July 7, 2011
Jefferson City, Mo. – Attorney General Chris Koster today announced a $92 million settlement with JP Morgan Chase & Co. (“JPMC”) as part of an ongoing nationwide investigation of alleged anticompetitive and fraudulent conduct in the municipal bond derivatives industry.
As part of the multistate settlement, JP Morgan has agreed to pay $65.5 million in restitution to affected state agencies, municipalities, school districts, and not-for-profit entities nationwide that entered into municipal derivative contracts with JP Morgan between 2001 and 2005. In addition, JP Morgan agreed to pay a $3.5 million civil penalty and $6 million in fees and costs of the investigation to the settling states. Koster said Missouri issuers will have the opportunity to recover more than $400,000 from the settlement.
“We’re pleased to get funds returned to municipalities, schools, and not-for-profits that were harmed by this scheme,” Koster said. “Another positive result of the settlement is the message we send to financial institutions – if you use anticompetitive and fraudulent tactics in doing business with consumers, you will be found out, you will be investigated, and you will face the full force of the law.”
The state settlement also provides that JP Morgan will pay $17 million in restitution directly to certain other government and not-for-profit entities as part of separate agreements it entered into today with the U.S. Securities and Exchange Commission and the Office of the Comptroller of the Currency.
The state, SEC, and OCC settlements are distinct components of a coordinated global $228 million settlement that JP Morgan entered into today with the U.S. Department of Justice’s Antitrust Division, the Internal Revenue Service, and the Federal Reserve Board. JP Morgan is the third financial institution to settle with a multistate working group in the ongoing municipal bond derivatives investigation following Bank of America and UBS AG.
“I do want to thank JP Morgan for doing the right thing by cooperating with our investigation and providing meaningful restitution to those harmed,” Koster added.
Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed, or to hedge interest-rate risk. In April 2008, the states began investigating allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair, and fraudulent conduct in the municipal bond derivatives market.
The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at JP Morgan and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids, and submission of fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.
Regardless of the means used to carry out the various schemes, the objective was to enrich the financial institution and/or the broker at the expense of the issuer – and ultimately taxpayers –depriving the issuer of a competitive, transparent marketplace. As a result of such wrongful conduct, state, city, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have otherwise.