JPMorgan Will Pay $228 Million to Settle Municipal Bond Bid-Rigging Claims
JPMorgan Chase & Co. agreed to pay $228 million to settle federal charges that the bank conspired to rig the bidding on investment contracts sold to state and local governments, the Securities and Exchange Commission said. Photographer: JB Reed/Bloomberg
By William Selway and Martin Z. Braun - Jul 7, 2011 12:24 PM CT
JPMorgan Chase & Co. (JPM) agreed to pay $228 million to settle federal charges that the bank conspired to rig the bidding on investment contracts sold to state and local governments to boost its profits at taxpayer expense.
JPMorgan, the second-biggest U.S. bank, agreed to pay $177 million to settle federal and state charges and to return $51.2 million to municipal borrowers affected by the conduct, the Securities and Exchange Commission said today in a statement.
The U.S. Justice Department and the SEC for more than four years have been investigating how banks and financial advisers fixed the bidding on investments sold to municipalities. Prosecutors say the conspiracy cost taxpayers by allowing banks to pay governments below-market rates. JPMorgan’s penalties are the largest yet to result from the investigation, which also led to settlements with UBS AG (UBSN) and Bank of America Corp. (BAC)
JPMorgan “improperly won bids by entering into secret arrangements with bidding agents to get an illegal ‘last look’ at competitors’ bids,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement. “Municipal issuers and investors didn’t stand a chance against the fraudulent strategies,” he said.
The Justice Department said the investigation is continuing.
Second Settlement
The settlement marks the second that JPMorgan has reached arising from its municipal derivatives business, which sold the investment contracts as well as interest-rate swaps to state and local governments, before the bank shut it down in 2008. In November 2009, the bank agreed to a $722 million accord with the SEC to end an investigation over its sales of derivatives to Jefferson County, Alabama, where its bankers made undisclosed payments to friends of county commissioners to win business.
JPMorgan “doesn’t tolerate anticompetitive activity or other violations of law,” the bank said in a statement. The employees concealed their conduct from management, the bank said.
“The firm assisted the government agencies in their investigations and is pleased to have resolved this matter with its regulators,” the statement said.
The investment contracts at the center of the charges are purchased by states and cities with proceeds of money raised in the $2.9 trillion municipal debt market, allowing them to earn a return until the cash is needed for public works projects.
Competitive Bidding
While competitive bidding is meant to ensure local governments get market rates on their investments, prosecutors say bankers and brokers carved up the market among themselves. The U.S. says that inflated their earnings at the expense of taxpayers and the Treasury, which taxes investment earnings from tax-exempt bond proceeds.
The SEC said JPMorgan was involved in rigging the bidding on 93 transactions in 31 states.
So far, 18 bankers and advisers have faced criminal charges, nine of whom have pleaded guilty, the Justice Department said. Among them are James Hertz, a former employee of JPMorgan. Hertz is among five former JPMorgan bankers who received letters informing them that they’re targets of the Justice Department probe, according to employment records filed with regulators.
To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
Following Hefty Fine for Allegedly Misleading Pensions, JPMorgan to Pay $228 Million in Muni Case
State and federal regulators have ordered JPMorgan to pay $228 million in a settlement of allegations that the bank's securities division rigged the market for municipal bond derivatives.
Thursday, July 07, 2011 4:13:05 PM
Following JP Morgan's announcement that it would pay millions to settle US regulatory claims that it misled pension funds and other investors, the bank -- the nation's second largest by assets -- is now set to pay $228 million [ http://www.sec.gov/news/press/2011/2011-143.htm ] to settle a bid-rigging case.
According to the US Securities and Exchange Commission (SEC), JP Morgan Securities LLC (JPMS) will pay $228 million to various government regulators and states to settle allegations that it rigged almost 100 transactions involving municipal-bond auctions.
“JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal 'last look' at competitors’ bids,” said Robert Khuzami, Director of the SEC's Division of Enforcement in a statement. “Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits."
Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, “When powerful financial institutions like JPMS conspire with each other to intentionally violate regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted. Rather than playing by the rules, the rules got played.”
The regulator claims that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations, and omissions undermined the competitive bidding process and influenced the prices that municipalities paid for reinvestment products. Furthermore, the regulator claims that the bank's alleged dishonesty deprived certain municipalities of a presumption that the reinvestment instruments had been purchased at fair market value. "JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted," the SEC said in a release.
In a statement, the New York-based bank said it doesn't "tolerate anticompetitive activity or violations of law." Additionally, the bank stated that it aided in the investigation and is working with regulators to "further strengthen its compliance programs in the public finance business."
According to the Wall Street Journal, the bank said its net total in payment is $211.2 million: $51.2 million to the SEC; $50 million to the Internal Revenue Service; $35 million to the Office of the Comptroller of the Currency; and $75 million to the states involved.
This is not the first time the SEC has settled with a financial institution stemming from its ongoing investigation into corruption in the municipal reinvestment industry. The SEC charged Bank of America Securities in December 2010 with securities fraud for similar conduct. In May, the SEC charged UBS Financial Services Inc. (UBS) with securities fraud for fraudulently rigging bids as both a provider and a bidding agent.
To contact the aiCIO editor of this story: Paula Vasan at pvasan@assetinternational.com; 646-308-2742. Follow on Twitter at @ai_CIO
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