In the Matter of JPMorgan Chase & Co., Admin. Proc. File No. 3-15507. On September 19, 2013, the SEC announced it issued a settled Order Instituting Proceedings (“OIP”) against JPMorgan Chase & Co. According to the OIP, the Sarbanes-Oxley Act of 2002 established requirements for public companies such as creating and maintaining a system of internal controls to provide investors with reasonable assurances that their financial statements are reliable, and ensuring that senior management provides important information to key decision makers such as the board of directors. According to the OIP, after its portfolio began to substantially decline in value, JPMorgan undertook internal reviews to determine the effectiveness of the Chief Investment Office’s (“CIO”) internal controls. From the reviews, senior management discovered that the valuation control group within the CIO – whose function was to detect and prevent trader mismarking – was not effective and was not sufficiently independent from the traders it oversaw. JPMorgan senior management did not share bad facts about the CIO firm’s audit committee.
To settle the SEC’s claims, JPMorgan admitted the following:
- 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.
- 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 OIP requires JPMorgan to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15. The OIP also requires JPMorgan to pay a $200 million penalty that may be distributed to harmed investors in a Fair Fund distribution. The settlement with the SEC is part of a larger, global settlement in which JPMorgan will pay a total of about $920 million in penalties to the SEC and other agencies including the U.K. Financial Conduct Authority, the Federal Reserve, and the Office of the Comptroller of the Currency.