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SEC Weighing Charges Against JP Morgan for Municipal Bond-Related Violations
May 13, 2008
JP Morgan Chase & Co. has received notice from the Securities and Exchange Commission that the agency is considering civil charges related to bidding in various instruments tied to municipal bonds.
In a litigation footnote contained in a report filed Monday with the SEC, JP Morgan said that on March 18 the staff of the commission’s Philadelphia regional office issued a Wells Notice advising JP Morgan Securities that it is “considering recommending an enforcement action” for violation of federal securities laws.
An expert familiar with the situation said the notice is related to the marketing of products sold by JP Morgan’s derivatives desk, including tax-exempt swaps and options. Municipalities use such products for hedging purposes and to temporarily invest money they plan to use for projects.
The filing also said that beginning in March, JP Morgan Securities, along with numerous other commercial banks, investment banks, insurance companies and brokers, has been named as a defendant in several class-action suits in the federal court in the District of Columbia, the Southern District of New York and the Northern District of California for “alleged antitrust violations in connection with bidding or sale of guaranteed investment contracts (GICs) and other derivatives to municipal issuers.”
It is not clear whether the Wells Notice is connected to problems with bidding practices at Bear Stearns, which JP Morgan is in the process of acquiring. In April, Bear Stearns said it received a Wells Notice from the SEC in February indicating that the firm could face civil charges for anticompetitive practices in bidding for municipal securities.
SEC spokesperson John Heine said that neither the SEC nor its regional offices are authorized to comment on pending investigations. Heine did, however, point to JP Morgan’s filing on the commission’s Web site. JP Morgan spokesperson Brian Marchiony said that his firm had no comment.
A guaranteed investment contract guarantees repayment of principal and a fixed or floating interest rate for a predetermined period of time. Depositing municipal bond proceeds in a GIC can give the issuer liquidity while earning a higher rate of return than a money market account.
A Wells Notice is a letter sent by the SEC when it is planning to bring an enforcement action for civil violations. While regulators are not legally required to provide such a notice, it is customary for the SEC to do so.
