors called the $1.7 billion the largest forfeiture by a U.S. bank and the largest Department of Justice penalty for a Bank Secrecy Act violation.

The settlement includes a so-called deferred prosecution agreement that requires the bank to acknowledge failures in its protections against money laundering but also allows it to avoid criminal charges. No individual executives were accused of wrongdoing.

The agreement resolves two felony violations of the Bank Secrecy Act in connection with the bank's relationship with Bernard L. Madoff Investment Securities, the private investment arm of Madoff's former business. The civil penalty was imposed by the Treasury Department's Office of the Comptroller of the Currency.

Criminal charges will be deferred for two years as JPMorgan admits to its conduct, pays the $1.7 billion to a fund established for victims of Madoff's fraud and reforms its anti-money laundering policies, prosecutors said.

A statement of facts included in the agreement describes internal communications at JPMorgan expressing concerns about how Madoff was generating his purported returns. As early as 1998, a JPMorgan fund manager wrote that the returns were "possibly too good to be true" and there were "too many red flags."

In more recent years, executives were disturbed by the fact that Madoff wouldn't let the bank examine his books, the statement of facts says.

"How much do we have in Madoff at the moment?" a bank analyst wrote in a 2008 email. "To be honest, the more I think about it, the more concerned I am."

When Madoff finally revealed to the FBI that his investment advisory business was a Ponzi scheme, fictitious account statements for thousands of clients showed $60 billion in assets. Of the roughly $17.5 billion in principal that was real, most of it was gone.

Since then, a court-appointed trustee has recovered more than $9.78 billion — including a portion of the JPMorgan civil payout — to redistribute to clients that invested directly with Madoff. The $1.7 billion criminal forfeiture and will go to a second victims' pool, already with $2.35 billion, that is processing claims from clients of so-called "feeder funds" that also invested heavily with Madoff.

The JPMorgan settlement is the latest in a series of major deals it has made to resolve its legal troubles. In November, the bank agreed to pay $13 billion over risky mortgage securities it sold before the financial crisis — the largest settlement to date between the Justice Department and a corporation.

The more than $2.5 billion that JPMorgan is paying comes from a company that reported $21.3 billion in net income for 2012. JPMorgan already has set aside $23 billion this year to cover settlement and litigation costs — including the $13 billion.

The settlement of criminal charges "is good, but still inadequate to stop what can only be called a one-bank crime spree," said Dennis Kelleher, the president of Better Markets, a group that advocates strict financial regulation.

"Once again, not a single individual working for JPMorgan Chase has been held accountable. Banks do not commit crimes; bankers do," Kelleher said in a statement. "Until individuals, including executives, are held personally liable, fined and jailed, the crime spree will continue."

Asked why no individual bankers were charged, Bharara said the settlement was the best option under the law.

"Obviously, the statement of facts recites in great detail some of the roles that various individuals played with the overall systemic failure," he said. "But in the interest of justice, you've got to look at every case individually and our view was at this point the obvious charge was against the bank. ... This is a statute directed against institutional failure and institutional deterrence and that's why it was brought the way it was today."

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AP Business Writer Marcy Gordon in Washington contributed to this report.

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Tainted frozen food sickens hundreds in Japan

TOKYO — Hundreds of people fell sick across Japan after eating frozen food that may have been tainted with a pesticide.

Food maker Maruha Nichiro Holdings used full-page ads in major newspapers Wednesday apologizing and warning consumers not to eat any of the tainted food, including pizza, croquettes and pancakes manufactured at a factory in Gunma Prefecture, north of Tokyo.

The company began recalling 6.4 million packages of various frozen foods on Dec. 29, saying it found some were tainted by high levels of malathion, a pesticide.

Maruha has received hundreds of thousands of calls about the problem.

"The products will have a strong smell and eating them may cause vomiting and stomach pain," it said in the notice, which included 51 color photos of the problem products.

The health ministry said it had confirmed 556 people suffering such symptoms after eating those products as of late Tuesday. In a notice on its website, it ordered Maruha Nichiro to recall all potentially affected products and to be forthright in informing the public about the situation.

Estimates of the number of people affected vary. Kyodo News agency said Wednesday that its tally found 909 people sickened after eating the Maruha products. Earlier, the public broadcaster NHK said information from local governments showed 356 people affected.

Both reports said it was unclear if consumption of the tainted products was directly responsible for the illnesses, suggesting a possibility of some public hysteria. The health ministry said it had not detected malathion in nearly three dozen cases tested.

Tokyo-based Maruha Nichiro says it has retrieved about 1.1 million packages subject to the recall so far.

Last week, it issued a formal apology and appealed to consumers not to eat any of the affected products. Police are investigating how the items were contaminated with malathion, reportedly by up to 2.6 million times the allowable limit.

Malathion is a pesticide used in farming and gardening and also to kill fleas on animals and people. At high enough concentrations, it can cause death, according to the U.S. Centers for Disease Control.

There have been no reports of life-threatening illnesses from Maruha's products, but the contamination has further shaken public confidence undermined by various food quality scandals.

Late last year a slew of top-notch hotels and department stores apologized after it was found that some of the items they were selling were actually cheaper substitutes.

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Associated Press writer Yuri Kageyama contributed to this report.

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US Sen. Warren: New mortgage rules will aid buyers

BOSTON — U.S. Sen. Elizabeth Warren is hailing new mortgage rules set to go into effect this week.

Warren said that under the new Consumer Financial Protection Bureau rules, lenders must determine that a borrower has the ability to repay a mortgage before issuing the loan.

The Massachusetts Democrat said the rules will prohibit brokers from being paid by lenders to steer customers into higher-cost loans and strengthen the mortgage market by improving mortgage servicing practices.

In remarks on the Senate floor Tuesday, Warren said the rules — which take effect Friday — will give consumers a better chance to buy and keep homes, and will force mortgage lenders and servicers to compete by offering better rates and customer service, not by "tricking and trapping people."

Warren championed the creation of the bureau after the nation's mortgage-led financial meltdown.

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3 challenges awaiting Yellen as next Fed chairman

Janet Yellen, confirmed Monday evening to succeed Ben Bernanke as chairman of the Federal Reserve, will confront numerous challenges when she begins the job Feb. 1. Here is a look at three of them.

BOND PURCHASES

The Fed announced in December that the job market had strengthened enough for the central bank to reduce the extraordinary stimulus it's given the economy since the Great Recession. The Fed said it would trim its bond purchases from $85 billion a month to $75 billion starting in January. The bond purchases have been intended to keep long-term borrowing costs low to stimulate borrowing and spending.

Economists expect further modest reductions of around $10 billion a month. The bond purchases could be phased out altogether by year's end if the economy keeps improving.

Despite paring its new purchases, the Fed said in December that it would keep reinvesting its bond holdings. The bond purchases have raised its investment portfolio above $4 trillion — four times its size before the financial crisis.

The Fed will need to be careful in navigating the wind-down of its bond purchases. If it moves too fast, it could spook financial markets, sending stock prices plunging and interest rates rising. If it acts too slowly, it could run the risk of creating asset bubbles in areas of the economy from stocks to real estate.

GUIDANCE ON SHORT-TERM RATES

Investors will carefully watch Yellen for any signal that the Fed is preparing to raise its key short-term interest rate, which affects many consumer loans.

The rate has been near zero since December 2008. Last month, the Fed revised its guidance to say it plans to keep that rate ultra-low "well past" the time when the unemployment rate hits 6.5 percent. The rate reached a five-year low of 7 percent in November.

The Fed foresees unemployment falling as low as 6.3 percent this year. Many economists think the first increase in the Fed's short-term rate won't occur before late 2015. But if unemployment falls faster or more slowly than that, Yellen might feel the need to modify the Fed's guidance.

FED INDEPENDENCE

The Fed's efforts to rescue the U.S. economy from the recession and financial crisis have made it a target for criticism. Some Republicans argue that the central bank isn't accountable enough to Congress.

Jeb Hensarling, the Republican chairman of the House Financial Services Committee, plans to examine whether changes should be made to the Fed's operations. Fed supporters worry that Congress could end up weakening the Fed's independence. They argue that its independence is critical to assuring markets that the Fed's actions aren't being swayed by political interests.

Last week, Bernanke criticized legislation that would give the Government Accountability Office the power to expand its audits of the Fed to review decisions on interest rates. The GAO, the auditing arm of Congress, can currently conduct audits of the Fed. But it's barred from investigating interest rate decisions.

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Intel says its processors are now 'conflict-free'

LAS VEGAS — Intel Corp., the world's largest maker of computer processors, says its processors are now free of minerals from mines held by armed groups in the Democratic Republic of the Congo.

It's the first major U.S. technology company to make such a claim about its products. It's the fruit of four years of work by the company to determine the sources of four crucial metals widely used in electronics manufacturing: tantalum, tungsten, tin and gold.

Eastern Congo is rich in minerals, and economic activity other than mining has been disrupted by nearly two decades of fighting between the government, rogue soldiers and different ethnic groups. There's been widespread concern that foreign purchases of minerals from mines held by armed groups are fueling the conflict, though many experts say the minerals are not the root cause of the fighting.

Intel CEO Brian Krzanich made the announcement Monday in a keynote speech ahead of the opening of the International Consumer Electronics Show in Las Vegas.

A U.S. law passed in 2010 requires U.S. public companies to report whether their products contain minerals from rebel-held mines in Congo. Compliance is difficult for many electronics manufacturers, since a single product like a cellphone can contain components from hundreds or thousands of suppliers. Intel relies on relatively few suppliers for its chips.

There's been concern that the law has amounted to a de facto embargo on minerals exports from an area with millions of people living at a subsistence level. Carolyn Duran, manager of Intel's "conflict minerals" program said that Intel still buys minerals from the region, as long as it's comfortable the mines are in good hands.

"We are not intending to leave the region behind," Duran said.

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China caution, US data subdue world stocks

Caution about China's economic prospects and upcoming U.S. economic data kept Asian stock markets subdued Tuesday. European markets were also lackluster.

Investors are awaiting economic events in the U.S. with Federal Reserve minutes due Wednesday and a monthly jobs report on Friday.

Japan's Nikkei 225 closed 0.6 percent down to 15, 814.37 while Hong Kong's Hang Seng added 0.1 percent to 22,712.78. China's Shanghai Composite Index gained 0.1 percent to 2,047.32. Australia's S&P/ASX 200 shed 0.2 percent to 5,317.00 and Southeast Asian markets were mixed.

Confidence was weakened by lackluster services industry activity in the U.S., Wall Street's fall Monday and recent signs of renewed weakness in China's manufacturing.

"China is defiantly in play right now," said Chris Weston, chief market strategist at IG in Melbourne, Australia. "We certainly aren't seeing the sort of flows that suggest the Chinese and Hong Kong markets are going to see double-digit appreciation this year."

In early European trading, the FTSE 100 index of leading British shares rose 0.1 percent to 6,735.29 while Germany's DAX was nearly flat at 9,431.48. France's CAC-40 was down 0.2 percent at 4,217.19.

Futures in New York pointed to a higher opening on Wall Street. Dow Jones futures rose 0.2 percent to 16,396 and S&P 500 futures were up 0.2 percent to 1,825.10.

On Monday, data showed U.S. service companies grew at a steady but slightly slower pace in December. Sales dipped and new orders dropped to a four-year low, according to a report from the Institute for Supply Management. It suggests growth may remain modest in the coming months.

The most closely watched economic report of the week will come on Friday, when the Labor Department is scheduled to release its jobs survey for December. That's going to influence the Fed's decision on how fast to reduce its bond purchases in the coming months. The Fed has been buying $85 billion worth of bonds each month to keep long-term interest rates low to boost borrowing and spending.

In currencies, the euro dropped to $1.3620 from S1.3634 late Monday in New York. The dollar rose to 104.32 yen from 104.20 yen.

Benchmark oil for February delivery was up 29 cents a barrel to $93.72 in electronic trading on the New York Mercantile Exchange. The contract fell 53 cents to close at $93.43 on Monday.

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Targeting individual health

In 2014, expect medicine to get personal.

Doctors and researchers around Boston are working to make drugs and health care delivery more individualized than ever. And patients will play a bigger role both in medical research and in their own health care, experts told the Herald.

"With personalized medicine, we're going to know what drugs work on certain people and what drugs don't work on certain people," said Robert Coughlin, president and chief executive of MassBio, the state's biotech industry group.

"I think you're going to see that for all therapies going forward," he said.

At Brigham and Women's Hospital, researchers in the year ahead will hone in on what's known as precision medicine — decoding genes to identify people at risk of developing diseases and treating them before they get sick.

The hospital is expecting an uptick in the number of patients — sick and healthy — who get their genomes decoded to find out their risk levels for a variety of diseases, said Dr. Christine Seidman, director of the Biomedical Research Institute at Brigham and Women's.

Researchers also plan to spend more time simply talking to patients as they work to develop new, life-saving therapies.

"We've really incorporated patients into the mix," Seidman said. "Having patients be involved and saying, 'I can help 
here' is huge."

Patients also will be expected to play a bigger role in tracking their own health with apps that record exercise and blood pressure. "There's an interest now all of a sudden in activity tracking," said Dr. Joseph Kvedar, director of the Center for Connected Health at Partners HealthCare. "So many of the chronic illnesses — diabetes, high blood pressure — would all be improved if patients were just a little more active every day."

Changes in health care delivery are rippling down to the labs where medical devices are invented. Device makers must make sure their products fit into a health care industry where everything — including patient records — is going digital.

"Medical device developers are looking at ways to make sure the device is accurate but also can support the health care delivery system by storing data," said Tom Sommer, president of the Massachusetts Medical Device Industry Council.

Coughlin said 2014 will shape up to be a healthy year for medical research, with as many as a dozen Massachusetts biotech companies going public. "The fact that Wall Street's coming back is only adding more cash when it's needed," he said.

But as some companies mature and thrive, other researchers are suffering from the loss of a crucial source of funding.

The federal government slashed research dollars last year as part of a round of budget cuts called sequestration.

"There's a great fear right now… of research money drying up," said Kevin O'Sullivan,

president and CEO of Massachusetts Biomedical Initiatives, a biotech incubator in Worcester. "There's such instability in the federal government."

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DPU may generate regs for electric vehicle charging

The state Department of Public Utilities has started investigating the possible regulation of electricity as a motor vehicle fuel.

Though there isn't a huge number of electric vehicles on the road today, the DPU considers their widespread adoption as an integral part of its electric grid modernization efforts. And Gov. Deval Patrick in October signed a multi-state pledge to increase the use of zero-emission vehicles, including electric cars.

"We're driving in that direction in terms of policies," said Ann Berwick, the DPU's chairwoman.

The DPU will look at how electric vehicles get charged — at people's residences, at businesses for a fee, or whether utility companies should be allowed to own charging systems. It also will consider metering policies and rate structures that incentivize off-peak charging for residential customers with electric vehicles.

"If you had a whole lot of electric vehicles charging at once, then you'd have questions about whether the electric grid at the moment can accommodate that," Berwick said. "There are all kinds of questions related to how they charge, when they charge, what they pay for charging and whether they have special rates."

The DPU also will study whether it should regulate a local hotel or mall with a so-called "juice bar," for example, where customers can plug in their electric cars for recharging.

"Should we regulate it differently depending on whether they're charging for the power or not, or whether it's a fee versus a kilowatt-basis charge?" Berwick asked.

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Boeing contract cuts into local labor influence

SEATTLE — A new labor contract that was approved in a close vote by Boeing machinists secures a major airplane contract for the Seattle area, but it also moves workers away from pensions.

National union leaders, the state's governor and the company all hailed Friday contract approval — which defied local union bosses — as a vital boost to the region's economy.

The tight count exposed deep rifts in the once-powerful union, but with plenty of states lining up to give Boeing exactly what it wanted to get work on the 777X, the aerospace giant had a tremendous advantage.

"It shows that even a strong local is vulnerable and has a limited defensibility to slow the tide of concessions that has been going on across the country," said Leon Grunberg, a sociology professor at the University of Puget Sound who co-authored a book, "Turbulence: Boeing and the State of American Workers and Managers."

He added Saturday, "This is happening with a company that's doing very well financially."

Members of the International Association of Machinists and Aerospace Workers approved an eight-year contract extension late Friday by 51 percent, a turnaround from November when the same workers voted down a previous offer by 67 percent.

The passing margin was about 600 votes of about 23,900 counted, according to Wilson Ferguson, president of a local unit of District 751.

Ferguson said Saturday that the vote diminished the local union's power since it conceded some hard-fought benefits they won't be getting back.

Foes of the contract opposed the idea of freezing the machinists' pensions and moving workers to a defined-contribution savings plan.

"The very fact that Boeing was making these demands in the first place just has to be seen as discouraging for average workers," said Jake Rosenfeld, a sociology professor at the University of Washington who has a forthcoming book "What Unions No Longer Do."

"This is a very strong union, and if you have a strong union, being forced into givebacks of this sort ... then you can just imagine how little leverage other workers have when negotiating," he added.

But Richard Gritta, a finance professor at University of Portland, said Boeing needed to gain these concessions to remain competitive in the "dog-eat-dog industry" that has seen Boeing and Airbus trade dominance.

"It's a very tough industry. To gain these concessions from labor is critical," he said Saturday.

Local union officials had urged their 30,000 members to oppose the deal, arguing that the proposal surrendered too much at a time of company profitability. They had opposed taking a vote at all but were overruled by national leaders in the Machinists union.

A number of political leaders, including Washington Gov. Jay Inslee, praised the vote, which supporters said keeps thousands of well-paying jobs in the state and solidifies Boeing's presence in the Seattle area, where the company built its first airplanes nearly a century ago.

Inslee, a Democrat, said the vote secured Washington state's "future as the aerospace capital of the world."

Some local elected officials had said there was no other choice but to vote "yes."

Grunberg, the University of Puget Sound professor, said, "Everybody was scared about Boeing moving this huge new production out of state, so I think there was tremendous anxiety about losing this production."

More than 20 other states moved recently to bid for work on the 777X, an updated version of Boeing's best-selling 777. Boeing has said the 777X is expected to carry as many as 400 passengers and be more fuel efficient than the 777.

U.S. Sen. Patty Murray, D-Wash., on Friday said the decision wasn't an easy one and workers' concerns about income and retirement security were legitimate. But the Democrat also said the agreement guarantees "thousands of good-paying jobs and billions of dollars in economic growth."

Under the terms of the contract extension, Boeing said the 777X and its composite wing will be built in the Puget Sound area by Boeing employees represented by the Machinists union.

Boeing Commercial Airplanes President and CEO Ray Conner said Friday that "the future of Boeing in the Puget Sound region has never looked brighter."

Lynne Dodson, with the Washington State Labor Council, the largest labor group in the state with 450,000 members, didn't see Friday's vote as an indication of declining union influence. "It's an indication of just how far Boeing will go," she said. "It's more a reflection of corporate greed than of union power."

Ferguson, the local union leader, said Saturday morning: "This was a turning point in the labor movement. Pensions were hard-fought battles to get in the first place. Once they're gone, they're gone."

"Their fear and intimidation worked," he added.

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Feds OK Mashpee pact with Mass. on casino

The Mashpee Wampanoags came one step closer yesterday to building a resort casino in Taunton, after federal officials effectively approved the tribe's gaming pact with the state.

The Bureau of Indian Affairs' approval of the agreement, which outlines terms such as how much gaming proceeds will go to the state, follows its rejection of a prior pact.

The Bureau of Indian Affairs continues to review the tribe's application to put Taunton land for the casino into a federal trust. While that approval is expected to be more troublesome, Mashpee tribal chairman Cedric Cromwell said he hopes to start construction this year.

"The tribal state compact represents a very exciting and important historical time," Cromwell said.

But an attorney for KG Urban Enterprises, which is suing the state and the Massachusetts Gaming Commission over the tribe's first rights to build a southeastern Massachusetts casino, yesterday called the state compact "legally irrelevant."

"The notion that the tribe will 'break ground on a casino by the end of 2014' is nothing short of absurd," attorney Jeff Harris said.

KG is undergoing a background check for a New Bedford casino after the commission's decision to open the southeast region's licensing process to commercial applications while the tribe pursues federal approvals.

KG's federal lawsuit seeks to invalidate the state's gaming act, claiming it includes "race-based set-asides" that give tribes an advantage.

"The United States Supreme Court held in 2009 that tribes such as the Mashpee are ineligible as a matter of federal law for new Indian lands," Harris said. "The compact is thus legally irrelevant and is nothing more than a distraction."

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