Institutional Investor Securities Blog

The Police Retirement System of St. Louis is suing JPMorgan Chase (JPM) CEO Jamie Dimon and several other senior bank officers over the “London Whale” scandal. The pension fund, which owns 39,000 of the investment bank, is one of numerous investors seeking compensation. Dimon and the other JPMorgan executives are accused of disregarding the red flags indicating that the London-based operation was engaged in taking large scale risks that ultimately resulted in close to $6 billion in losses last year.

In its derivatives lawsuit, the Police Retirement System of St. Louis contends that the defendants “eviscerated” the risk controls of JPMorgan’s London unit to up profits. Even after the media reported that one of the bank’s traders in London was making big bets (that trader was eventually dubbed the “London Whale”), Dimon downplayed the news to investors. The pension fund contends that the executives and others breached their duties to shareholders by not stopping the risky trades.

In March, US lawmakers sought to understand the multimillion-dollar trading loss. At a hearing before Congress, they questioned past and current JPMorgan executives about the financial scandal. Their interrogation came a day after the release of a damning 300-page Congressional report that blamed the bank’s lax culture while also criticizing the Office of the Comptroller of the Currency for also failing to follow up on warning signs.

The executives tried to defend themselves, saying their attempts to lower risks were countered by traders that purposely undervalued bets to conceal an increase in losses. Among the executives that gave testimony was ex-JPMorgan chief investment office head Ina Drew, whose group was in the middle of the debacle. She too blamed lower-level traders and others, while contending that she had been given inaccurate information. Drew said she didn’t know that traders were upping their bets.

Withering Questions at Senate Hearing on JPMorgan Loss, New York Times, March 15, 2013

JPMorgan hit with new investor lawsuit over "Whale" losses, Reuters, April 15, 2013

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Continue reading "Police Retirement System of St. Louis Also Suing JPMorgan Chase Executives Over “London Whale” Scandal " »

CtW Investment Group has announced plans to file a document with the Securities and Exchange Commission that would press shareholders to vote against reelecting four JPMorgan Chase & Co. (JPM) board of directors: James Crown, Ellen Futter, Laban Jackson, and David Cote. The group, which represents pension funds that together hold approximately 6 million of the financial firm’s shares and is labor organization Change to Win’s advisory arm, also intends to make its request in writing to the shareholders.

CtW believes that these directors can no longer be depended on to deal with oversight failures and blames most of them for poor risk management oversight that they say allowed the trading fiasco to happen. Meantime, JPMorgan is seeking support among its biggest shareholders. It claims that the board isn’t to be blamed for the “London Whale,” which involved its operation in England making risky bets and losing nearly $6 billion in losses.

Meantime, in a report on the global investment banking industry, JPMorgan’s analysts pointed to Goldman Sachs (GS) and Deutsche Bank (DB) as examples of Tier 1 investment banks to stay away from. It described this tier of banks as “un-investable, with their viability in doubt.

JPMorgan’s banking analysts worry that several new, uncoordinated global banking regulation could negatively affect the firm’s future earnings. For example, they expect the average equity return for leading financial firms to drop to 9.6% after 2015.

Also, because of new capital requirements, firms will have to keep more money in reserve in case of possible loss on high-risk trades. Some are worried that a lower investment banking revenue in the wake of the financial crisis will affect financial firms’ bottom lines. How the bonus caps proposed by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act will be put into effect is still not clear.

Some banks have reacted to the regulatory changes that are coming by making their investment banking units smaller and concentrating on areas of the business that are more profitable. However, caution the JPMorgan analysts, shareholders will likely seek higher returns to make up for the greater risks that now exists among the global markets. They believe that banks will have to up their profits to meet shareholder demands, which may require more layoffs, pay cuts, and face calls for offloading high risk trading activities.

If you think your investment losses are due to securities fraud, contact our institutional investment fraud law firm today. We represent both individual and institutional investors, not just in the US, but also clients abroad with securities arbitration claims and lawsuits against firms based domestically. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today to request your free case assessment.

WSJ Blog: Activists Turn Up the Heat on J.P. Morgan's Board, The WSJ, April 16, 2013

US Securities and Exchange Commission

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Dexia SA (DEXB) is suing JP Morgan Chase & Co. (JPM ) for over $1.7 billion. In its mortgage-backed securities lawsuit, the Belgian-French bank contends that the loans underlying the securities that the US bank sold it were riskier than what they were represented to be.

JP Morgan and its companies, Washington Mutual (WM) and Bear Stearns Co., are accused of “egregious” fraud for allegedly making and selling mortgage bonds backed by loans that they knew were “exceptionally bad.” Dexia claims it sustained substantial losses.

According to The New York Times, there are a slew of employee interviews and internal e-mails related to this MBS lawsuit that talk about how the three firms disregarded quality controls and problems—perhaps even concealing the latter—in order to make a profit from these mortgages that were packaged into complex securities. They are accused of seeking to avail of the mortgage-backed securities demand during the housing boom even as doubts began to arise about whether or not these investments were good quality. Court filings report that JPMorgan would get mortgages from lenders that didn’t have stellar records, assigning Washington Mutual and American Home Mortgage a “poor” grade on its “internal ‘due diligence scorecard.’” The loans were then swiftly sold off to investors.

Meantime, Bear Stearns and Washington Mutual are also said to have cut back on quality controls—the latter even reducing due diligence staff by 25% for the supposed purpose of upping profits. One e-mail said that executives who protested these actions were harassed.

Also, per court documents, a 2006 analysis for JP Morgan by a third party to study home loans before they were bundled into investments determined that close to half the sample pool—about 214 loans—were “defective,” meaning that they failed to satisfy underwriting standards. Meantime, considering the size of some mortgages, the incomes of its borrowers were reportedly precariously low, and per another report that year, thousands of borrowers were late on payments. Yet, contend the documents, JP Morgan would on occasion disregard or change these critical assessments while giving certain employees, including bankers that put together the mortgages, the authority to veto or turn a blind eye to these negative reviews. JP Morgan executives at times even allegedly lowered the number of loans thought delinquent or “defective.”

All of these actions were allegedly part of a plan to raise profit. One Washington Mutual employee even revealed in a deposition that making the loan defects known would have been harmful to the financial firm. Also, because some firms did not give an accurate portrayal of their investments, this impacted the way credit ratings agencies would rate the securities.

Since the financial crisis, Dexia has been bailed out twice. Court records show that it sustained $774 million in losses on MBS, which overall cost over $22.5 billion in losses from 2005 and 2007 alone.

Related Web Resources:
E-Mails Imply JPMorgan Knew Some Mortgage Deals Were Bad, The New York TImes, February 6, 2013

JPMorgan Sued by Dexia Over $1.7 Billion in Mortgage-Backed Securities, Bloomberg, January 20, 2012

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Speaking at a panel at the World Economic Forum in Davos, Jamie Dimon, the chief executive officer of JPMorgan Chase (JPM), said that one reason many of the issues from the 2008 financial crisis have yet to be fixed is because new regulations have made things more complex. Dimon said that not only is too much being attempted too quickly, but also he believed that regulators have become too overwhelmed by the rules.

Dimon said that rather improving the system, during the last five years there has been a great deal of placing blame and exchanging misinformation. He did, however, praise the Federal Reserve, which he said saved “the system” by coming to the rescue after Lehman Brothers failed.

“It’s unbelievable that Mr. Jamie Diamond would be complaining so loudly about regulations,” said Institutional Investment Fraud Lawyer William Shepherd. “Among other gambling woes, his company just took a $6 billion loss on one of his traders bets! Look where deregulation of the financial markets got us 5 years ago! After the 1929 debacle, laws were passed to regulate these markets. One outlawed banks and securities firms being under the same umbrella. In fact, this is how Morgan Stanley (MS) was formed, as a forced spinoff of JP Morgan Bank. Lawmakers had decided that banks insured by FDIC, thus the taxpayers, should not gamble in the securities markets. Unfortunately, that law was repealed, and less than 10 years later our financial system collapsed again. Congress should have simply reinstituted the ban on such combined firms but has instead voted out far less protection. Stop your wining Jamie!

If you believe that securities fraud caused you to suffer financial losses, do not hesitate to contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Related Web Resources:
JPMorgan CEO Hits Back at Policymakers, Yahoo.com, January 23, 2013

JPMorgan slashes CEO Dimon's pay on "Whale" trade, Reuters, January 16, 2013

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New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit, Stockbroker Fraud Blog, October 4, 2012

The Office of the Comptroller of the Currency and The Federal Reserve is ordering JPMorgan Chase (JPM) to fix the breakdown that occurred in its risk management that resulted in the “London Whale” trades. These were outsized credit derivatives bets made by a group of traders in the UK that resulted in over $6 billion in losses for the investment bank. Due to the extremity of the some of the positions, prices in the markets became distorted. The “London Whale” is the nickname of one of the traders involved.

According to the newly issued enforcement actions, the internal controls of the bank did not succeed in spotting and preventing specific trading involving credited derivatives that Chief Investment Office Ina Drew conducted and this led to the losses. The OCC says that per investigations that were conducted, there had been certain deficiencies, such as poor risk management procedures and processes, insufficient governance and oversight for proper material risk protection, inadequate control of trade valuation, models that were not properly developed or implemented, and insufficient internal audit processes. Meantime, the Fed pointed to deficiencies of senior management letting the board of directors know about certain issues.

While JPMorgan Chase doesn’t have to pay a fine, there are steps it is going to have to take to enhance its risk management and improve its anti-money laundering procedures. The OCC says that the financial firm’s controls for anti-money laundering have key deficiencies related to the reporting of suspicious activity, the monitoring of transactions, risk assessment, customer due diligence, independent testing, and the proper placement of adequate internal control systems.

Now, JPMorgan has issued its “Whale Report” related to its 2012 CIO losses. The documents look at the complex bets on credit derivatives placed by the financial firm’s chief investment office, which started to create huge losses in early 2012. Among its conclusions:

• The CIO’s execution and judgment, and escalation of issues during 2012’s first quarter were poor.

• The financial firm failed to ensure the CIO’s controls and oversight grew along with the greater complexity and risks affecting the unit.

• CIO Risk Management didn’t have the needed staff and structure to run the portfolio

• Risks limits were lacking in granularity.

• Modifications to VaR, the risk-measurement tool, were flawed.

If you believe you were the victim of derivatives securities fraud, contact our institutional investment fraud law firm today.

Related Web Resources:
Read the JPMorgan Report

JPMorgan Chase's 'Whale' Harpooned by More Regulators, The Street, January 15, 2013

The Office of the Comptroller of the Currency

Federal Reserve

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Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

The London Inter-Bank Offer Rate (LIBOR) manipulation scandal involving Barclays Bank (BCS-P) has now opened up a global probe, as investigators from the United States, Europe, Canada, and Asia try to figure out exactly what happened. While Barclays may have the settled the allegations for $450 million with the UK’s Financial Services Authority, the US Department of Justice, and the Commodity Futures Trading Commission, now a number of other financial firms are under investigation including UBS AG (UBS), JPMorgan Chase (JPM), Deutsche Bank AG, Credit Suisse Group (CS), Citigroup Inc., Bank of Tokyo-Mitsubishi UFJ, HSBC Holdings PLC (HBC-PA), Lloyds Banking Group PLC (LYG), Rabobank Groep NV, Mizuho Financial Group Inc. (MFG), Societe Generale SA, RP Martin Holdings Ltd., Sumitomo Mitsui Banking Corp., and Royal Bank of Scotland PLC (RBS).

In the last few weeks, the accuracy of LIBOR, which is the average borrowing cost when banks in Britain loan money to each other, has come into question in the wake of allegations that Barclays and other big banks have been rigging it by submitting artificially low borrowing estimates. Considering that LIBOR is a benchmark interest rates that affects hundreds of trillions of dollars in financial contracts, including floating-rate mortgages, interest-rate swaps, and corporate loans globally, the fact that this type of financial fudging may be happening on a wide scale basis is disturbing.

“It’s my understanding the total financial paper effected by LIBOR is close to $500 trillion dollars. This is a half-quadrillion dollars if you are wondering about the next step up,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Institutional Investment Fraud Attorney William Shepherd.

Barclays contends that its manipulation of borrowing estimates could not alone have dramatically influenced the final labor rate. The bank claims that it submitted low borrowing costs that were artificial because it suspected that this is what other banks were doing and it didn’t want to look like it was in financial trouble by comparison.

“In the US, these allegations could fall under the Sherman Anti-trust and/or the Clayton Unfair Trade Practices Acts, said Securities Lawyer Shepherd. “The recovery possible under such legislation could reach triple damages, plus legal fees and costs.”

A slew of securities lawsuits, including class actions and regulator complaints, against some of these banks under investigation, are likely. CNN reports that already, attorneys general in Massachusetts, Florida, New York, and Connecticut are investigating the LIBOR rate-setting scandal. There may be a variety of plaintiff types, including municipal governments and investment firms.

“Institutions are usually the subject of such actions, which are also federal crime statutes, but individuals can also be held liable,” said Stockbroker Fraud Attorney Shepherd. “The allegations cover more than just price-fixing or predatory pricing and involve multiple acts of price manipulation among institutions (legally an “enterprise”), such that racketeering (RICO) laws could also apply.”

Banks belonging to the LIBOR panels will likely become defendants of criminal complaints, regulator complaints, and huge class actions. For now, they in turn, have been blaming the central banks and regulators.

States weighing Libor scandal suit, CNN, July 16, 2012

Who Else Is Under Investigation for Libor Manipulation?, The Wall Street Journal, July 9, 2012

The Worst Banking Scandal Yet?, Bloomberg, July 12, 2012

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In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the "JPMorgan loophole" (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase's (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm's loss has likely grown to closer than $6 billion to $7 billion.

Read the Letter by Merkley and Levin

Volcker Rule Resource Center, SIFMA

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Continue reading "Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked" »

According to the Wall Street Journal, during five of the months when JPMorgan Chase’s (JPM) Chief Investment Office made the trades that has led to over $2 billion in losses, the financial firm lacked a treasurer. Also, the executive appointed to head up department’s risk management might not have had the necessary experience to do the job. A few ex- and current employees of the financial firm have alluded to poor decisions in staffing as a reason that bad positions were allowed to go unchecked.

Apparently, until the appointment of Sandie O’Connor as treasurer was announced in March, the last person to hold that position was Joseph Bonocore. He left the financial firm in October 2011, which was before trading losses soared. Prior to leaving, he expressed general worries about risks that were being made by the JPMorgan’s London office, which is where many of the questionable trades originated. (He also had previously served as the investment unit’s chief financial officer for about 11 years.) Now, questions are being raised by those on the outside as to how a bank as big as JPMorgan could go so long without a treasurer.

As for its chief risk officer, Irving Goldman, he is related by marriage to JPMorgan executive Barry Zubrow. Goldman was moved into the post this February, one month after Zubrow was made the bank’s chief of corporate regulatory affairs. Goldman’s background in trading is extensive. He previously worked for Salomon Brothers, Credit Suisse First Boston, and Cantor Fitzgerald (CANTRP), where he also was president of its asset management and debt capital markets divisions. A JPMorgan spokesperson defended Goldman’s professional background, saying it wasn’t uncommon for a risk manager to be heavy on trading experience.

In February, Zubrow, Goldman and now ex-chief investment officer head Ina Drew and former CFO John Wilmot reportedly told Federal Reserve officials that new regulations might impede a banking entity’s ability to properly manage its structural risks. They contended that certain types of trading (including the trading that has led to this major loss) shouldn’t be part of a proposed proprietary trading ban under the Volcker ruler.

Although JPMorgan’s Chief Executive James Dimon had announced $2 billion trading loss, additional losses have continued to accrue by up to $150 million a day since his announcement last week. The losses may eventually exceed $5 billion.

JPMorgan has acknowledged that it employed a strategy that was not only badly designed but also poorly executed. It is conducting its own internal probe in conjunction with outside auditors. Meantime, the US Justice Department and a number of regulators, including the SEC and the Federal Reserve, have opened their own investigations into the losses.

Shepherd Smith Edwards and Kantas, LTD, LLP wants to hear from individual institutional investors affected by JPMorgan Chase’s trading losses, contact our securities fraud attorneys today.

Key Void at Top for J.P. Morgan, The Wall Street Journal, May 17, 2012

JPMorgan Chase Chief Investment Office Played By Different Rules, Huffington Post, May 16, 2012

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JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment office and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust -- Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.” As a result, when the derivate bets faltered “horribly,” the company suffered “billions of dollars in lost capital,” as well as additional losses in the billions for JPMorgan shareholders in terms of market capitalization. The securities fraud lawsuit is seeking unspecified damages for investors.

The second complaint, submitted by plaintiff James Baker, is a shareholder derivative lawsuit. He is an individual investor seeking damages on behalf of JPMorgan Chase from Dimon, Braunstein and members of the bank’s board. In JPMorgan Chase & Co. v James Dimon, Baker accuses the CEO of publicly disputing that any investment safety regulation was warranted on the grounds that JPMorgan of its own accord was “purportedly so careful” with its investments. Baker says the financial firm failed to disclose that the losses were because of a “marked shift” in its “allowable risk model” and the “clandestine conversion” of a company unit, which was supposed to provide a “conservative risk-reduction function,” into one that touted high risk, short-term trading that ended up exposing JPMorgan to huge losses.

Baker who is charging bank officers and directors with waste of corporate assets, breach of fiduciary duty, and unjust enrichment, is seeking unspecified damages from the bank officers and directors. He also wants a court order mandating that JPMorgan install two shareholder representatives on its board, let shareholders vote on proposals regarding enhancing board supervision, and test internal audit and control policies to make sure that they immediately notify management about trading risks that are not acceptable.

If you are an investor that has lost money because of JPMorgan’s $2 Billion trading loss, please contact our securities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

JPMorgan Shareholders Sue Dimon Over $2 Billion Loss, Bloomberg, May 16, 2012

Saratoga Advantage Trust v JPMorgan Chase & Co., Justia.com

JPMorgan Chase & Co. v James Dimon

Dimon: Investment Portfolio is 'Very Conservative’, Bloomberg, April 13, 2012

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In the wake of JPMorgan Chase’s (JPM) announcement that it lost $2 billion in a trading portfolio that is supposed to hedge against the risks that it takes against its own money, the Securities and Exchange Commission, the Federal Bureau of Investigation, the Federal Reserve and other regulators are launching their respective investigations to find out exactly what happened. JPMorgan is the largest bank in the US.

As the financial firm’s stock plummeted nearly 7% in after-hours trading after the announcement, its CEO, Jamie Dimon, attributed the losses to “many errors, sloppiness and bad judgment." He also said that the portfolio, which consisted of derivatives, ended up being “riskier” and not as effective as an economic hedge as the financial firm had previously thought. Also seeing drops in their stocks following JPMorgan’s announcement of its massive trading loss were other banks, including Bank of America (BAC), Morgan Stanley (MS), Citigroup (C) and Goldman Sachs (GS)http://www.securities-fraud-attorneys.com/.

Now, the SEC and other regulators are looking into whether possible civil violations were involved in JPMorgan’s massive loss. The Commission had recently opened a preliminary probe into the financial firm’s public disclosures about its trades and accounting practices. According to The New York Times, questions regarding JP Morgan’s chief investment office, which is in charge of its hedging activities, were raised in April following reports that a trader in London was taking large bets that were “distorting the market.” Dimon, at the time, dismissed worries about the bank’s trading activities.

The FBI is also looking into potential wrongdoing related to the $2 trading loss.

Known for its excellence in trading until now and earning up to $5.4 billion of securities gains last year, JPMorgan’s chief investment office has now seen a reversal of fortune. Per The New York Times, the financial firm’s problems may have begun with its bond portfolio, which was valued at $379 billion in March. Just 30% of the portfolio had been invested in securities that the federal government had guaranteed—a change from 2010 when government guaranteed bonds made up 42% of the portfolio.

Signs of trouble with JPMorgan’s trading strategy started to brew at the end of March when the market went against corporate bonds. Yet during its first-quarter earnings call in mid-April, Dimon did not give any indication that there were problems with the bank’s trading.

Last week, however, Dimon told a different story by announcing the $2 billion trading loss. He said the investment bank’s problems were caused in part by its value-at-risk measure, which underestimated the losses on hedge funds that depended on credit derivatives. Yet were the trades even actual hedges? Banks have been known to perform elaborate trades that at first seemed to be a hedge but eventually become a bad bet.

SEC Opens Review of JP Morgan, The Wall Street Journal, May 11, 2012

F.B.I. Begins Preliminary Inquiry Into JPMorgan, The New York Times, May 15, 2012

JPMorgan Chase Discloses $2 Billion Trading Loss, NPR/AP, May 11, 2012

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Continue reading "JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI" »

Institutional investors that placed their money in over $95B in mortgage-backed securities want the trustees overseeing JP Morgan & Chase. Co.-issued securities to figure out whether certain loans shouldn’t have been included as a result of faulty underwriting. US Bank, Bank of New York Mellon, Wells Fargo & Co., HSBC, and Citibank are the trustees.

PIMCO and BlackRock Inc. are two of the institutional investors requesting the investigation. According to their legal representatives, the group of investors represent over 25% of voting rights on 243 residential mortgage-backed securities. The institutional investors want to know whether mortgages that were not eligible ended up included in the collateral backing the bonds. The investor group is the same one that reached an $8.5 billion securities settlement with Bank of America. (The 22 investors include the Federal Reserve Bank of New York, Black Rock Inc., Goldman Sachs Asset Management, MetLife Inc., and PIMCO). However, the settlement is still pending and has been challenged by other mortgage bondholders.

Related to this current requested probe, JP Morgan and its different arms put out the securities between 2005 and 2007. Included were bonds from Washington Mutual and Bear Stearns. About $450 billion in residential MBS were issued by JP Morgan to investors between 2005 and 2008. Approximately $169 billion of that principal is outstanding.

A lot of the loans were not originated at JP Morgan, but the investment bank and its other entities did buy them. JP Morgan has contented that it should be the originator that should buy back the loans that were part of the securities contract.

According to the New York Times, if investors were to settle with JP Morgan by applying the same loss ratio used in arriving at the Bank of America agreement, this figure would probably hit about $1.9 billion. Meantime, JP Morgan must contend with approximately $31 billion in securities class-action cases.

Because of mortgage-related concerns, beginning in 2010, JP Morgan placed $8.5 billion into its reserves for litigation. At the end of the third quarter, the investment bank’s mortgage repurchase reserves were $3.6 billion.

Meantime, state attorneys generals and the Federal Housing Finance Agency continue to look at how investment banks handled mortgage-backed securities leading up to the housing market. More securities litigation from investors is expected.

Investors target JPMorgan over $95 billion of RMBS, Reuters, December 16, 2011

Mortgage Investors Put J.P. Morgan in Cross Hairs, The Wall Street Journal, December 17, 2011

Bank of America in $8.5 billion settlement, CNN, June 29, 2011

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Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed, Institutional Investor Securities Blog, September 24, 2011

Continue reading "Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities" »

U.S. Bankruptcy Judge Martin Glenn says that MF Global Holdings Inc. can use approximately $21 million in cash collateral from JPMorgan Chase & Co, which is its mortgage lender. In issuing this decision, Glenn overruled customer objections that this money could be part of the $1.2B that has gone missing from their accounts. MF Global and JP Morgan have arrived at an agreement over how the cash will be used.

At the start of MF Global’s bankruptcy, JPMorgan had already consented to let the brokerage firm use $26M. This was per an agreement that would give the investment bank a lien on all MF Global assets.

It was just earlier this month that Glenn ruled that MF Global Inc. clients could recover 72% of what they lost when the broker-dealer filed for bankruptcy. Ruling against objections made by the brokerage firm’s creditors, he approved trustee James Giddens’ request. Per Glenn's decision, MF Global’s clients can receive another $2.2 billion distribution, which lets them get back .72 on the dollar.

While the majority of the transfers were to go out within a few days, some were expected to take up to four weeks. In a separate decision, the Glenn approved transferring approximately 330 MF Global client securities accounts to Perrin, Holden & Davenport Capital Corp. MF Global has already moved approximately 38,000 commodities accounts to other financial firms.

Glen plans to tackle the issue of physical goods distribution, such as silver and gold bars, next month. Clients have complained about not being able to get their share of ownership of such items, which cannot be physically divided. HSBC Holdings Plc (HSBA) has even filed a lawsuit against Giddens. The financial firm is trying to determine whois the owner of the 15 silver bars and five gold bars underlying several Comex contracts between a client and MF Global.

Previous payouts to commodity clients are already at about $2 billion. However, some customers have said they didn’t receive any money from these initial payments.

In other MF Global-related news, CME Group has stopped issuing grants through its primary foundation in the wake of the brokerage firm's bankruptcy filing. The Chicago-based commodities exchange had issued $22 million to Chicago-area schools and charities in the last five years. CME has said that it will continue to support charitable organizations through other corporate foundations and programs.

In November, CME said it would give ex- MF Global customers the $50 million that was held by CME Trust. Originally meant to assist traders, the trust had turned into a primary source of charitable giving for the exchange operator.

Exclusive: CME Trust's charity grants halt on MF failure, Reuters, December 18, 2011

MF Global Wins Permission to Use JPMorgan’s Cash as Judge Suggests Probe, Bloomberg, December 14, 2011

MF Global clients get back 72 cents on the dollar, Bloomberg/Investment News, December 9, 2011

More Blog Posts:
$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

MF Global Shortfall May Be More than $1.2B, Says Trustee, Stockbroker Fraud Blog, November 26, 2011

MF Global Holdings Ltd. Files for Bankruptcy While Its Broker Faces Liquidation and Securities Lawsuit by SIPC, Institutional Investor Securities Blog, October 31, 2011

Continue reading "Bankruptcy Judge Grants MF Global Permission to Use $21M from JPMorgan Chase" »

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

JPMorgan to pay $153.6M to settle fraud charges, Boston Herald, June 21, 2011

Court Tosses Some SEC Claims Against IA Exec Over Role in JPM CDO Deal, BNA Securities Law Daily, October 28, 2011

More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

***This post has been backdated.

Continue reading "Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed" »

The D.C. Circuit Court of Appeal has revived a securities fraud lawsuit filed by bondholders of the now failed Washington Mutual Bank against JP Morgan Chase & Co. (JPM.N). The plaintiffs had accused the investment bank of causing them to suffer financial losses because it purchased the thrift’s assets at a “fire sale” price.

Per the securities complaint, insurers American National Insurance Co., Farm Family Life Insurance Co., American National Property and Casualty Insurance Co., National Western Life Insurance Co., and Farm Family Casualty Insurance Co. are accusing JP Morgan of exerting pressure on the U.S. Federal Deposit Insurance Corp. so it would force the $1.9 billion sale of Washington Mutual. They contend that as a result, what used to be the biggest savings and loan in the country with $307 billion in assets was “drastically undervalued,” which allowed the financial firm to pick out the best assets at the expense of the plaintiffs, whose bond investments lost their value.

The appeals court panel’s decision reverses a federal district judge’s ruling last year dismissing the complaint. The judge had said that the bondholders need to have pursued all administrative revenues before filing their securities fraud lawsuit, which is one of a number of complaints stemming from the FDIC’s seizure of WaMu in 2008. WaMu’s holding company immediately filed for bankruptcy and is still waiting for a judge to grant the permission required to allow it to give creditors $7 billion.

The appeals court’s decision came just one day after the WaMu bankruptcy reorganization plan was challenged by Aurelius Capital Management. The hedge fund said that WaMu was denied access to approximately $4 billion that JP Morgan was improperly holding. Aurelius claims that as a result, this settlement is currently of greater value to JP Morgan than WaMu.

Related Web Resources:
Aurelius withdraws support of WaMu bankruptcy plan, Bloomberg Businessweek/AP, June 23, 2011

Court revives WaMu bondholder suit vs JPMorgan, Reuters, June 24, 2011

American National Insurance Co.

Farm Family Life Insurance Co.

American National Property and Casualty Insurance Co.

National Western Life Insurance Co.

Farm Family Casualty Insurance Co.

More Blog Posts:
JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

National Credit Union Administration Board Files $800M Mortgage-Backed Securities Fraud Lawsuits Against JP Morgan Securities, RBS Securities, and Other Financial Institutions, Institutional Investor Securities, June 23, 2011

Securities Practices of JPMorgan Chase & Goldman Sachs Under Investigation by Federal Investigators, Institutional Investor Securities Blog, May 19, 2011

Continue reading "Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court" »

This week, the National Credit Union Administration Board filed two securities fraud lawsuits accusing a number of financial institutions of misrepresenting the risks involved in the mortgage-securities that they sold to investors. The federal credit union is seeking a combined $800 million.

JP Morgan Securities LLC, Novastar Mortgage Funding Corp, and RBS Securities Inc. are just a few of the defendants, who are accused of committing securities fraud against five wholesale credit unions. Both mortgage-backed securities lawsuits claim that large investment banks sold securities to institutional investors that held subprime loans as Triple-A rated investments. The financial firms allegedly omitted material facts, including that the securities were larded with loans issued to borrowers at high risk of default. The defendants are accused of getting the wholesale credit unions to purchase over $3 billion in mortgage-backed securities that, according to The Wall Street Journal, were “destined to perform poorly.” Subsequently, the credit unions became 5 of the over 40 in the US that have failed since 2009. It has since been up to the approximately 7,000 remaining credit unions to take on some of the loans, while charging higher interest rates to stay in operation. Meantime, the failures of the credit unions have forced NCUA to take on about $50 billion in battered bonds that are currently valued at a fraction of their original value.

When a borrower defaults on a loan payment, the value of the mortgage-backed security suffers. The NCUA’s complaint says that as a result, the credit ratings assigned too many mortgage-backed securities that the credit union purchased collapsed in short order. The NCUA plans to file more securities fraud complaints. Goldman Sachs will likely be among the new defendants.

Feds Sue Bankers Over Fall in Bonds, The Wall Street Journal, June 21, 2011

National Credit Union Administration Board sues big banks for $800M, Biz Journals, June 20, 2011

National Credit Union Administration

More Blog Posts:
MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court, Institutional Investor Securities Blog, June 14, 2011

“Skin in the Game” Mortgage Rule Announced by Federal Regulators, Institutional Investor Securities Blog, April 16, 2011

Ambac Financial Group, Insurers, and Bank Underwriters to Pay $33M to Settle Securities Lawsuits Alleging Concealed Risks Related to its Bond-Insurance Business, Stockbroker Fraud Blog, May 18, 2011

Continue reading "National Credit Union Administration Board Files $800M Mortgage-Backed Securities Fraud Lawsuits Against JP Morgan Securities, RBS Securities, and Other Financial Institutions" »

Federal investigators are taking an even closer took at the securities-related practices of JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS ). In a May 6 Filing with the Securities and Exchange Commission, JPMorgan reported that an investigation into its municipal derivatives securities practices is being conducted by the SEC, the US Justice Department, the Office of the Comptroller of the Currency, the Internal Revenue Service, and a number of state attorneys general. The investment bank and Bear Stearns are under investigation for possible tax, antitrust, and securities-related violations related to “the sale or bidding of guaranteed investment contracts and derivatives to municipal issuers." The SEC’s Philadelphia office is recommending that the commission file civil charges against JPMorgan.

Meantime, in its May 9 filing to the SEC Goldman Sachs revealed that the Commodity Futures Trading Commission is looking at the clearing-services practices that Goldman subsidiary Goldman Sachs Execution and Clearing LP provided to a broker-dealer. Goldman is also being investigated by the Justice Department over matters “similar” to a European Commission probe into anti-competitive practices involving credit default swap transactions.

Goldman’s filing notes that CFTC staffers verbally notified GSEC that it will recommend that the commission bring charges related to supervision, aiding and abetting, and civil fraud over the financial firm providing a broker-dealer client with clearing services. The charges are being recommended because of allegations that GSEC knew or should have known that subaccounts belonged to the broker-dealer’s customers and were not the client’s “proprietary accounts.”

Related Web Resources:
Federal Investigators Expand Inquiries Into Goldman Sachs, JPMorgan Practices, BNA Securities Law Daily, May 11, 2011

Wall Street inquiry expands beyond Goldman Sachs, Los Angeles Times, May 14, 2011

Office of the Comptroller of the Currency

Commodity Futures Trading Commission

More Blog Posts:
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court, Stockbroker Fraud Blog, July 23, 2010

Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Institutional Investor Securities Blog, February 23, 2011

Continue reading "Securities Practices of JPMorgan Chase & Goldman Sachs Under Investigation by Federal Investigators" »

Ambac Assurance Corp., a mortgage insurance company, claims that not only did JP Morgan Chase & Co. resist repurchasing loans from Bear Stears-created bonds, but also, it demanded that a lender buy back the bad mortgages. Ambac made the claim in a proposed amended securities lawsuit against Bear Stear’s EMC Mortgage unit. JP Morgan now owns Bear Stearns.

Ambac filed its securities lawsuit in 2008, claiming that ex-Bear Stearns mortgage executives that currently head mortgage divisions at Bank of America, Goldman Sachs, and Ally Financial defrauded and cheated investors, while hiding their actions from the public. Its complaint lists more than $600 million in claims with $1.2 billion in damages from the bad mortgage securities that it insured against and invested in. The insurer is now adding the claim of fraud to its case.

According to the complaint, on March 11, 2008, Bear Stearns, who had bought loans and packaged them into bonds for investors to buy, sought to have a lender repurchase mortgages in bonds that Syncora Guarantee Inc. had insured because it claimed that they did not meet promised standards of quality. This, at the same time that Bear Stearns refused, per Syncora’s demands, that it buy back the loans over the same flaws.

Bear traders allegedly sold the toxic mortgage securities to investors and then resold the bad loans with early payment defaults to banks that originated them. Because investors were not notified that the time allowed for early default payments had been cut, this allowed the investment bank to swiftly securitize defective loans without giving investors time conduct due diligence.

Former EMC analysts have stepped forward admitting that they were ordered to falsify loan-level performance data and that the information was passed on to ratings agencies, who would then approve Bear’s billion-dollar deals. They also claim that senior traders were taking money that should have gone to the security holders that bought the bonds and loans from Bear. Due diligence standards were allegedly ignored. Executives allegedly made tens of millions of dollars in compensation.

Ambac claims that Bear knew that what traders were doing in its mortgage trading division yet chose to conceal the defective loans and ignore contractual obligations. The insurer is now holding JP Morgan accountable for the accounting fraud that began at Bear. Ambac also contends that JP Morgan has continued to ignore the vast off-balance sheet exposure linked to its contractual repurchase agreements.

Related Web Resources:
E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic, January 25, 2011

Ambac Says JPMorgan Refused Mortgage Repurchases It Also Sought, Bloomberg Businessweek, January 25, 2011

JP Morgan and Chase, Institutional Investors Securities Blog, February 3, 2011

Continue reading "Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases" »

According to JPMorgan Chase & Co. (NYSE: JPM) Chief Executive Officer Jamie Dimon, investors of the municipal bond market can expect expect more bankruptcies. He spoke at the investment bank’s annual healthcare conference and called for those investing in the $2.9 trillion public dept market to be cautious. Dimon is not alone in his prediction. Cities, such as Harrisburg, Pennsylvania and Detroit, Michigan, have also talked about possibly filing for bankruptcy.

Dimon’s statements come even as the number of bankruptcy filings has gone down. Bloomberg.com reports that while 10 municipal entities sought bankruptcy protection in 2009, just five bankruptcy filings were made last year. The largest last year was a South Carolina toll road that had over $300 million in debt. Also, in 2008, Vallejo California sought bankruptcy protection after it didn’t win union pay cuts.

Now, Liberty Mutual Holding Co. has reduced its municipal debt holdings in California, Connecticut, and Illinois. At the end of 2009, it had about $15.5 billion in municipal securities. As of last September, it had about $13.7 billion in municipal securities, or about 20% in invested assets. Moody’s Investors Service has given Liberty Mutual’s holdings in Illinois an A1 rating. Its holdings in Connecticut have been rated Aa2. Insurer Allstate also has had to reduce its municipal securities holdings.

With cities and states hitting their record debt levels, investors in municipal bonds are concerned that their investments are no longer guaranteed to be safe. Attention institutional investors: Contact our securities fraud law firm to discuss your case.

Related Web Resources:
JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon Issues Warning for Municipal Bond Investors, Money Morning, January 17, 2011

JPMorgan's CEO Dimon Says More U.S. Municipalities May File for Bankruptcy, Bloomberg, January 11, 2011

Municipal Securities, Institutional Investors Securities Blog

Securities Fraud Attorneys

Jefferson County, Alabama officials have presented a proposed settlement to Wall Street creditors that could get rid of almost half of its $3.2 billion sewer debt, create a $30 million relief fund for ratepayers that have a hard time paying their sewer bills, and limit sewer rate increases to approximately 2.5% annually. The county wants to solve its sewer bet crisis before the current County Commission leaves in November.

A significant number of investors have to agree to the proposal. JPMorgan Chase and Co. owns most of the county warrants. However, the other banks, including State Street Bank of Boston, Lloyds Bank of Scotland, the Bank of Nova Scotia in Canada, and Societe Generale of Paris would also have to approve it. Getting all of them to agree could prove challenging. Not all creditors may end up with half of what is owed. Some creditors want the settlement discussions to slow down while efforts are made to determine if more money can be obtained from the county.

“Our firm is handling a number of multi-million dollar Jefferson County-related securities claims and other ARS claims, which included claims for ‘consequential damages,” says Stockbroker Fraud Lawyer William Shepherd. “In these cases damages have been incurred by businesses and others when they denied access to their funds for months or years. Meanwhile, they had been told that the funds were placed into ‘money market’ type investments and were readily available on short notice. Some business completely failed because their cash flow was interrupted when the funds were suddenly tied up in these illiquid investments.”

In 1994, the county started a sewer restoration and rehabilitation program after individuals and the Cahaba River Society won their lawsuit demonstrating that the county had polluted rivers and creaks with untreated waste. In a consent decree in 1996, the county agreed to fix the sewer system. Initially estimated to cost $1 billion, it became a $3.2 billion project.

In 2002, a number of financial advisers, including bankers from JP Morgan, convinced county officials to replace traditional fixed-rate bonds with notes that came with floating interest rates, such as ARS. Following the credit crisis in 2008, and as borrowing costs rose, the complex financing scheme that the county was using failed. The county has been trying to figure out how to pay back the money it borrowed and is attempting to restructure its debt. In 2009, JP Morgan settled SEC charges related to an illegal payment scam that enabled the broker dealer to obtain business (involving swap agreement transactions and municipal bond offerings) in Jefferson County for a $75 million penalty. JP Morgan also agreed to forfeit $647 million in swap termination fees.

“Our securities claims are not against Jefferson County, but against the securities firms that sold our clients these securities,” says Shepherd. “Thus, the amounts not recovered by investors in the settlement are losses we are also seeking for our clients based on misrepresentations and omissions in the sales process.”

Related Web Resources:
Jefferson County officials proposing that creditors accept half of $3.2 billion sewer debt, AL.com, September 26, 2010

Jefferson County Sewer debt at $3.2 billion and growing, NBC13, September 7, 2010

Jefferson County, Alabama

Continue reading "Jefferson County, Alabama Officials Want JP Morgan Chase & Other Wall Street Creditors to Accept Proposal that Would Eliminate Almost Half of Its $3.2 Billion Sewer Debt" »