Code Brown: Get out of the pool.
Unlike the unfounded narrative that cryptocurrency enables crime, big banks are more than happy to serve unsavory clients if it is lucrative enough for them. The latest example of this is a report that Jeffrey Epstein was apparently using his bank accounts to fund sex trafficking and possibly other crimes.
Follow the Money
The reported death of the Wall Street financier and convicted sex offender Jeffrey Epstein on Saturday morning in a Manhattan prison cell has left a lot of questions. Among these is how exactly he funded his criminal activities, which included sex trafficking of minors to be used by the rich and powerful. One matter that is not a mystery is how Epstein funded his perversions: he used the traditional fiat banking system, with all its extensive KYC and AML regulations.
The alleged suicide of Epstein shouldn’t stop the “Legions of lawyers, bankers and accountants” that have been digging into his financial affairs in recent weeks claims the New York Times. These include officials conducting internal reviews at the two big banks that worked with him for years, JP Morgan Chase and Deutsche Bank. The employees at both of these financial institutions have reportedly been going over their books in a long overdue attempt to understand how they got into business with the convicted criminal and what exactly he was using their banking services for. A person who was briefed on Deutsche Bank’s internal review reportedly said “it appeared that Mr. Epstein was using his accounts for sex trafficking and possibly other illegal activity.”
Further, according to the report, compliance officers and other employees at both JP Morgan Chase and Deutsche Bank had strongly advised their higher-ups to stop doing business with Epstein years before his accounts were finally closed. This was suggested not due to the unpalatable nature of his businesses, but due to the risks associated with him such as hurting the bank’s brand and upsetting regulators. However, former employees at both banks said that “managers and executives rejected that advice and kept doing business with the lucrative client.”
Deutsche Bank Only Recently Closed Epstein’s Accounts
Jeffrey Epstein pleaded guilty and was convicted in court of law of both soliciting a prostitute and of procuring a minor for prostitution back in 2008. He served 13 months in custody with work release, as part of a plea deal, where federal prosecutes had identified 36 girls as young as 14 years old who had been victimized. His case was very hard to miss due to the fact that his name was tied to some of the most famous and powerful people in the world such as Donald Trump, former U.S. President Bill Clinton, the U.K.’s Prince Andrew, former Israeli Prime Minister Ehud Barak, and disgraced Hollywood star Kevin Spacey.
Despite all of this, it isn’t too hard to see why the higher-ups at the big banks didn’t want to let go of his business. While not much is known about the source of his money, Epstein definitely had a lot of it moving around. Among his confirmed assets is a private island in the U.S. Virgin Islands, a Manhattan mansion worth over $77 million, a Palm Beach estate worth over $12 million, additional real-estate properties in New Mexico and Paris, a private jet airplane and no less than 15 cars. Considering this, it isn’t that surprising that Deutsche Bank only cut its ties to Epstein when prosecutors were set to charge him again with operating a sex-trafficking ring of underage girls in June of this year.
JP Morgan Chase worked with Epstein from the late 1990s until 2013 and Deutsche Bank served him from 2013 until June 2019. The latter bank has reportedly already started giving his complete transaction history to investigators while the former awaits receiving similar demands for his financial data from U.S. authorities.
In a statement on Saturday after the alleged suicide, Manhattan U.S. Attorney Geoffrey S. Berman expressed his commitment to the victims to keep the investigation ongoing, despite the demise of the defendant. This means that the public will hopefully get a detailed examination into the criminal banking activities of Epstein in due course.
Big Banks Have a Long History of Enabling Crime
Governments, central banks and international financial institutions have all been pushing a largely unfounded narrative in recent years that cryptocurrencies enable illicit activity. Parroted by the mainstream media, it was used as justification to crack down on exchanges and other crypto service providers with demands for less user privacy or outright bans. In contrast, the established banking system has a long and proven track record of enabling all sorts of crimes, despite its burdensome compliance requirements, and yet erring institutions receive nothing more than a fine equal to a slap on the wrist.
The recent seizure of a cargo ship owned by JP Morgan, which was loaded with 20 tons of cocaine, highlight the involvement of the big banks, albeit unwittingly in this instance, in such activities. Money laundering for drug cartels as well as moving funds for terrorists, arms dealers and dictatorial regimes are among the many misdeeds the banks have been caught red-handed abetting over the years.
What do you think about the big banks that reportedly enabled Jeffrey Epstein to fund his sex trafficking crimes? Share your thoughts in the comments section below.
In a shocking move, Chase Bank announced on Thursday that it was going to be forgiving all outstanding credit card debt from its Canadian customers, according to Yahoo Finance. The bank closed all of its credit card accounts in Canada back in March of 2018.
When the accounts were initially closed, customers were told to continue paying down their debt. Now, they’re being told by the company that their debt is cancelled. CBC talked to some customers who got letters from the bank this week.
Douglas Turner of Coe Hill, Ontario, who still owed about $4,500, said:
“I was sort of over the moon all last night, with a smile on my face. I couldn’t believe it. It’s crazy. This stuff doesn’t happen with credit cards. Credit cards are horror stories.”
Paul Adamson of Dundalk, Ontario said he called his bank after seeing his account was closed because he was concerned about missing a payment. Adamson said:
“I’m honestly still so … flabbergasted about it. It’s surprise fees, extra complications – things like that, definitely, but not loan forgiveness.”
The bank had previously offered rewards cards for both Amazon and Marriott in Canada. Maria Martinez, vice-president of communications for Chase Card Services, said that the bank could have sold the debt, but that forgiving it “was a better decision for all parties, including and most importantly our customers.”
It’ll be interesting to see if the news is as well received by diligent Chase customers in Canada who paid off their cards, as well as American customers who have undoubedtly racked up massive sums of debt with the bank.
A 24 year old university student, Christine Langlois of Montreal, said she hadn’t paid the card in 5 years.
“It’s kind of like I’m being rewarded for my irresponsibility,” she said.
JP Morgan is the custodian responsible for safe keeping physical silver backing the SLV ETF
- John Edmonds, 36, pleaded guilty to one count of commodities fraud and one count of conspiracy to commit wire fraud, price manipulation and spoofing.
- Edmonds, a 13-year J.P. Morgan veteran, said that he learned how to manipulate prices from more senior traders and that his supervisors at the firm knew of his actions.
An ex-J.P. Morgan Chase trader has admitted to manipulating the U.S. markets of an array of precious metals for about seven years — and he has implicated his supervisors at the bank.
John Edmonds, 36, pleaded guilty to one count of commodities fraud and one count each of conspiracy to commit wire fraud, price manipulation and spoofing, according to a Tuesday release from the U.S. Department of Justice. Edmonds spent 13 years at New York-based J.P. Morgan until leaving last year, according to his LinkedIn account.
As part of his plea, Edmonds said that from 2009 through 2015 he conspired with other J.P. Morgan traders to manipulate the prices of gold, silver, platinum and palladium futures contracts on exchanges run by the CME Group. He and others routinely placed orders that were quickly cancelled before the trades were executed, a price-distorting practice known as spoofing.
“For years, John Edmonds engaged in a sophisticated scheme to manipulate the market for precious metals futures contracts for his own gain by placing orders that were never intended to be executed,” Assistant Attorney General Brian Benczkowski said in the release.
Of note for J.P. Morgan, the world’s biggest investment bank by revenue: Edmonds, a relatively junior employee with the title of vice president, said that he learned this practice from more senior traders and that his supervisors at the firm knew of his actions.
Edmonds pleaded guilty under a charging document known as an “information.” Prosecutors routinely use them to charge defendants who have agreed to cooperate with an ongoing investigation of other people or entities.
His sentencing is scheduled for Dec. 19. Edmonds faces up to 30 years in prison but is likely to receive less time than that. The guilty plea was entered under seal Oct. 9 and unsealed on Tuesday.
New York-based J.P. Morgan declined to comment on the case through a spokesman. It was reported earlier by the Financial Times.
J.P. Morgan learned about this case only recently, according to a person with knowledge of the matter. A recent regulatory filing from the bank didn’t make any mention of the issue.
Tracey Dewart helped oversee her father’s brokerage account. A close look at one monthly statement led her to uncover a pattern of unauthorized trades and excessive commissions.CreditCreditSara Naomi Lewkowicz for The New York Times
Tracey Dewart faced a daunting task last summer: moving her 84-year-old mother, Aerielle, from her Manhattan apartment to an assisted living facility in Brooklyn. Her mother, who has Alzheimer’s, didn’t want to go, but there was little choice after she was found wandering near her home on the Upper East Side several times.
It was “physically and emotionally a horrible and overwhelming time,” said Ms. Dewart, 58. “It felt like there had been a death in the family as we had to sort through all of my parents’ belongings.”
And she was about to confront another ordeal — one that could serve as a cautionary tale for anyone who helps manage their parents’ money and, more broadly, anyone who does business with an investment broker.
To help pay for her mother’s care, Ms. Dewart relied on an investment account at J.P. Morgan Securities that her 89-year-old father, Gordon, opened at least eight years ago. The account was already paying expenses for Ms. Dewart’s father — who, after two strokes, was living in the residence that his wife was moving to — and for Ms. Dewart’s younger sister, who lives in a community for adults with developmental disabilities.
Around the time of her mother’s move, Ms. Dewart noticed what looked like unusual activity in the account, which she and her older sister had overseen for about four years. A closer look revealed that it was down $100,000 in a month.
“My own accounts were rallying, so I thought this was strange,” she said.
She notified the firm that something seemed awry. As someone who does research and policy analysis for a living, she also put her own skills to work.
She pored over piles of statements and trade confirmations, built spreadsheets and traded phone calls and emails with the broker who handled the account, Trevor Rahn, his manager and the manager’s manager. She hired a lawyer and worked with a forensic consultant.
After about six months, she learned that the account, worth roughly $1.3 million at the start of 2017, had been charged $128,000 in commissions that year — nearly 10 percent of its value, and about 10 times what many financial planners would charge to manage accounts that size.
In August 2017 alone, Mr. Rahn had sold two-thirds of the portfolio, or about $822,000, and then reinvested most of the proceeds, yielding about $47,600 in commissions, according to monthly financial statements and an analysis by Genesis Forensic Consulting, the firm Ms. Dewart’s lawyer hired.
A statement listed all 344 trades that month as “unsolicited” — meaning, in Wall Street terms, that they were the customer’s idea, not the broker’s. But Ms. Dewart said she had not authorized the transactions and had only discussed a few specific ideas with Mr. Rahn, including possibly selling some Exxon shares if cash was needed.
An August 2017 statement showed that the Dewarts’ portfolio was down about $100,000 in a month and that roughly two-thirds of the stocks in it had been sold in that time.
Something else was unusual. Mr. Rahn was selling stocks in small batches multiple times a day. In April 2017, he sold between 75 and 125 shares of Exxon eight times in one day, rather than all at once, generating commissions on each sale.
“These are not just bad choices,” said Laura Levasseur, the president of Genesis Forensic. “This is frantic trading.”
Ms. Dewart also discovered that the Exxon stock and other investments were being held in a margin account, which lets customers use borrowed shares to make bigger bets, potentially amplifying gains and losses. She said she never approved opening such an account.
“I had implicitly trusted Trevor because my father did,” she said. Her father had first put his investments in Mr. Rahn’s care when the broker was at Deutsche Bank, and had followed him to J.P. Morgan in 2010.
About five months after Ms. Dewart questioned Mr. Rahn’s handling of the account, J.P. Morgan had canceled 681 of the 1,499 transactions for 2017, crediting about $84,000 in commissions, according to Genesis. That left 818 trades and commissions totaling about $44,000 for the year — about 3.8 percent of the account’s value, still triple what many financial planners would charge.
Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks – aware that the next leg lower in commodities is imminent – are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to “assist” energy companies to sell equity, and use the proceeds to take out as much of the banks’ balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be as far away as possible from the carnage. All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally denied accusing us of lying, yet which the WSJ confirmed, confirming the Dallas Fed was openly lying.
This was the punchline:
[Record low] recovery rate explain what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP (debtor in possession) lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.“
And so, one by one the pieces of the puzzle fall into place: banks, well aware that they are facing paltry recoveries in bankruptcy on their secured exposure (and unsecured creditors looking at 10 cents on the dollar), have engineered an oil short squeeze via oil ETFs…
… to push oil prices higher, to unleash the current record equity follow-on offering spree…
… to take advantage of panicked investors some of whom are desperate to cover their shorts, and others who are just as desperate to buy the new equity issued. Those proceeds, however, will not go to organic growth or even to shore liquidity but straight to the bank to refi loan facilities and let banks, currently on the hook, leave silently by the back door. Meanwhile, the new investors have no security claims and zero liens, are at the very bottom of the capital structure, and face near certain wipe outs.
In short, once the current short squeeze is over, expect everyone to start paying far more attention to recovery rates and the true value of “fundamentals.”
Going back to what Lipsky said, “the banks do not want to be there.” So where do they want to be? As far away as possible from the shale carnage when it does hit.
Today, courtesy of The New York Shock Exchange, we present just the case study demonstrating how this takes place in the real world. Here the story of troubled energy company “Lower oil prices for longer” Weatherford, its secured lender JPM, the incestuous relationship between the two, and how the latter can’t wait to get as far from the former as possible, in…
I am on record saying that Weatherford International is so highly-leveraged that it needs equity to stay afloat. With debt/EBITDA at 8x and $1 billion in principal payments coming due over the next year, the oilfield services giant is in dire straits. Weatherford has been in talks with JP Morgan Chase to re-negotiate its revolving credit facility — the only thing keeping the company afloat. However, in a move that shocked the financial markets, JP Morgan led an equity offering that raised $565 million for Weatherford. Based on liquidation value Weatherford is insolvent. The question remains, why would JP Morgan risk its reputation by selling shares in an insolvent company?
According to the prospectus, at Q4 2015 Weatherford had cash of $467 million debt of $7.5 billion. It debt was broken down as follows: [i] revolving credit facility ($967 million), [ii] other short-term loans ($214 million), [iii] current portion of long-term debt of $401 million and [iv] long-term debt of $5.9 billion. JP Morgan is head of a banking syndicate that has the revolving credit facility.
Even in an optimistic scenario I estimate Weatherford’s liquidation value is about $6.7 billion less than its stated book value. The lion’s share of the mark-downs are related to inventory ($1.1B), PP&E ($1.9B), intangibles and non-current assets ($3.5B). The write-offs would reduce Weatherford’s stated book value of $4.4 billion to – $2.2 billion. After the equity offering the liquidation value would rise to -$1.6 billion.
JP Morgan and Morgan Stanley also happen to be lead underwriters on the equity offering. The proceeds from the offering are expected to be used to repay the revolving credit facility.
In effect, JP Morgan is raising equity in a company with questionable prospects and using the funds to repay debt the company owes JP Morgan. The arrangement allows JP Morgan to get its money out prior to lenders subordinated to it get their $401 million payment. That’s smart in a way. What’s the point of having a priority position if you can’t use that leverage to get cashed out first before the ship sinks? The rub is that [i] it might represent a conflict of interest and [ii] would JP Morgan think it would be a good idea to hawk shares in an insolvent company if said insolvent company didn’t owe JP Morgan money?
The answer? JP Morgan doesn’t care how it looks; JP Morgan wants out and is happy to do it while algos and momentum chasing day traders are bidding up the stock because this time oil has finally bottomed… we promise.
So here’s the good news: as a result of this coordinated lender collusion to prop up the energy sector long enough for the affected companies to sell equity and repay secured debt, the squeeze may last a while; as for the bad news: the only reason the squeeze is taking place is because banks are looking to get as far from the shale patch and the companies on it, as possible.
We leave it up to readers to decide which “news” is more relevant to their investing strategy.