JP Morgan Chase Background Information
JP Morgan Chase could trace its roots to the Bank of Manhattan, founded in 1799 by Arron Burr, six years before he killed Alexander Hamilton in a duel. Instead, the firm links its heritage to Canal Bank, which was formed in 1831. Yet, JP Morgan Chase’s CEO recently admitted that Canal Bank financed slavery and owned over 1,200 slaves through loan defaults.
Canal Bank was taken over by Chase Bank a century later. However, in 1955, Chase was bought by Manhattan Bank. In 1996, Chase Manhattan was itself taken over by Chemical Bank, which selected the Chase name. “Chemical” Bank had started as a chemical company in 1823. When J.P. Morgan was bought in 2000, the firm became J.P. Morgan Chase & Co.
John Pierpont Morgan, a private financier (and some say profiteer during and after the Civil War) helped form Drexel, Morgan & Co in 1895, an investment banking firm which soon used only his name. He also took over U.S. Steel in 1901, and reportedly bailed out the U.S. Treasury in 1896 and again in 1907, before the Federal Reserve System was created in 1914. He also bailed out and combined bankrupt railroads, stacked their boards and “stabilized” rail rates before these were the first to be “busted” by the Sherman Anti-Trust Act. His empire was estimated to be worth over $22 billion in 1912.
JP Morgan & Company built its Wall Street headquarters, “The House of Morgan,” in 1914, which was the center of American finance for decades. During WWI, JP Morgan Co. financed war efforts and became the monopoly underwriter of war bonds for England and France. A bomb exploded in front of The House of Morgan in 1920, killing 38 and injuring 400. Terrorists left an anti-American note but were never caught.
In the 1930s, the Glass-Steagall Act required financial firms to choose between banking and investment banking. JP Morgan & Co. chose banking. Meanwhile, many of its former investment bankers, including the founder’s grandson, left to form the firm Morgan Stanley.
J.P. Morgan began operating as only a bank in 1935 and two decades later merged with Guaranty Trust to form Morgan Guaranty Trust Company. That firm created a holding company called J.P. Morgan & Co. When it merged with Chase Manhattan in 2000, the new firm became JP Morgan Chase & Company. As laws changed to again allow banking and investment banking by the same firm, the bank reentered the field of investments through a series of acquisitions.
JPMorgan Chase is now the 3rd largest financial institution in the United States, behind Bank of America and Citigroup. It has $1.3 trillion in assets, 175,000 employees worldwide in 6 divisions and $172, billion in market capitalization. It also operates the largest hedge fund in the U.S. with $34 billion in assets. In 2006, the firm earned $13 billion from $61 billion in revenues.
[On “9-11” in 2001, a second terrorist attack hit the firm’s headquarters. Since then, cash-rich JP Morgan Chase has reportedly received over $750 in taxpayer finance subsidies.]
Just one day after a New York jury convicted WorldCom’s former CEO of criminal fraud, and just one day before JP Morgan Chase & Co. was to go to trial, the company announced it would pay $2 billion to settle an investor class action against it for its role in the sale of WorldCom bonds.
The bondholders, mostly large institutions including banks, lost over $13 billion. In their lawsuit, they accused several banks of helping the company to sell bonds in 2000 and 2001, just before the WorldCom scandal surfaced, saying these banks knew or should have known WordCom was lying about its finances
Fourteen investment banks, including JPMorgan Chase, have agreed to pay $6 billion to settle the case, a record for securities fraud actions. “This certainly blows away any we’ve seen so far,” said a vice president of Institutional Shareholder Services who tracks securities settlements. The record had been a $3.1 billion settlement with Cendant Corp. The percent of losses recovered in the Worldcom bond case is also quite high and, because defendants remain in the case, that amount will likely grow.
The Securities and Exchange Commission settled enforcement proceedings against JP Morgan Chase & Co. by fining it $135 Million for its role in Enron’s manipulation of its financial statements, saying it helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities.
JP Morgan Chase consented to the entry of a final judgment in that action that, without it admitting or denying liability, would also permanently enjoin the firm violating the antifraud provisions of the federal securities laws.
This case “serves as yet another reminder that you can’t turn a blind eye to the consequences of your actions if you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws,” said the SEC’s Enforcement Director.
In another step to end its Enron woes, JP Morgan agreed to settle a class action filed by former Enron shareholders by paying them a total of $2.2 billion.
The firm first set aside a $1 billion to settle Enron suits, but was also able to settle with its insurance companies for almost $600 million. The insurance companies had disputed the claim and J.P. Morgan had to file suit.
The insurance companies then claimed that JP Morgan had defrauded insurers, disguising loans to Enron as commodities trades and therefore participated in the fraudulent transactions. Fraudulent acts are generally not covered by insurance.
J.P. Morgan Chase & Company settled a long-running antitrust lawsuit filed by copper companies who claimed the bank’s predecessor conspired with a Japanese trading house to manipulate the copper market in the 1990s.
As the trial was scheduled to begin in federal court, the parties to the suit reached a confidential settlement. About 20 manufacturing companies who claimed they purchased copper at inflated prices sought as much as $1 billion in damages and attorney fees from J.P. Morgan.
The multibillion dollar copper trading scandal upset world copper markets and damaged the reputation of Sumitomo Corp, a 300-year-old Japanese global metals trader. Its star copper trader had created $2.6 billion in losses through unauthorized trades over a decade, and caused copper prices to plummet worldwide.
The companies claimed that before the collapse, J.P. Morgan and one of its subsidiaries provided financing to help the trader artificially reduce copper supplies to drive up prices. This was allegedly done by buying up parts of the copper market so supplies owned by Sumitomo would be worth more, the suit claimed.
Sumitomo had paid millions of dollars to settle cases and class-action suits filed in the U.S. and abroad. Because the damages it sought from JP Morgan included for federal antitrust claims, it could have won triple damages.
In the latest twist in a JP Morgan bond debacle, that firm told a Greek parliamentary committee investigating an overpriced bond scam that it was misled by a former employee.
The scandal began when JP Morgan and North Asset Management sold 280m of structured bonds to the Greek government pension which were later claimed to have been overpriced. Although JP Morgan has since offered to buy back the bonds, publicity and political overtones have created an atmosphere in which any such quick ending does not appear possible.
The debacle has created severe repercussions and paralyzed Greece on 15 May 2007, when flights were grounded in a 24 hour strike by unions protesting mismanagement of their members’ pensions. The scandal also led to the resignation of the head of the civil servants’ Auxiliary Pension Fund.
JP Morgan was fined $2.1 million by the Securities and Exchange Commission, the New York Stock Exchange and Financial Industry Regulatory Authority over E-mail record keeping violations.
All three regulators had instigated actions against JP Morgan Securities and investigated alleged conflicts of interest and undue influence of investment banking interests on securities research.
According to the SEC, this led to the discovery that JP Morgan Securities’ E-mail record keeping was improper. According to Reuters, the SEC found that some back-up tapes were suspiciously damaged, missing, and/or not retained. Corporate scandals such as Enron and Worldcom, and the passing of the Sarbanes-Oxley Act have highlighted the need for adequate internal record keeping.
“JP Morgan Securities’ representation that its e-mail production was complete, without disclosing that it had failed to retain, locate and restore all e-mail responsive to our investigation, is simply unacceptable,” said the chief of SEC enforcement.
The Financial Industry Regulatory Authority censured and levied a $400,000 fine on Banc One Securities Corp., a subsidiary of JP Morgan, for inadequate systems and procedures to detect and prevent late trading in mutual funds and for inaccurately recording entry times for customer orders.
Late trading refers to the practice of placing orders to buy or sell fund shares after the 4 p.m. ET market close, at the net asset value, or price, preciously set at the market close. Late trading allows traders to profit from market-moving events which occur after the close of the market which are not reflected in that day’s closing share price.
“Late trading is illegal and to prevent it, firms must implement systems to guarantee that all mutual fund orders processed after the close of the market were received during normal trading hours,” said a FINRA Vice Chairman.
The FINRA found that, Banc One processed about 5,400 mutual fund orders after market close, during the period investigated, at that day’s closing price. While the evidence was inconclusive as to when some of the orders arrived, for others there was evidence the order placed after the close.
The FINRA fined J.P. Morgan Securities $6 million for unlawful Initial Public Offering (IPO) profit sharing at its tech-focused investment bank unit Hambrecht & Quist.
The claims arose over an investigation into inflated commissions charged to customers J.P. Morgan neither admitted nor denied the allegations, but consented to the entry of findings.
According to the FINRA, the JP Morgan Unit was a top manager of IPO’s and, to boost its margins on allocations, the Unit would raise commissions on unrelated trades as a way of tapping into the outrageous profits initial IPO holders gained by flipping their shares in a hot market, the FINRA alleged.
For example, the FINRA pointed to a trading day that generated $590,000 in commission revenue and claims that the next day, when an H&Q-led IPO began trading, the firm billed $2.2 million much more than a standard commission, of perhaps 6 cents per share, could generate.
The company was previously hurt by its overexposure to bad tech and telecom debt, and the FINRA quoted one sales person as saying, “My baby’s going to college!” after pulling off two trades with a 50 cents per share commission.
The regulator even pointed to an internal e-mail from the firm’s compliance department warning about investors about making “wash trades” to pony up on higher commissions. A customer would buy non-IPO-related shares at a high commission and sell shares of the same company through another broker. Such offsetting trades were done purely to reward the IPO-offering bank, the FINRA said.
JP Morgan was also previously hit with an $80 Million fine by national and state regulators for its part in the widespread research scandal which rocked Wall Street.