JP Morgan Chase and Co

Analyst Conflicts of Interest

In April of 2003 J.P. Morgan entered in to an agreement with the Securities and Exchange Commission to settle charges arising from an investigation of research analyst conflicts of interest. The settlement, and settlements with nine other firms, is part of the global settlement that the firms have reached with the SEC, NASD, the NYSE, and the New York State Attorney General. As part of the agreement, J.P. Morgan agreed to pay a total of $80 million- $25 million as a disgorgement, $25 million in penalties, $25 million to provide the firm’s clients with independent research, and $5 million to be used for investor education.

The SEC’s complaint, resolved with the announcement of the settlement, specifically alleged that the J.P. Morgan assured clients that hired the firm for Investment Banking services that the firm’s research operation would cover their stocks. The complaint stated that in pitches for investment banking business, the firm would promise potential clients that it would cover their stocks for a certain period of time (in some cases, 18 months). Some pitches also implicitly suggested that analysts would provide favorable coverage after the investment banking transaction.

Enron

In July of 2003 J.P. Morgan Chase was charged with aiding and abetting Enron Corp in securities fraud by helping to cover up billions of dollars of debt between 1997 and 2001. According to the complaint, J.P. Morgan provided Enron with a series of seven loans amounting to $2.6 billion over four years but the transactions were structured as complex structured finance transactions, called ‘prepays,’ to allow Enron to report the loans as cash from operating activities.

According to the SEC, J.P. Morgan and Enron apparently set up incredibly complex transactions in order to hide the loans. The Commissions 2003 press release announcing the case reads, “The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans from J.P. Morgan Chase to Enron.”

Simultaneous with the filing of the complaint, J.P. Morgan Chase agreed to file a consent and final judgment settling the Commission’s action against it. J.P. Morgan agreed to pay $135 million in disgorgement, penalties, and interest to a court account for distribution to victims of the fraud.

J.P. Morgan Chase was also a major party in the slew of civil litigation that followed Enron’s collapse. In June of 2005, J.P. Morgan reached a $2.2 billion to Enron shareholders to settle a case alleging that J.P. Morgan aided and abetted Enron in deceiving investors. A month later J.P. Morgan reached a $1 billion deal with a group of appointed Enron directors on behalf of the Enron estate to resolve a similar suit alleging that J.P. Morgan had aided and abetted Enron executives in the company’s ultimate collapse.

WorldCom

In March of 2005, J.P. Morgan Chase agreed to pay $2 billion to settle claims asserted against them by shareholders relating to the collapse of WorldCom. The suit, brought by a group of shareholders with New York State Comptroller Alan Hevesi as the lead plaintiff alleged that J.P. Morgan, which underwrote about a third of WorldCom’s 2000 and 2001 offerings, was in part responsible for the company’s actions in defrauding investors by improperly reporting earnings. Initially J.P. Morgan denied any wrongdoing, asserting that even the company’s independent auditors could not uncover the fraud, but after Citigroup settled a similar case for $2.65 billion, J.P. Morgan reentered negotiations. Although J.P. Morgan’s settlement was considerable smaller than CitiGroup it represented a considerably higher percentage of the total possible settlement from the case.

Improper IPO Commissions

In February of 2003, J.P. Morgan Chase agreed to pay a $6 million fine to settle a case with the NASD alleging that the company’s subsidiary, Hambrecht & Quist, had acted improperly in taking oversized trading commissions from investors who bought shares of IPO stock offerings. Apparently, Hambrecht & Quist accepted commissions of as much as 20 times the prevailing rate. According to the NASD, however, the outsized commissions weren’t paid on the IPO transactions. Rather, investors buying IPO shares paid inflated commissions to buy other stocks that were more widely traded.

The firm was fined again for similar behavior in June of 2005. The same subsidiary, Hambrecht & Quist and officers of the firm sold shares in four offerings before the expiration of the three year lockup period. J.P. Morgan agreed to pay a $150,000 fine to settle the case.

In a completely separate instance, J.P. Morgan Securities Inc., a subsidiary of J.P. Morgan Chase & Co. agreed to pay a $25 million civil penalty relating to violations of SEC regulations in the firm’s allocation stock to intuitional customers in IPO’s. The complaint alleged that J.P. Morgan induced customers who received allocations of IPOs to place orders for additional shares in the aftermarket. The complaint also alleges that J.P. Morgan promised allocations of upcoming ‘hot’ IPOs for customers who would accept allocations of ‘cold’ IPOs.