JPMorgan Chase & Co. has 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 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 Thursday.
The Justice Department and the SEC have been investigating for more than four years the ways that 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 and Bank of America Corp.
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.
The settlement is 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 an Alabama county 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.
While competitive bidding is meant to ensure that local governments get market rates on their investments, prosecutors say bankers and brokers carved up the market among themselves. Regulators say 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, including California.
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 subjects of the Justice Department probe, according to employment records filed with regulators.
Source: San Francisco Chronicle