The Securities and Exchange Commission alleged that from 1997 through 2005, the bank manipulated the municipal bond market using information obtained from bidding agents about competing bids, in a practice known as “last looks.” The bank was accused of using “secret arrangements” to set up certain providers to win, either through deliberately submitting losing bids or by having bidding agents obtain losing bids from competitors.
Municipal bonds are typically low-risk investments whose sale proceeds are invested in municipal projects until the bonds are used. The competitive bidding process is used to achieve a fair market value to meet IRS regulations and allow municipalities to claim tax-exempt status for the money.
In its official statement, JPMorgan neither admitted nor denied the charges.
“JP Morgan Chase does not tolerate anticompetitive activity or other violations of law,” the bank said. “The investigations focused on a small desk that was discontinued and on certain employees who are no longer with the firm. These employees concealed their conduct from management.”
Under the terms of the agreement, JPMorgan will pay out the settlement as follows: $50 million to the U.S. Internal Revenue Service; $51.2 million to the SEC; $35 million to the OCC; and $75 million to the offices of the involved State Attorneys General. $129.7 million of the total will be eligible for distribution to the affected municipalities.
The settlement is not expected to impact the bank’s material earnings, according to a statement.
In a related action, the SEC also barred JPMorgan Securities vice president James Hertz from operating in the municipal bond market, after Hertz’s December 6, 2010, guilty plea to two counts of conspiracy and one count of wire fraud in municipal bond investment.
This is the SEC’s third and largest settlement in its ongoing investigation into corruption in the municipal reinvestment industry. In December 2010, regulators reached a $137 million settlement with Bank of America on similar charges of provider misconduct. In May of this year, UBS Financial Services agreed to a $160 million settlement on charges of securities fraud for rigging bids as both a provider and a bidding agent.
See also: “JPMorgan Reaches $211 Million Settlement in State and Federal Muni Bond Bid-Rigging Probe; Plaintiffs Lawyers in Antitrust MDL Already Crying Foul,” AmLaw Litigation Daily, July 2010.