An earlier post reported that both the Consumer financial Protection Bureau (CFPB) and the Office Of The Comptroller Of The Currency (OCC) were considering fines for JPMorgan Chase, after allegations about how the bank sold identity theft protection services to credit card customers, and collected past-due bills from customers. The two agencies had investigated together the allegations. Late last week, several agencies concluded their investigations and announced both settlements and fines with the bank.
First, the CFPB announced that it had ordered:
"... Chase Bank USA, N.A. and JPMorgan Chase Bank, N.A. to refund an estimated $309 million to more than 2.1 million customers for illegal credit card practices... Chase enrolled consumers in credit card “add-on” products that promised to monitor customer credit and alert consumers to potentially fraudulent activity. In order for consumers to obtain credit monitoring services, consumers generally must provide written authorization. Chase, however, charged many consumers for these products without or before having the written authorization necessary to perform the monitoring services. Chase charged customers as soon as they enrolled in these products even if they were not actually receiving the services yet."
So, the bank charge customers for services the customers never authorized. And, there is more. The bank also unfairly charged fees and interest:
"... The unfair monthly fees that customers were charged sometimes resulted in customers exceeding their credit card account limits, which lead to additional fees for the customers. Some consumers also paid interest charges on the fees for services that were never received."
And, the bank didn't deliver the services promised:
"... Consumers were under the impression that their credit was being monitored for fraud and identity theft, when, in fact, these services were either not being performed at all, or were only partially performed."
All of this happened from October 2005 to June 2012. the order requires Chase to:
- Stop unfair billing practices
- Fully refund, with interest, the 2 million consumers who enrolled in credit monitoring services, charged for these services, and did not receive the services promised. The bank must also refund any interest and over-the-limit fees charged. This refund is estimated at $309 million.
- Consumers should have received refunded by November 30, 2012. Chase credit card holders should have received a credit to their accounts. Former card holders should have received checks.
- The bank must submit to an independent audit to ensure compliance with the CFPB order.
- The bank must also strengthen its management of third-party vendors that provide any credit monitoring services.
- The bank will pay a $20 million penalty payment to the CFPB’s Civil Penalty Fund.
Second, the OCC announced that it had levied a separate $60 million fine against JPMorgan Chase and Chase Bank USA:
"The OCC found that the bank’s billing practices violated Section 5 of the Federal Trade Commission (FTC) Act, 15 U.S.C. § 45(a)(1), which prohibits unfair and deceptive acts or practices. The $60 million civil money penalty reflects a number of factors, including the scope and duration of the violations and financial harm to consumers from the unfair practices. The penalty will be paid to the U.S. Treasury."
Third, the Securities and Exchange Commission (SEC) announced several charges against the bank and a settlement agreement with the bank:
"JPMorgan has agreed to settle the SEC’s charges by paying a $200 million penalty, admitting the facts underlying the SEC’s charges, and publicly acknowledging that it violated the federal securities laws."
This is noteworthy also because, as part of the settlement, the bank will admit to facts that led to the wrongdoing. Sadly, most settlement agreements don't require the defendant to admit to any wrongdoing. The SEC had charged JPMorgan Chase with:
"... with misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses."
As part of the settlement agreement, the bank will admit to the following facts that led to the wrongdoing:
"The trading losses occurred against a backdrop of woefully deficient accounting controls in the CIO, including spreadsheet miscalculations that caused large valuation errors and the use of subjective valuation techniques that made it easier for the traders to mismark the CIO portfolio."
"JPMorgan senior management personally rewrote the CIO’s valuation control policies before the firm filed with the SEC its first quarter report for 2012 in order to address the many deficiencies in existing policies."
"By late April 2012, JPMorgan senior management knew that the firm’s Investment Banking unit used far more conservative prices when valuing the same kind of derivatives held in the CIO portfolio, and that applying the Investment Bank valuations would have led to approximately $750 million in additional losses for the CIO in the first quarter of 2012."
"External counterparties who traded with CIO had valued certain positions in the CIO book at $500 million less than the CIO traders did, precipitating large collateral calls against JPMorgan."
"As a result of the findings of certain internal reviews of the CIO, some executives expressed reservations about signing sub-certifications supporting the CEO and CFO certifications required under the Sarbanes-Oxley Act."
"Senior management failed to adequately update the audit committee on these and other important facts concerning the CIO before the firm filed its first quarter report for 2012."
"Deprived of access to these facts, the audit committee was hindered in its ability to discharge its obligations to oversee management on behalf of shareholders and to ensure the accuracy of the firm’s financial statements."
The CIO is the Chief Investment Office within the bank. George S. Canellos, Co-Director of the Division of Enforcement at the SEC said:
“While grappling with how to fix its internal control breakdowns, JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”
The SEC coordinated its global investigations and actions with the U.K. Financial Conduct Authority, the Federal Reserve, and the OCC.The U.K. Financial Conduct Authority announced that it fined JPMorgan Chase:
"... £137,610,000 ($220 million) for serious failings related to its Chief Investment Office (CIO). JPMorgan’s conduct demonstrated flaws permeating all levels of the firm: from portfolio level right up to senior management, resulting in breaches of Principles 2, 3, 5 and 11 of the FCA’s Principles for Businesses - the fundamental obligations firms have under the regulatory system.The breaches occurred in connection with the $6.2 billion trading losses sustained by CIO in 2012... known as the “London Whale” trades, and were caused by a high risk trading strategy, weak management of that trading and an inadequate response..."
The SEC announcement said that JPMorgan will pay about $920 million total in penalties to the four agencies.
I applaud the agencies for their coordinated, global actions. Because banks and corporations operate globally, enforcement agencies must work smartly and cooperate globally. I commend the agencies for a settlement agreement where the defendant admits to facts that led to wrongdoing.
I commend the agencies for the fines, but I wish the fines were far greater. All of this wrongoding at JPMorgan Chase seems consistent with research that found younger bankers have accepted wrongdoing as a necessary evil to succeed. Bankers globally have a severe ethics problem. As former Secretary of Labor Robert Reich commented recently on Twitter.com about the effectiveness of fines to prevent banking abuses:
"Fines effective only if risk of being caught x probability of being prosecuted x amount of fine > profits to be made."
I agree with that assessment 1,000 percent. The outstanding questions I have:
- Who is going to jail as a result of violating federal securities laws?
- What actions (e.g., discipline, firings) will the bank's board of directors taking against senior management that participated in the wrongdoing?
- Since wrongdoing occurred at all levels within the bank, what corrective actions -- beyond the settlement agreements -- will the bank take to change banking culture (e.g., teach and reinforce ethics since many bankers fear retaliation) to prevent future wrongdoing?