The Securities and Exchange Commission’s latest reward of $50 million to two whistleblowers is an indicator that the program is successfully unveiling major frauds and more are anticipated. The $50 million awards relate to an SEC investigation stemming from whistleblower info which resulted in J.P. Morgan wealth management subsidiaries paying $267 million and admitting wrongdoing to settle charges that they failed to disclose conflicts of interest to clients.
An SEC investigation found that the firm’s investment advisory business J.P. Morgan Securities LLC (JPMS) and nationally chartered bank JPMorgan Chase Bank N.A. (JPMCB) preferred to invest clients in the firm’s own proprietary investment products without properly disclosing this preference. This preference impacted two fundamental aspects of money management – asset allocation and the selection of fund managers – and deprived JPMorgan’s clients of information they needed to make fully informed investment decisions.
One whistleblower received an award of $37 million and the other received an award of $13 million. The $37 million award is the Commission’s third-highest award to date after the $50 million award made in March 2018 to joint whistleblowers and more than $39 million award announced in September 2018. One of the whistleblowers was represented by Attorney Jordan Thomas of the firm Labaton Sucharow
“Whistleblowers like those being awarded today may be the source of ‘smoking gun’ evidence and indispensable assistance that strengthens the agency’s ability to protect investors and the capital markets,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “These awards show how critically important whistleblowers can be to the agency’s investigation and ability to bring a case to successful and efficient resolution.”
In a parallel action, JPMorgan Chase Bank agreed to pay an additional $40 million penalty to the U.S. Commodity Futures Trading Commission (CFTC).
“Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “These J.P. Morgan subsidiaries failed to disclose that they preferred to invest client money in firm-managed mutual funds and hedge funds, and clients were denied all the facts to determine why investment decisions were being made by their investment advisers.”
According to the SEC’s order instituting a settled administrative proceeding, JPMS failed to disclose numerous conflicts of interest to certain wealth management clients from 2008 to 2013:
- JPMS failed to disclose its preference for J.P. Morgan-managed mutual funds for retail investors in a unified managed account program known as the Chase Strategic Portfolio (CSP) that was sold through Chase Bank branches.
- JPMS failed to disclose that the availability and pricing of services provided to JPMS by another J.P. Morgan affiliate was tied to the amount of CSP assets invested in J.P. Morgan proprietary products.
- JPMS failed to disclose that certain J.P. Morgan-managed mutual funds purchased for CSP clients offered a less expensive share class and would generate less revenue for a JPMS affiliate than the share class JPMS chose for CSP clients.
- JPMS’s Forms ADV for CSP failed to adequately disclose these conflicts of interest.
- JPMS failed to implement written policies and procedures reasonably designed to prevent the violations that occurred.
The SEC’s order also found that JPMCB failed to disclose several conflicts of interest to certain high net worth and ultra-high net worth clients of JPMorgan’s U.S. Private Bank and certain clients of Chase Private Client, who invested in J.P. Morgan Investment Portfolio, a discretionary managed account program available to affluent Chase Bank clients:
- From early 2011 to early 2014, JPMCB failed to disclose that it preferred JPMorgan-managed mutual funds for clients with JPMorgan U.S. Private Bank discretionary managed accounts, including purchasers of Global Access Portfolio (GAP) funds, and to clients of Chase Private Client who invested in J.P. Morgan Investment Portfolio.
- From 2008 to early 2014, JPMCB failed to disclose that it preferred JPMorgan-managed hedge funds for clients with U.S. Private Bank discretionary management accounts, including purchasers of GAP funds.
- From 2008 to 2015, JPMCB failed to disclose its preference to invest certain clients in third-party-managed hedge funds that shared management or performance fees called retrocessions with a JPMCB affiliate.
The SEC’s order finds that JPMS willfully violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7 and JPMCB willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. JPMS and JPMCB admitted the facts set forth in the SEC’s order and acknowledged the conduct violated the federal securities laws. The subsidiaries agreed to jointly pay $127.5 million in disgorgement, $11.815 million in prejudgment interest, and a $127.5 million penalty. JPMS agreed to be censured, and both subsidiaries agreed to cease and desist from further violations.