JP Morgan/Madoff Case Puts Spotlight on Use of Lawyers as Investigation-Blockers

Whenever a scandal of sufficient magnitude arises at a bank, it’s standard practice to hire an “independent” third party to conduct an investigation and give a report to senior management and the board. For instance, former Comptroller of the Currency Gene Ludwig, now head of Promontory Group, became the go-to person for this sort of report for rogue traders. It’s a great business because you get face time with the top people at the organization and get to charge handsome fees too.

I must confess I’d never focused on the notion that banks would hire outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly (in terms of litigation risk) conduct.* In the US, even though it is being nibbled at around the margins, attorney-client privilege, particularly as relates to business matters, is one of the areas that is still pretty much exempt from disclosure.

An important piece in the New York Times by Ben Protess and Jessica Silver-Greenberg, based on a Freedom of Information Act filing, shows that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury (in this case, the typical “I remember nothing” defense).

The reason this is such a striking charge is that, it comes from two of the most bank friendly parties, the Office of the Comptroller of the Currency and the Treasury Inspector General, to which the OCC escalated its belief that JP Morgan was using counsel to hide misconduct. If you recall Neil Barofsky’s book Bailout, the Treasury Inspector General is considered to be one of the most spineless of all IGs. For something not to pass the smell test with the Treasury IG suggests it was pretty rancid. But they were not in a position to take it further, and the DoJ, which would be the agency that would have to go to the mat with JP Morgan. Cronyism? Reluctance to go mano a mano with a bank that would clearly throw lots of heavyweight law firm firepower at fighting back? Or simply bureaucratic “not invented here”?

Here’s the set-up for the story:

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…

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.”

The New York Times reporters’ key document is the letter from the Department of Justice, in September of last year, rejecting the Treasury IG’s request to revoke attorney-client privilege:

…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.”

There are other issues here. The article notes that disputes between banks and regulators rarely rise to the level where the DoJ is called in to act as a potential enforcer. Given how utterly intransigent JP Morgan has been in its dealings with the OCC (recall how in Senate hearings, they were revealed to have lied repeatedly about their failure during a critical two weeks of the London Whale fiasco, to turn over information they provided routinely, invoking patently false “computers are having trouble” excuses. This is a high-level overview of some of the findings from the Senate report on the London Whale episode:

Management hid the existence and role of the unit within the JP Morgan Chief Investment office that entered into the “whale” trades, the Synthetic Credit Portfolio, from its inception, even as its exposures ballooned, from the OCC

The bank made repeated, knowing misrepresentations about the size of the losses, the severity of the control failures, and the degree of management knowledge to regulators and investors

The contempt for regulators and for the need for timely and adequate disclosure is symptomatic of an out of control environment. Between the beginning of the year and end of April 2012, the SPG breached risk limits 330 times, sometimes even violating bank-wide limits. Yet staff and management regarded them as an inconvenience rather than treating them as shrieking alarms that warranted swift action

JP Morgan managers and risk control officers were aware of and complicit in the mismarking of positions (this is a very big deal in a financial institution).

It is not hard to imagine that the OCC went back and re-examined some recent and open matters with the Morgan bank and came to the conclusion that it had been far less forthcoming with the regulator than was required. And the Madoff affair, which was highly public but at the same time should have implicated only a fairly small number of staffers, would be the sort of cover-up that would be highly offensive after the London Whale losses.

The reporters also stress that the use of attorneys as an information shield for banks is already troublingly widespread:

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.”….

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.

There’s more important, as in troubling material in this important piece. It raises the question as to whether class issues are at work, whether the Department of Justice is unwilling to push back against the assumption that law firms have not crossed the line in the use of attorney-client privilege (these firms are members of a particularly elite club, so the accusation would be perilously close to charging them with an ethical breach).

If nothing else, this pattern shows how banks continue to push back against laws and regulations in ways that even normally supine regulators find unacceptable. That alone should give plenty of cause for pause.

*Perhaps that’s because one of the best bits of forensic work during the crisis was when the Swiss National Bank (Switzerland’s central bank) required UBS to issue a detailed report to as to how they screwed up so badly as to need a bailout. Some UBS people wrote to me later indicating they had been interviewed by outside counsel. However, banking has a special status in Switzerland (saying bad things about banks can land you in jail; I have a colleague who is critical of Swiss banking practices who will not travel to Switzerland for that reason), so the nexus between attorney-client privilege and bank regulator authority may shake out differently there than in the US.

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  1. timotheus

    But note that attorney-client privilege is easily breached when the government wants to impede the defense of Guantánamo prisoners. The Supreme Court just refused to hear a challenge ( from the CCR about NSA surveillance of their communications with defendants. They couldn’t get standing because of the difficulties in proving secret surveillance (though the evidence is pretty compelling), but if you get leaks a la Snowden that confirm it, you’re set up for illegal disclosures. Case should be called US v. Joseph K.

  2. j gibbs

    Nothing new here. Companies have always used lawyers in this way. There really isn’t any other reason to use them except attorney client privilege.

    1. j gibbs

      For those non-lawyers who would like to understand law, I recommend A Frolic of His Own, by William Gaddis. For those who would like to understand anything else, I recommend all of this other books.

      Gaddis characterized the legal profession as a ‘self regulating conspiracy’.

  3. David Mills

    Not quite the operating phrase, but close would be: “… I’ll take the nickel on that counsellor, on that question and every other question ya got.” Ethical breach, please. Ethics now are as quaint as the Geneva conventions, and “Place” Holder won’t do a thing other than provide cover.

  4. washunate

    Yves, this is a really interesting piece.

    “I must confess I’d never focused on the notion that banks would hire outside law firms as a way to put a shield around the questionable activity…”

    I wonder if this sentiment shows the danger of being ‘too close’ to an issue? To be so familiar with the details that it makes it harder to see the big picture trend changes? There could be a whole range of interesting cognitive biases at play there.

    Personally, I have assumed since the 1990s that major financial and energy companies used members of the professional technocratic class (lawyers, accountants, computer scientists, etc.) to shield questionable activity, and I thought that what happened with companies like Enron in the early 2000s pretty much put to pasture any notion otherwise.

    This isn’t unique to corporate governance, either. For example, one of the most corrosive aspects of prisoner abuse in our system is that the government has involved the medical community in overseeing abuse, both monitoring individual cases and developing strategies to maximize the pain, so to speak.

    1. Yves Smith Post author

      Oh, I’m generally well aware of the efforts at limiting the scope of investigation and making narrowly accurate, if misleading disclosures. Look at how every CEO except Jamie Dimon is prepped to the hilt before Congressional hearing or depositions.

      It was the SPECIFIC decision to use lawyers in internal investigations. The one high profile case I was aware of (UBS per footnotes) that wasn’t the case, which is why I haven’t given it much thought.

    2. OMF

      Personally, I have assumed since the 1990s that major financial and energy companies used members of the professional technocratic class (lawyers, accountants, computer scientists, etc.) to shield questionable activity, and I thought that what happened with companies like Enron in the early 2000s pretty much put to pasture any notion otherwise.

      In Ireland, this is referred to as a “Consultancy culture”. You hire a consultant, in any field, to write a report, investigate a situation, all but make a decision, etc, etc. The purpose of the consultant is to dilute both responsibility and accountability, and obfuscate and confuse any possible inquiry into the situation. If matters become tough you “take legal advice”; which translates into hiring a legal “consultant” to give you the advice you want in an effort to intimidate people with a brief from some law firm or the other. It’s an amazingly successful system and one of the principle reason why, 6 years after the worst per capita banking crisis in human history, Ireland has not seen even one person held to account.

      I must admit though, the procedure of hiring lawyers to act on your behalf and then using attorney-client privilege to hide the evidence is a new one on me. Again we have another example of “min-maxing”, amorally bending the rules to the absolute breaking point to the extent that the rule of law itself is undermined.

  5. Oregoncharles

    The question this raises is whether the AG’s office is irretrievably corrupt.

    Obama essentially ran on Wall St. money; and wasn’t Holder a major Wall St. player before he became AG? I seem to remember that being an issue when he was nominated, though the giddiness over Obama’s election was still very strong then.

    More and more, I think our problems with government come down to fairly straightforward financial corruption. Teapot Dome stuff. Payoffs, mostly after office.

    But as the article says, class loyalty is probably a big factor, too. Most politicians are lawyers.

    1. Vatch

      Oh, yeah, Holder worked at the white shoe Washington, D.C., law firm Covington and Burling. Among his clients were Merck and UBS. I’ve often wondered: do those guys really wear white shoes?

    2. Cheyenne

      “Covington and Burling, the firm from which both Attorney General Eric Holder and Associate Attorney General and head of the criminal division Lanny Breuer hail, has as its current clients Goldman Sachs, Bank of America, JP Morgan, Wells Fargo, Citigroup, Deutsche Bank, ING, Morgan Stanley, UBS, and MF Global among others. Other top Justice officials have similar connections through their firms.”

      You really have to wonder how deviously the attorney-client privilege and work product doctrine are being used to protect the guilty. For instance, Goldman’s Timberwolf case was egregious enough to draw a criminal referral from Senators Levin and Grassley to the DOJ, which nevertheless declined to prosecute.

      As it turns out, Breuer had brought in a corporate defense attorney from outside the DOJ–from Breuer and Goldman’s own law firm Covington–to “serv[e] as co-leader of a criminal investigation into Goldman Sachs Group Inc.”

      Breuer and the DOJ then cited “insufficient evidence” as the reason for not prosecuting. Predictably, Breuer and this “co-leader” returned to Covington when it was all said and done (in Breuer’s case, for a $4 million annual paycheck).

      At a minimum, the foregoing facts reek to high heavens and invite questions about whether the Goldman investigation “co-leader” had worked for Goldman during his 1st stint at Covington. More pointedly, was there any “evidence” of wrongdoing by Goldman that was unavailable to the DOJ based on the work product doctrine?

      One can imagine the “we-would-NEVER-stoop-so-low” noises coming from Covington/DOJ in response to any such inquiry, and little else. What a laugh. The fact that such questions can be posed in the first place is absolutely shameful.

      1. j gibbs

        Or, as they say in those NBA commercials, Think Big.

        [Don’t worry kids; even if you can’t run and jump you can still make a career for yourself enabling white collar slime at C&B, or at least one or two of you can]

  6. DolleyMadison

    Karen Pooley, a Pro Se homeowner in Washington state was recently successful in forcing Chase’s lawyers to turn over emails that they considered to be “work product.” She asked for an in camera review by the judge for him to decide if the “work product” was relevant in her case. The emails showed collusion to back date assignments in order to foreclose and the Judge released them, unredacted, to Pooley. I thought that lawyers were “officers of the court” and as such obligated not to hide illegal behavior??

    1. j gibbs

      Emails showing collusion to back date assignments? You mean something like this:

      [“Dear Beatrice, go into the Chase file and Xerox that pile of assignments. Take your bottle of white out and cover up the dates. Type in a new date in each case, no earlier than July 15, 2003, and no later than September 23, 2004. When you finish, Xerox the corrected copies, place the Xeroxes in the file, and throw away the originals. Tx. Stumble and Mumble, Esqs.”]

      1. DolleyMadison

        Pretty much exactly that! They don’t even pretend to follow the law anymore…

  7. allcoppedout

    Lawyer-client privilege is weird. You find notes made by a serial rapist on how he is going to deal with police in any future interrogations when he is arrested again. He claims he was writing these for discussion with his lawyers. Not admissible in evidence then (check the recent London case on Worboys).

    Nick chummy and you’ll soon be telling him his credibility in court will be zilch if he raises something he doesn’t reveal now. You keep any accomplices apart. Now investigate some cops who have just killed someone. They can refuse to be interviewed and ‘talk’ to you through written statements from their lawyers, after colluding with each other. Sticking lawyers between cops (regulators) and the suspects and witnesses is standard crooked form Yves. Sticking hopeless ‘independent’ judges, lawyers and the rest between a complaint and proper scrutiny is common practice from police-care-health issues to the financial elite and politicians.

    Lawyers are so dumb they don’t know what an independent brief really is then? Nothing to do with covering up for rich clients and establishing a long line of such work in the future. Auditors do an independent job at cheap rates totally unconnected with big bucks consultancy then?

    What did JPM know about Madoff? Well what would me and a couple of colleagues known after a bit of third-degree on a couple of computers from his office with a budget of less than a week’s pat for Dimon? Enough to throw away the key, one suspects.

    The lawyers, accountants and regulators are as bent as senior cops who prance off from the Met to work for potentates in the Middle East and call freedom protesters criminals within days of their appointment. The use of lawyers like this is the equivalent of wager of law and straw men in 18th century jurisprudence. Exactly what we’d expect.

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