One of the most significant legal actions involving Wall Street’s role in the 2008 financial crisis recently ended in settlement. JPMorgan Chase & Co. has agreed to pay $153.6 million to settle civil fraud charges brought against it by the SEC. The SEC lawsuit charged JP Morgan with misleading investors into purchasing complex mortgage securities immediately prior to the collapse of the housing market.
The case revolves around the need for the sellers of securities to sufficiently disclose all relevant information to potential purchasers. JPMorgan failed to inform investors that the mortgage securities were part of an investment portfolio that a hedge fund helped construct. More significantly, investors were never told that the same Hedge Fund was betting that the portfolio would fail. Following the resolution of the lawsuit, SEC Enforcement Chief Robert Khuzami stated “the appropriate disclosures would have been to inform investors that an entity with economic interests adverse to their own was involved in selecting the portfolio.”
JPMorgan itself has produced statements showing that it lost $900 million on the investment. Incidentally, just two weeks earlier, JPMorgan CEO Jamie Dimon complained to Federal Reserve Chairman Ben Bernanke that new financial regulations put in place following the financial crisis placed too high a burden on banks.
The investors who were harmed, mostly large financial institutions, will be reimbursed for all of their losses as part of the settlement. The remaining portion of the settlement, consisting of approximately $30 million, will go to the U.S. Treasury. In addition, JPMorgan, while neither admitting nor denying wrongdoing, agreed to improve its procedures for reviewing and approving mortgage securities transactions. Just a year earlier, similar charges were brought against Goldman Sachs & Co., resulting in a $550 million settlement, the largest penalty against a Wall Street firm in SEC history.