JP Morgan Agrees to Settle Fraudulent BID Rigging Charges by SEC for $228 Million
In an announcement on July 7, 2011, the Securities and Exchange Commission (SEC) confirmed that it had reached a settlement with JP Morgan Securities LLC (JPMS) for charges it had made against the firm for fraudulently rigging bids on at least 93 municipal bond deals in 31 states, producing millions of dollars in unlawful gains. The terms of the settlement reflect that JP Morgan will pay $51.2 million in funds that will be paid back to affected municipalities or borrowers and pay another $177 million to settle other state and federal charges. This is the largest settlement achieved by the SEC with any Wall Street firm in its continued focus on what it has claimed to be a nationwide conspiracy to rig the municipal bond bidding process. Bank of America and UBS agreed to large settlements last year, $137 million and $160.2 million, respectively.
In the SEC News Release, Robert Khuzami, the Director of the SEC's Division of Enforcement, said that JP Morgan "improperly won bids by entering into secret arrangements with bidding agents to get an illegal last look at competitors' bids." He went on to say that "municipal issuers and investors didn't stand a chance against the fraudulent strategies JP Morgan and others used to guarantee profits." Elaine Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, said "When powerful financial institutions like JP Morgan conspire with each other to intentionally violate the regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted."
JP Morgan engaged in its fraudulent practices during the time from 1997 through 2005, undermining the competitive bidding process through misrepresentations and omissions resulting in municipalities paying something other than fair value for the reinvestment instruments, according to the SEC allegations. Furthermore, the fraudulent conduct of JP Morgan served to jeopardize the tax exempt status of billions of dollars in municipal securities because the competitive bidding process that establishes the fair market value of the investments was corrupted. Sources have indicated that the employees involved in the fraud are no longer with the firm. The fraudulent activity allowing JP Morgan to win bids would occur when it would get information from the bidding agents about competing bids in a practice known in the industry as "last looks". Other times, the bidding agent would deliberately get non-winning bids from other firms in a practice known in the industry as "set ups".
In the normal course of business, municipalities temporarily invest the proceeds from the sale of municipal securities in municipal reinvestment products until the money is used for whatever its intended purpose is. These funds are required by the Internal Revenue Service (IRS) to be invested at fair market value, which should be determined by a competitive bidding process where bidding agents attempt to find the appropriate investment vehicle for the municipality.
In a settlement that is subject to court approval, JP Morgan has consented to the entry of a final judgment enjoining it from future violations of Section 15(c)(I)(A) of the Securities Exchange Act of 1934 and agreed to pay a penalty of $32.5 million; disgorgement of $11,065,969 and interest of $7,620,380.
JP Morgan Vice President James Hertz pleaded guilty to two counts of conspiracy and one count of wire fraud in December 2010, for his participation in the bid rigging of the investments of the proceeds from tax exempt muni-bonds. He was also barred by the SEC from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating agency and from participating in any penny stock offering.