JPMorgan Chase will pay $228 million to settle charges that the bank’s securities division “rigged the market for municipal bond derivatives.” State and federal regulators announced the settlement last month. The Securities and Exchange Commission and state Attorneys General, including Alabama’s Luther Strange, accused the company’s JPMorgan Securities unit of anti-competitive and fraudulent conduct in reinvestment transactions linked to municipal bonds. According to the SEC, JPMorgan Securities reaped millions of dollars in ill-gotten gains by manipulating the bidding process for securities that state and local governments use to reinvest proceeds from the sale of municipal bonds.
The SEC alleges that JPMorgan Securities entered into “secret agreements” with bidding agents to obtain information on rival bids, a practice known as “last looks.” Robert Khuzami, the SEC’s top enforcement officer, had this to say about JPMorgan Chase’s conduct: “Municipal issuers and investors didn’t stand a chance against the fraudulent strategies JPMS and others used to guarantee profits.”
The charges covered at least 93 transactions in 31 states from 1997 through 2005, the SEC said. Under the settlement, JPMorgan will return about $51.2 million to municipalities and other borrowers. It will also pay $177 million to settle “parallel charges” brought by other federal and state agencies. In a statement, JPMorgan put the blame on “certain former employees on the municipal derivatives desk.” The company said that desk was closed in 2006.
The SEC also barred James Hertz, a vice president at JPMorgan Securities, from operating in the municipal bond business and other financial industries. Hertz, who pleaded guilty to fraud in connection with the municipal bond bidding process, had been cooperating with investigators. This settlement stems from an ongoing investigation into the most interesting world of municipal bond trading. While it wasn’t immediately known how much each state would be paid since the fund to issue repayments has yet to be set up. Alabama Attorney General Luther Strange had this to say about the settlement:
I am pleased that this settlement will make compensation available to Alabama entities that were harmed. I appreciate the leadership and diligent work of those involved and commend our Antitrust Chief James Steinwinder for leading Alabama’s four -year investigation.
In April 2008, the states began investigating allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market. Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed, or to hedge interest-rate risk. The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at JPMC and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids and submission of fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.
Regardless of the means used to carry out the various schemes, the objective was to enrich the financial institution and/or the broker at the expense of the issuer – and ultimately taxpayers – depriving the issuer of a competitive, transparent marketplace. As a result of such wrongful conduct, state, city, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have otherwise.
Similar settlements have already been reached with Bank of America in December of 2010 and with UBS-AG in March of 2011. The SEC brought similar charges last year against Bank of America Securities and UBS Financial Services. Both firms settled. For JPMorgan, it was the second time in as many months that the bank settled fraud charges brought by the SEC. In June, the New York-based bank paid $154 million in connection with charges it misled investors in the sale of mortgage-backed securities during the housing bubble.
Source: CNN and WSFA
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