Only one Wall Street bank stayed profitable throughout the financial crisis: JPMorgan Chase & Co. No doubt there are countless reasons for this remarkable performance. The agreement yesterday by one of its main affiliates, J.P. Morgan Securities LLC, to pay $153.6 million to settle fraud charges brought by the Securities and Exchange Commission provides one clue about some of the unseemly methods this banking giant apparently used to make its profits.
According to the SEC’s press release yesterday, J.P. Morgan’s fraud happened “in a complex mortgage securities transaction.” But at its essence, it wasn’t all that complex. The bank’s affiliate put together and sold securities to investors without telling them that the residential real estate-based assets contained in the investment would largely be chosen by an entity, a hedge fund, which stood to gain a lot of money if the investment turned bad. Instead the investors were told that the assets in the portfolio would be picked by “an independent manager looking out for investor interests.”
As the SEC complaint says, J.P. Morgan’s “representations were materially misleading because, unbeknownst to the . . . Investors, [the hedge fund], a party with economic interests adverse to investors, played a significant role in the selection of the investment portfolio.”
This deal with the investors happened in the spring of 2007 when the housing market was showing very troubling signs. At the time a J.P. Morgan employee said in an email: “We all know [that the hedge fund] wants to print as many of these as possible before everything completely falls apart.”
Within 10 months after the deal, the securities were near worthless. The investors lost just about everything.
With this SEC settlement, the investors will get back everything they invested. And $27.73 million will be paid to the U.S. Treasury, in part to pay back taxpayers for the costs of investigating and negotiation this settlement.
NOTE: For more information about other SEC enforcement actions against misconduct related to the financial crisis, visit the SEC website here. This also includes information on many of the 32 CEOs and other senior corporate officers charged so far by the SEC.