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Wave of Penalties Hit JPMorgan Chase With $920 Million in Fines

Joe Mont | September 19, 2013

Regulator in the United States and Britain have hit banking giant JPMorgan Chase & Co. with a series of sanctions that will total more than $920 million.

The Federal Reserve Board on Thursday morning announced that JPMorgan will pay a $200 million penalty for deficiencies in the oversight, management, and controls governing its Chief Investment Office (CIO). The Office of the Comptroller of the Currency will also assess a consent civil money penalty of $300 million and the Securities and Exchange Commission will issue an enforcement action that includes a $200 million penalty. The Financial Conduct Authority of the U.K. hit the bank with a $220 million fine.

The penalties relate to $6.2 billion of trading losses in 2012. These losses arose as a result of what became known as the “London Whale” trades, and were caused by a high-risk trading strategy in its Synthetic Credit Portfolio and, according to regulators, weak management of that trading and an inadequate response to red flags.

The consent Order of Assessment of a Civil Money Penalty by the Fed cites the failure by JPMorgan to “appropriately inform its board of directors and the Federal Reserve of deficiencies in risk-management systems identified by management.”

The SEC charged JPMorgan Chase & Co. with misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses. It previously charged two former JPMorgan traders with committing fraud to hide the losses. As part of the SEC settlement, the bank will admit to wrongdoing, reflecting a new settlement policy by the SEC to require some defendants to confess to the actions.

According to the SEC's administrative proceeding against JPMorgan, the Sarbanes-Oxley Act of 2002 established requirements for public companies and their management regarding corporate governance and disclosure. Public companies are required to create and maintain internal controls that provide investors with reasonable assurances that their financial statements are reliable, and ensure that senior management shares important information with  internal decision makers such as the board of directors. JPMorgan failed to adhere to these requirements, and consequently misstated its financial results in public filings for the first quarter of 2012.

“JPMorgan's senior management broke a cardinal rule of corporate governance:  inform your board of directors of matters that call into question the truth of what the company is disclosing to investors,” SEC Co-Director of Enforcement George Canellos said in a statement. “Here, at the very moment JPMorgan's management was grappling with how to fix its internal control breakdowns and disclose the full scope of its CIO trading disaster, the bank's Audit Committee was in the dark about the extent of these problems.”

In addition to paying a $200 million penalty, JPMorgan will admit to the facts underlying the SEC's charges, and publicly acknowledging that it violated the federal securities laws.

“At its core, today's case is about transparency and accountability, and JPMorgan's admissions are a key component in that message,” Canellos said. “While not every case will be appropriate for admissions of wrongdoing, the SEC required JPMorgan to admit the facts in the SEC's order – and acknowledge that it broke the law – because JPMorgan's egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.”

In a statement, the UK's Financial Conduct Authority cited “serious failings” at the bank's CIO. “JPMorgan's conduct demonstrated flaws permeating all levels of the firm: from portfolio level right up to senior management,” it wrote.

"This is yet another example of a firm failing to get a proper grip on the risks its business poses to the market. There were basic failings in the operation of fundamental controls over a high risk part of the business,” said Tracey McDermott, its director of enforcement and financial crime.

http://occ.gov/static/enforcement-actions/ea2013-140.pdf

 

In another hit to the bank, the OCC also announced an enforcement action against it for unsafe or unsound practices in connection with non-home loan debt collection litigation practices and a lack of compliance with the Servicemembers Civil Relief Act (SCRA).

The enforcement action requires the bank to provide remediation to affected consumers and to correct deficiencies in practices and procedures related to the preparation and notarization of affidavits and other sworn documents used in debt collection litigation and its SCRA compliance program. The action also directs the bank to improve its debt collection litigation policies and procedures to ensure that affidavits and other sworn documents used in connection with non-home loan debt collection litigation are accurate.

With respect to its SCRA compliance program, the OCC requires the bank to improve iprocedures for determining whether servicemembers are eligible for related benefits, ensuring that the benefits are calculated correctly, and verifying military status prior to seeking or obtaining default judgments on non-home loans.

The OCC's action also directs the bank to conduct a review of all non-home lending debt collection litigation from January 1, 2009 until present, and all non-home lending SCRA accounts at the bank from January 2005 until present, to identify consumers eligible for remediation as a result of the deficiencies and unsafe or unsound practices cited by the OCC. The bank must submit a plan to the OCC detailing how remediation will be made.