Two strikes against JP Morgan

July 7, 2011

Can too-big-to-fail banks be restrained from engaging in fraudulent and manipulative practices? Or should we expect large, global banks to keep breaking the rules over and over again?

Today JP Morgan Securities reached a settlement with 25 state attorneys general and five federal regulators regarding their practice of using “sham bids” in the municipal market. The global bank will pay $211 million to settle federal and state charges, according to Reuters.

The details of the settlement are a little mind-numbing if you don’t follow muniland, but they mirror charges of “sham bids” in the auction-rate securities market that JP Morgan first settled in 2006. After violating that SEC’s “cease and desist” order, the bank had to settle for the second time with the North American Securities Administrators Association (NASAA), the Illinois Securities Department, the Florida Office of Financial Regulation and the New York Office of the Attorney Genera in 2008.

This is from a letter written by then-New York Attorney General Andrew Cuomo and sent to Stephen Cutler, General Counsel of JP Morgan, describing the “sham bids” that JP Morgan used to prop up the auction-rate securities market:

…from August of 2007 up until widespread auctions failures, which occurred in the early part of 2008, the auction rate securities market only continued as a result of broker-dealers placing support bids

JP Morgan Securities, like all broker-dealers, regulates itself for the most part. If transactions are not executed on an exchange, then generally no regulator or third party is monitoring the dealers’ activities. This is the responsibility of the in-house compliance team and the licensed principals (Series 24 and Series 53) who oversee lines of business.

Of course the bank has disclaimed the actions of their former employees who were the cause of today’s $220 million settlement, and little was said in 2008 about the internal manipulation of bidding for auction rate securities. Undoubtedly sharp securities lawyers will find many ways in which these violations don’t represent a pattern of behavior.

The Office of the Comptroller of the Currency (OCC) is the primary regulator of JP Morgan’s banking unit, and in their Formal Agreement with JPM today they said:

Whereas, it is the further goal of the Comptroller and the Bank that the Bank shall establish and maintain policies, procedures, systems, and controls on an enterprise basis to effectively manage all businesses that involve competitive bidding;

The OCC is saying no more sham bids for anything. It’s a high-minded agreement, but who will enforce it? Inside that giant murky bank, who will ensure that markets are not manipulated and investors are provided with full disclosure? Will the securities’ principal responsible (Series 24) for a line of business, or the auditor who sees large unaccounted payments being made outside the firm, or a member of the compliance department sniff out that a market is not being used fairly take action? Or will illegal conduct and/or unsafe or unsound practices have to become so large again that a regulator finally notices and takes action?

Wall Street must earn the confidence of its customers and the public. Flashy marketing and promotional credit-card rates only go so far. Underneath the shiny packaging Wall Street must embrace fair business practices. JP Morgan now has two strikes in muniland. Will there be a third?


DoJ statement

OCC statement


Financial Times

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