JPMorgan Chase & Co. (JPM) agreed to a $228 million settlement on charges it conspired to rig the bidding on investment contracts sold to state and local governments to boost its profits at taxpayer expense.
The agreement ends investigations of the second-largest U.S. bank by the Justice Department, the Securities and Exchange Commission and the attorneys general of 25 states including the District of Columbia, the Justice Department and SEC said today.
Federal investigators have probed for more than four years how banks and financial advisers fixed bids on investment contracts to let them pay governments below-market rates. JPMorgan’s penalties are the largest yet to result from that investigation, which also led to settlements with UBS AG (UBSN) and Bank of America Corp., the biggest U.S. bank by assets.
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.
Criminal charges have been brought against 18 finance-industry employees in the past two years, nine of whom have pleaded guilty, including James Hertz, a former JPMorgan banker. Hertz is one of five former workers at the bank who received letters informing them that they are targets of the Justice Department probe, according to regulatory filings.
Court documents filed by prosecutors point to wide-ranging collusion by Wall Street banks, insurance companies and advisers hired by public officials to guide their investments. Papers entered in a case against CDR Financial Products Inc., an advisory firm based in Los Angeles, identified more than a dozen banks and insurers as co-conspirators.
The accord marks the second for JPMorgan 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 entered a $722 million accord with the SEC to end a separate investigation over its sales of derivatives to Jefferson County, Alabama, where its bankers made undisclosed payments to friends of county commissioners to win business.
As part of today’s settlement, JPMorgan took responsibility for “illegal, anticompetitive conduct by its former employees,” the Justice Department said. The SEC said the bank neither admitted nor denied claims in the agency’s complaint.
The accord includes $92 million for the states and the district, $35 million for the U.S. Office of the Comptroller of the Currency, $51.2 million for the SEC and $50 million for the Internal Revenue Service. The agreement with the states provides for $17 million of payments in connection with the federal settlement. JPMorgan said the deal will lead to $211.2 million in net payments.
The bank “doesn’t tolerate anticompetitive activity or other violations of law,” JPMorgan said in the statement. “The firm assisted the government agencies in their investigations and is pleased to have resolved this matter with its regulators,” the bank said.
JPMorgan has increased the number of legal and compliance staff in its public-finance division and raised the level of auditing, said Jennifer Zuccarelli, a spokeswoman. The bank also has increased antitrust, ethics and other training, she said.
The New York-based bank rose 76 cents, or 1.9 percent, today on the New York Stock Exchange. The shares have gained 8.3 percent in the past year.
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 bond market, allowing them to earn a return until the cash is needed for public works projects.
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. Federal prosecutors say that inflated their earnings at the expense of taxpayers and the Treasury, which collects levies on investment earnings from tax-exempt bond proceeds.
The investigation is continuing and may result in additional charges and settlements. To settle similar cases, Charlotte, North Carolina-based Bank of America in December agreed to pay $137 million, and Zurich-based UBS agreed to pay $160 million in May.
“We have a pretty full pipeline on post-crisis cases,” SEC Chairman Mary Schapiro said today in an interview. “So I think hopefully we’ll see some more activity.”
JPMorgan’s misconduct ranged from 1997 to 2005, the SEC said. The agency’s charges say bankers there received tips from brokers that enabled them to win deals, or adjust their bids to make them more profitable, and then lied to cover their tracks. The bank also submitted sham offers in auctions that were won by rivals to give the appearance of competitive bidding.
The SEC said at least 11 different bidding agents, who ran the auctions, also participated, and JPMorgan steered work to those firms in return.
The conspiracy spanned at least 93 transactions related to the proceeds of more than $14.3 billion raised by borrowers in 31 states, the SEC said in its complaint. The agency said the trades produced “millions of dollars in ill-gotten gains.”
The settlement will provide cash to municipalities victimized in the scheme.
Among them are the Pennsylvania Intergovernmental Cooperation Authority, which will get about $3.32 million, and Philadelphia, in line for almost $1.38 million; Chicago, which will get about $1.32 million. The Orlando, Florida, airport authority will receive more than $853,700, according to the agreement between JPMorgan and the U.S. Comptroller’s office.
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