The amount actually will involve a net payout of only $211.2 million from the company because states agreed to credit it for $17 million of payments to two agencies. It includes $129.7 million in restitution to state and local issuers, nonprofits, and corporate borrowers that purchased the contracts, according to federal agencies.
The global settlement of antitrust, securities fraud, tax and other charges was announced Thursday by the Justice Department, the Securities and Exchange Commission, the Internal Revenue Service, the Office of the Comptroller of the Currency, the Federal Reserve Board, and 25 state attorneys general.
Some sources said the $228 million settlement amount seems low, given that the firm either paid or agreed to forego a total of $722 million to settle SEC charges in connection with muni bond and swap transactions done with Jefferson County, Ala. In that settlement, which was announced in November 2009, JPMorgan paid $25 million to the SEC, $50 million to the county, and agreed to forfeit more than $647 million of claimed termination fees.
But others noted that the global settlement amount is the highest reached with a company so far in the probes over anti-competitive practices and that JPMorgan shut down its derivatives desk in September 2008 and cooperated with federal and state regulators.
A federal judge in New Jersey must still approve the settlement and the final document will contain the specific bond transactions involved, regulatory officials said. The SEC charges were made in connection with 93 muni bond reinvestment transactions and the OCC sanctions involved 48 reinvestment transactions.
The SEC also barred former JPMorgan Securities Inc. vice president and marketer James Hertz from association with any broker-dealer, investment adviser, muni adviser, transfer agent or nationally recognized credit rating agency, as well as from penny stock offerings.
Last November, Hertz pleaded guilty to two counts of conspiracy and one count of wire fraud for his role in the bid-rigging.
The commission said it "recognizes Hertz's cooperation in the SEC's investigation" and the other probes by law enforcement agencies.
In its complaint against JPMorgan, the SEC said the securities firm's former officials, acting as agents for the bank, engaged in rigging bids for guaranteed investment contracts, forward purchase agreements, and repurchase agreements from 1997 through 2005 in connection with $14.3 billion of muni bonds sold as far back as 1993.
The officials submitted bids that were set up in advance to win the contracts, obtained advance information about competing bidders, and sometimes purposely submitted non-winning bids, according to the SEC.
The documents do not name the former officials, but the SEC said they include the former head of the desk, a managing director. That would have been Douglas MacFaddin, who was fired in March 2008 after he told JPMorgan he had been informed he was the target of a grand jury investigation.
"By entering into illegal agreements to rig bids on certain investment contracts, JPMorgan and its former executives deprived municipalities of the competitive process to which they were entitled," said assistant attorney general Christine Varney, who is in charge of the Justice Department's antitrust division but is scheduled to soon leave that post for the private sector.
Robert Khuzami, director of the SEC's enforcement division, said JPMorgan "improperly won bids by entering into secret arrangements with bidding agents to get a 'last look' at competitors bids. Municipal issuers and investors didn't stand a chance against the fraudulent strategies [the firm] and others used to guarantee profits."
Elaine Greenberg, chief of the SEC's municipal securities and public pensions unit, declared: "When powerful financial institutions like [JPMorgan] 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 investment bank neither admitted nor denied the charges.
"JPMorgan Chase does not tolerate anti-competitive activity or other violations of law," the firm said in a release. "The firm assisted the government agencies in their investigations and is pleased to have resolved this matter with its regulators."
"The investigations focused on a small desk that was discontinued and on certain employees that are no longer with the firm," the release said. "These employees concealed their conduct from management."
JPMorgan said it has enhanced its supervisory programs and worked with regulators to strengthen its compliance with muni bond rules and laws, adding: "The firm will continue to strengthen these programs."
Under the terms of the settlement, JP-Morgan agreed to pay: $92 million in a settlement with the states' attorneys general, $65.5 million of which will be deposited into a multi-state restitution fund for issuers and borrowers; $51.2 million to the SEC, all of which will be returned to muni issuers and borrowers in 93 reinvestment transactions; $50 million to the IRS; and $35 million to the OCC, including a civil penalty of $22 million and $13 million in unjust enrichment and prejudgment interest obtained in connection with 48 reinvestment transactions.
The $51.2 million settlement with the SEC includes a penalty of $32.5 million, disgorgement of $11.1 million and prejudgment interest of $7.6 million.
Beyond the $65.5 million in restitution, the $92 million settlement with the states includes a $3.5 million civil penalty, $6 million to cover costs associated with the probes, and a credit for $17 million the firm is to pay the SEC and OCC.
The OCC also executed a formal agreement with JPMorgan Chase, requiring the bank to develop and implement a detailed plan to strengthen its policies, procedures and internal controls related to bank-wide competitive bidding.
The $228 million global settlement is the largest that federal and state regulators have brought against a bank or firm for bid-rigging of muni-related reinvestment contracts.
In May, UBS agreed to pay more than $160 million to federal and state regulators — some of which included restitution for issuers and borrowers — for rigging bids for at least 100 reinvestment transactions in 36 states, which threatened the tax-exempt status of more than $16.5 billion of bonds.
In December 2010, Bank of America Securities LLC, now Bank of America Merrill Lynch, agreed to pay more than $137 million to federal and state regulators, including restitution to 88 issuers.
To date, the probes, which have been ongoing since 2005, have resulted in Justice Department criminal charges against 18 executives of financial services companies and one corporation.
Nine of the 18 have pleaded guilty, including James Hertz, Justice officials said.
The conduct represents a second generation of what is known as yield-burning. The first generation of the practice occurred in the 1990s and resulted in a global settlement between the SEC, the IRS, and some issuers with 17 broker-dealer firms.
The firms agreed to pay more than $138.3 million to resolve federal allegations that they overcharged muni issuers for open-market Treasuries for refunding escrows, with the markups lowering, or burning down, the investment yield so that it was below the bond yield and didn't generate illegal arbitrage profits for the issuers that would have violated tax laws.
After the yield-burning settlement, the IRS wrote rules providing issuers with a "safe harbor" that assured the prices of their investment contracts would be treated as having fair-market value if strict bidding rules were followed, including that at least three competitive providers bid for the contracts.
Issuers needed to show the investments were purchased at fair-market value to show they had not earned illegal arbitrage profits from the investments of their bond proceeds.
In the more recent deals, the bids for the reinvestment contracts were rigged, even though firms falsely certified to issuers that the bidding was competitive. The bid-rigging also threatened to jeopardize the tax-exempt status of the bonds, which is why the settlement with the IRS is particularly important in resolving the tax issues.