JPMorgan’s securities arm has been fined £33.32m ($48.79m), the largest penalty ever levied by the UK financial regulator, for failing to protect billions of dollars of client money by keeping it in segregated accounts.
At the height of the financial crisis, JPMorgan’s futures and options business was keeping up to $23bn in institutional client money mixed up with its own funds in an unsegregated account at the securities division’s parent bank. Had the bank run into financial difficulties, clients such as pension funds and hedge funds would have been at risk of losing their money.
The administrators of Lehman Brothers, the failed US investment bank, are still trying to disentangle its books due to similar problems. The judges handling Lehman-related lawsuits have criticised the UK Financial Services Authority’s supervision of client money.
Thursday’s fine by the FSA, which is twice as large as the previous record of £17m paid by Royal Dutch Shell, is part of a broader investigation into how banks and brokers protect client money. The regulator is concentrating on the wholesale area, where the potential for one failure to bring down other institutions is greater.
Margaret Cole, the FSA’s enforcement director, said: “This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated in accordance with FSA rules. Firms need to sit up and take notice of this action – we have several more cases in the pipeline.”
The problem dates back to the merger of JPMorgan and Chase Manhattan and lasted for seven years. During that time, auditor PwC repeatedly certified that the bank was properly handling client money.
The FSA has required firms to keep client money separate since 2002 but until the financial crisis its supervisors relied on auditors to certify that money was handled properly and did little hands-on investigation.
The Financial Reporting Council, which oversees auditors, said it would consider the evidence gathered by the FSA to determine whether it needed to investigate further.
JPMorgan and PwC declined to comment. The bank discovered the issue in July 2009, reported the problem to the FSA and received a discount for early settlement, the regulator said. The fine represented 1 per cent of the average amount of client money held by the business during the period.
“While the error is regretful, I am proud of the manner in which the firm has conducted itself since discovering it,” Daniel Pinto, head of the securities unit, said in an e-mail to staff seen by the Financial Times.
FSA loses insider dealing case
The Financial Services Authority on Thursday lost its first insider share dealing case, as a finance director and two lawyers were acquitted of an alleged conspiracy to make tens of thousands of pounds by trading shares in a drugs company days before a proposal to take it over was announced, write Brooke Masters and Michael Peel.
Andrew King, former finance director of NeuTec Pharma, the company at the centre of the allegations, and Michael McFall, a lawyer, were acquitted by a jury at Southwark Crown Court. Andrew Rimmington, another lawyer, who was discharged during the trial for personal reasons, was also acquitted after the FSA offered no evidence against him in light of the other verdicts.
Lawyers said the acquittals would not greatly damage the FSA’s reputation, since they came in the wake of several wins and showed the prosecutor was not playing it safe by taking on easy cases.
Margaret Cole, director of enforcement and financial crime at the FSA, said: “Insider dealing cases are challenging to prove, but these were serious charges and we considered that the evidence provided a proper basis to put the case before a jury for them to decide. Criminal prosecutions are integral to the FSA’s long-term strategy of delivering credible deterrence and combating insider dealing.
She added that the FSA was “not afraid to pursue cases through the criminal courts” and that prosecutions sent a message “loud and clear that insider dealing is a serious crime”.
Mr McFall and Mr Rimmington, partners specialising in corporate law at US firms, made £39,000 profit each when they traded in NeuTec shares in late May and early June 2006. They bought the stock days before the company, which specialised in treatments for drug-resistant infections, announced a £305m takeover offer from Swiss drugs group Novartis.
Sarah Wallace, a lawyer at Irwin Mitchell representing Mr King, said: “We always believed the FSA’s case against him was flawed but Mr King has faced a long fight to clear his name and he and his family have faced years of worry.”
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