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JPMorgan Chase pays US$153.6m to settle mortgage charges

July 5, 2011

Bank forks out $189m to settle fraud case

By Macy Gordon

NZ Herald 

Thursday Jun 23, 2011

JPMorgan Chase has agreed to pay US$153.6 million ($189 million) to settle civil fraud charges that it misled buyers of complex mortgage investments just as the housing market was collapsing.

JP Morgan Securities, a division of the powerful Wall St bank, failed to tell investors that a hedge fund helped select the investment portfolio and then bet that the portfolio would fail, the Securities and Exchange Commission said.

Among the investors who lost money were autoworkers for General Motors, a Lutheran financial organisation in Minneapolis and a retirement services company in Topeka, Kansas.

The settlement announced yesterday is one of the most significant legal actions targeting Wall Street’s role in the 2008 financial crisis. It comes a year after Goldman Sachs paid US$550 million to settle similar charges.

Still, the settlement amounts to less than 1 per cent of the bank’s 2010 net income of US$17.4 billion; it is less than what JPMorgan earns in one week.

In its announcement, the SEC said it had also charged Edward Steffelin with misleading investors.

Steffelin headed the team at GSCP, an investment firm that was supposed to have been selecting the portfolio of mortgage securities in the US$1.1 billion deal.

The SEC alleged Steffelin knew that hedge fund Magnetar Capital was directly involved in choosing the securities and was seeking a job with Magnetar at the time. Steffelin has not reached a settlement with regulators.

His attorney, Alex Lipman, disputed the allegations. He said the SEC was making Steffelin a scapegoat in its case against JPMorgan.

As part of the JPMorgan settlement, investors who were harmed will receive all of their money back, the SEC said. JPMorgan also agreed to improve the way it reviews and approves mortgage securities transactions.

JPMorgan neither admitted nor denied wrongdoing under the settlement. The bank released a statement saying it lost nearly US$900 million on the investment. It also noted that it reviewed similar mortgage investments and voluntarily paid US$56 million to compensate some investors in those deals.

The bank agreed to settle the charges two weeks after Jamie Dimon, chief executive of JPMorgan Chase complained to Federal Reserve chairman Ben Bernanke that new regulations designed to prevent another financial crisis were too burdensome.

Regulators have been investigating a number of major banks’ actions ahead of the financial crisis. More charges are expected.

SEC enforcement chief Robert Khuzami said the JPMorgan case, at its core, is about getting investors truthful information about investment options.

“The appropriate disclosures would have been to inform investors that an entity with economic interests adverse to their own was involved in selecting the portfolio,” he said.

Magnetar essentially made a US$600 million bet that the investments would fail once the deal closed in May 2007, the SEC said. Just one month earlier, JPMorgan had launched a “frantic global sales effort” going beyond its traditional customers to sell mortgage securities, according to the agency’s suit.

Magnetar wasn’t charged in this action, Khuzami said, because the company “was not responsible for those disclosures to investors”. But he said such deals “remain a high priority for the SEC.”

– AP

By Macy Gordon

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