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.”

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.”

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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 <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(July 7, 2011) — John Paulson — founder and president of New-York based hedge fund Paulson & Co., which manages $37 billion overall — lost more than 11% on his biggest fund in June, hurt by major losses as it sold off Chinese forestry company Sino-Forest.

The timber losses left Paulson’s Advantage Plus Fund down 11.54% in June. The fund’s gold-denominated share class dropped 11.77% during the month.

The Chinese forestry company, Sino-Forest Corp., has been accused of overstating its timberland holdings and production. The firm dropped about 73% from its closing price on June 1. Paulson & Co. subsequently sold the entire stake in Sino-Forest as of June 17.

The big declines experienced by Paulson’s funds reflect difficult times for hedge funds in June, as they faced hard times navigating events such as Japan’s earthquake and nuclear disaster, volatility in commodity prices, and worries over a Greek default.

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Despite the widespread popularity of the asset class particularly among institutional investors, the Dow Jones Credit Suisse Core Hedge Fund Index lost 1.95% last month, leaving the index down 1.1% on the year. The month of May shared similar difficulties, when the index fell 1.71%.

Oliver Schupp, President of Credit Suisse Index Co., LLC, said in a statement, “Headlines over Eurozone debt concerns dominated markets and set the tone for a second consecutive negative month of hedge fund performance in June…A lack of fundamentally driven trends hurt many managers, with Global Macro experiencing the most significant decline, falling 3.12%. Fixed Income Arbitrage was the month’s only bright spot. The sector gained 0.20% as managers benefited from increased interest rate volatility and widening swap spreads. The strategy remains up 2.38% year-to-date.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742