7/7/2011 04:13:05 PM

Following Hefty Fine for Allegedly Misleading Pensions, JPMorgan to Pay $228 Million in Muni Case

State and federal regulators have ordered JPMorgan to pay $228 million in a settlement of allegations that the bank's securities division rigged the market for municipal bond derivatives.

(July 7, 2011) -- Following JP Morgan's announcement that it would pay millions to settle US regulatory claims that it misled pension funds and other investors, the bank -- the nation's second largest by assets -- is now set to pay $228 million to settle a bid-rigging case.

According to the US Securities and Exchange Commission (SEC), JP Morgan Securities LLC (JPMS) will pay $228 million to various government regulators and states to settle allegations that it rigged almost 100 transactions involving municipal-bond auctions.

“JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal 'last look' at competitors’ bids,” said Robert Khuzami, Director of the SEC's Division of Enforcement in a statement. “Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits."

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Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, “When powerful financial institutions like JPMS conspire with each other to intentionally violate regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted. Rather than playing by the rules, the rules got played.”

The regulator claims that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations, and omissions undermined the competitive bidding process and influenced the prices that municipalities paid for reinvestment products. Furthermore, the regulator claims that the bank's alleged dishonesty deprived certain municipalities of a presumption that the reinvestment instruments had been purchased at fair market value. "JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted," the SEC said in a release.

In a statement, the New York-based bank said it doesn't "tolerate anticompetitive activity or violations of law." Additionally, the bank stated that it aided in the investigation and is working with regulators to "further strengthen its compliance programs in the public finance business."

According to the Wall Street Journal, the bank said its net total in payment is $211.2 million: $51.2 million to the SEC; $50 million to the Internal Revenue Service; $35 million to the Office of the Comptroller of the Currency; and $75 million to the states involved.

This is not the first time the SEC has settled with a financial institution stemming from its ongoing investigation into corruption in the municipal reinvestment industry. The SEC charged Bank of America Securities in December 2010 with securities fraud for similar conduct. In May, the SEC charged UBS Financial Services Inc. (UBS) with securities fraud for fraudulently rigging bids as both a provider and a bidding agent.

To contact the aiCIO editor of this story: Paula Vasan at pvasan@assetinternational.com; 646-308-2742