Three high-profile firms have been slapped by three regulatory entities with fines and arbitration awards relating to hedge funds during the financial crisis (FINRA on Merrill Clearing), municipal bond reinvestment transactions (the SEC on JP Morgan) and an interim award for alleged breach of fiduciary duty on an individual investor (a private arbitration panel on Fisher Investments.)
FINRA and Merrill Lynch
A FINRA arbitration panel ordered Merrill Lynch Professional Clearing (now part of BAC) to pay more than $63.7 million to Rosen Capital Partners, a hedge-fund group, as compensation for losses incurred during the 2008 financial crisis, according to an award document released by FINRA on Tuesday.
The Los Angeles-based panel found Merrill’s clearing unit liable for about $63.7 million in compensatory damages as well as 9% interest accruing from Oct. 7, 2008 – representing about $15.5 million. Punitive damages were denied, but the amount of the compensatory damages makes it one of the largest ever awards granted by FINRA arbitrators, the self-regulatory body says.
Rosen had alleged damages caused by “unexpected margin calls” and sought punitive damages for what it said was a breach of contract, fraud and negligence on the part of Merrill.
“We strongly disagree with the arbitration panel’s award, which is contrary to the facts presented,” Merrill Lynch spokesperson William Halldin said in a statement. “At all times, we met the contractual requirements of our relationship with this sophisticated hedge fund, which sought to blame us for losses during a period of extreme market volatility in October 2008. We are considering additional action in this matter, including asking a court to overturn this award.”
SEC and JP Morgan
The Securities and Exchange Commission announced Thursday that it had charged J.P. Morgan Securities (JPMS) with “fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in ill-gotten gains.” The SEC said that to settle the SEC’s fraud charges, JPMS agreed to pay approximately $51.2 million that will be returned to the affected municipalities or conduit borrowers. JPMS and its affiliates also agreed to pay $177 million to settle parallel charges brought by other federal and state authorities.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the company, acting as the agent for its affiliated commercial bank, JPMorgan Chase Bank (JPM), at times won bids because it obtained information from the bidding agents about competing bids, a practice known as “last looks.” In other instances, it won bids set up in advance for JPMS to win because the bidding agent deliberately obtained nonwinning bids from other providers, and it facilitated bids rigged for others to win by deliberately submitting nonwinning bids.
“JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal ‘last look’ at competitors’ bids,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in the statement. “Municipal issuers and investors didn’t stand a chance against the fraudulent strategies JPMS and others used to guarantee profits.”
Without admitting or denying the allegations in the SEC’s complaint, JPMS consented to the entry of a final judgment under the Securities Exchange Act of 1934 and has agreed to pay a penalty of $32.5 million and surrender $11.1 million with prejudgment interest of $7.6 million. The settlement is subject to court approval.