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JPMorgan Discloses Eight DOJ Probes From Asia to Madoff

By Dawn Kopecki & Hugh Son - Nov 1, 2013 10:00 PM ET
Bloomberg

JPMorgan Chase & Co. (JPM) said that the U.S. Department of Justice is conducting at least eight separate investigations into the bank’s activities, ranging from recruitment in Asia to its relationship with Ponzi scheme operator Bernard Madoff.

The largest U.S. bank disclosed for the first time in a filing yesterday that the Justice Department is examining its energy-trading practices, which were subject to a $410 million civil settlement with the Federal Energy Regulatory Commission in July. Investigations are also focusing on mortgage-bond sales, interest-rate rigging, the credit-derivatives market, and the bank’s trading loss last year, according to the filing.

U.S. Attorney General Eric Holder has said that it’s a priority for his department and for President Barack Obama to hold banks accountable. Chief Executive Officer Jamie Dimon visited Holder in September to try to negotiate a settlement of mortgage-related cases against the bank.

“The scope and breadth of risky practices at JPMorgan are mind-boggling,” said Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University. “Some of these probes are criminal, they’re not even just civil anymore, and I think it’s very telling about the broad risk-taking culture that was allowed under Jamie Dimon.”

Currency Trading

The eight Justice Department investigations disclosed in JPMorgan’s filing compare with one in Citigroup Inc.’s. Citigroup has disclosed two other investigations that weren’t included in the latest filing because there was no material change.

Disclosures don’t always specify whether the Justice Department is involved. For instance, both JPMorgan and Citigroup said they’re cooperating with inquiries into the currency market without saying who’s doing the investigating. The Justice Department is taking a leading role in the global probe into possible manipulation of the $5.3 trillion-a-day foreign-exchange market, a department official said earlier this week.

JPMorgan, whose $2.4 trillion in assets make it the biggest U.S. bank, last month reported its first quarterly loss under Dimon, 57, after taking a $7.2 billion after-tax charge to cover the cost of mounting litigation and regulatory probes.

The bank has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover legal costs. JPMorgan said yesterday it may need as much as $5.7 billion more to cover “reasonably possible” losses in excess of the reserve, even after it added $9.2 billion in pretax cash to its litigation funds in the third quarter.

‘Wrong Message’

JPMorgan’s purchase of Bear Stearns Cos. and some of Washington Mutual Inc.’s assets during the financial crisis have contributed to the bank’s legal costs. American International Group Inc. CEO Robert Benmosche said the tough line taken against JPMorgan fails to account for the role that borrowers, regulators and government played in the crisis and may dissuade companies from making similar purchases in the future.

“No good deed will go unpunished, and I think it’s the wrong message to send, but the politicians want to punish someone here,” Benmosche, 69, said in an interview with Betty Liu on Bloomberg Television yesterday. “We’ve got to stop the rhetoric about ‘We’ve got to get the bad guys,’ because I think most of us were the bad guys.”

Mortgage Settlement

JPMorgan last week agreed to pay $5.1 billion to settle claims from the Federal Housing Finance Agency that the bank misrepresented the quality of mortgage bonds it sold to Fannie Mae and Freddie Mac. That resolved part of a $13 billion settlement the company is seeking with state and federal authorities to close multiple investigations into its mortgage-securities sales practices. The U.S. Attorney’s Office in Sacramento, California, is leading a criminal probe of the bank’s mortgage business.

Authorities in the U.S. and overseas are also looking at the bank’s employment of people referred by clients, potential clients and government officials as well as hiring “of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region,” according to JPMorgan’s filing yesterday.

The U.S. Attorney’s office in Manhattan, run by Preet Bharara, is examining whether JPMorgan violated criminal anti-bribery laws in hiring the children and other relatives of well-connected politicians and clients in hopes of steering business to the firm, a person with knowledge of the investigation said in August. JPMorgan said it was cooperating with the investigations.

Madoff Role

South Korea, Singapore and India are among the locations where hiring practices are being scrutinized, the New York Times reported yesterday, citing unidentified people briefed on the matter. Investigators include authorities in the U.K., it said.
Bharara’s office is also is conducting an investigation into how JPMorgan handled Madoff’s funds and whether it turned a blind eye to his multibillion-dollar fraud, the biggest Ponzi scheme in U.S. history. Bharara is weighing a deferred prosecution agreement or fine for JPMorgan in the Madoff probe, a person familiar with the matter said last week.

JPMorgan disclosed yesterday that Bharara’s office is examining whether the bank manipulated the electricity market. The Federal Bureau of Investigation is looking into JPMorgan’s settlement with the FERC to see if any individuals committed any crimes, a person briefed on the matter said in August.

The office is also conducting an investigation into JPMorgan’s record trading loss last year by Bruno Iksil, who became known as the London whale because of the size of his trading bets.

Libor, CDS

Former JPMorgan trader Julien Grout and his former boss, Javier Martin-Artajo, both of whom are in Europe and worked with Iksil, were indicted on securities fraud charges after being accused of trying to hide some of the more than $6.2 billion in losses in their unit last year. Grout and Martin-Artajo have denied wrongdoing, while Iksil is cooperating in the investigation.

Additionally, JPMorgan is part of an industrywide investigation by the Justice Department and others looking at whether banks in the U.S. and abroad rigged benchmark interest rates tied to the London interbank offered rate, or Libor. The bank is cooperating with a probe of the credit-default swaps market that started in 2009, the company said.

The bank said that it’s also facing a civil investigation into its compliance with the Federal Housing Administration’s direct endorsement program, which streamlines origination of federally insured home loans by banks and other lenders.

To contact the reporters on this story: Dawn Kopecki in New York at [e-mail]; Hugh Son in New York at [e-mail]

To contact the editor responsible for this story: Peter Eichenbaum at [e-mail]
http://www.bloomberg.com/news/2013-11-01/jpmorgan-discloses-eight-doj-probes-from-asia-to-madoff.html