The many legal millstones weighing down JPMorgan

[August 13, 2013]  NEW YORK (AP) -- The London Whale isn't the only thing weighing on JPMorgan Chase these days.

In fact, the nation's largest bank has a long list of legal challenges beyond the $6 billion trading loss with the memorable nickname. It faces a swirl of investigations and lawsuits, among them accusations that it is too quick to sue credit card customers over late payments and that it should have caught on to Bernie Madoff's giant Ponzi scheme.

The bank has only recently cleared away other legal problems, including settling regulators' accusations last month that it manipulated energy prices.

The legal entanglements are an unwelcome development for a bank usually lauded for stellar risk management and considered the darling of Washington until as recently as last year, when the trading loss came to light. After emerging from the financial crisis better off than most of its peers, JPMorgan was the only big bank with a CEO who had the street cred and guts to both challenge President Barack Obama and be his confidante.

The shift in JPMorgan's reputation is a reminder that banks, supposedly chastened by the financial crisis, are still being haunted by it. Its struggles are also a microcosm of the government's tightening influence on the industry, and a reminder of how quickly fortunes can change.

Kathleen Day, a professor at Johns Hopkins University who lectures on the history of financial crises, questions whether the bank's board of directors is doing its job to rein in managers from excessive risk.

"The allegations are serious and unusual," Day says, "and the list just seems to go on and on."

To be fair, investors haven't seemed overly concerned so far. Even with the 2012 trading loss, the bank pulled in its biggest annual profit ever -- $20 billion. The stock, though it fell when the loss was announced in May 2012, is up by a third from its pre-Whale price. It closed Monday at $54.09.

CEO Jamie Dimon has said the bank is undergoing "extensive changes" to its business practices, and that regulatory compliance is its top priority. "Let me be perfectly clear: These problems were our fault, and it is our job to fix them," Dimon wrote in this year's annual letter to shareholders. "In fact, I feel terrible that we let our regulators down."

Some observers think JPMorgan is being unfairly targeted. They say that regulators -- criticized for being too lax before the financial crisis -- are now overcompensating by being too punitive.

"It is jihad against the largest U.S. banks," says Tom Brown, founder of the investment management firm Second Curve Capital and often a critic of the industry.

Among the legal problems JPMorgan is facing or has recently settled:

• The London Whale: The Department of Justice and the Securities and Exchange Commission are looking into last year's $6 billion trading loss, which is nicknamed after the location of the trader who allegedly engineered it and the size of the bets he made.
  
  Authorities are focusing on whether the bank had adequate control over its trading operations, and also whether it tried to cover up or downplay the size of the loss.
  
  Federal prosecutors are reportedly preparing to arrest two employees who were involved. JPMorgan says it has also received requests for information related to "inquiries and investigations" by Congress, U.S. banking regulators, the U.K.'s Financial Conduct Authority and others. JPMorgan says it is cooperating.
  
  The bank has acknowledged that it made mistakes. It has gotten rid of top managers, taken back bonuses and changed some of its risk management practices. But it rejects any assertions that it tried to hide the losses or the risks, and it is fighting lawsuits from shareholders who accuse it of that.

• Mortgage-backed securities: JPMorgan and other banks sold these investments in the run-up to the financial crisis. They'd make mortgage loans, then, instead of keeping them on their own books, they'd bundle the mortgages together and sell them in slivers to investors. When the housing bubble burst and many homes fell into foreclosure, the investors lost billions. Regulators -- as well as the investors -- have accused banks of not telling investors how risky the underlying mortgages were.
  
  JPMorgan faces criminal and civil investigations by the DOJ. The DOJ's civil division has already told the bank that it has reached the initial conclusion that the bank broke the law. The SEC made similar accusations, which JPMorgan settled in 2011 and again in 2012.
  
  The bank also faces lawsuits from the National Credit Union Administration and the New York attorney general's office. JPMorgan is contesting the attorney general's lawsuit, which targets investments sold by Bear Stearns in 2006 and 2007. JPMorgan didn't buy Bear Stearns until 2008.

• MF Global: JPMorgan held funds for MF Global, the brokerage led by former New Jersey Gov. Jon Corzine, and also processed some of its trades. When MF Global collapsed in 2011 under the weight of bad bets on European debt, about $1.2 billion in customer money was missing from its accounts. It was later discovered that the customer money was used to fund MF Global's own operations.
  
  After months of legal wrangling, a court in July approved a plan under which the bank agreed to return cash that was misplaced from customers' accounts.
  
  The bank continues to respond to inquiries from the Commodity Futures Trading Commission. It is also being sued by people who had invested in MF Global, and who claim that JPMorgan as an underwriter wasn't up front about the risks MF Global was taking. JPMorgan is fighting the lawsuit.

• Bernie Madoff: The disgraced financier used JPMorgan as one of his banks when he was running his giant Ponzi scheme. JPMorgan says it is responding to investigations by the DOJ and other regulators. It didn't give details, but it has previously faced accusations that it and other banks ignored signs that Madoff was a con artist.

• Collection practices: The bank says it is responding to formal and informal inquiries from state and federal regulators about its credit card collection practices.
  
  The California Attorney General has accused JPMorgan of illegally "robo-signing" various documents -- meaning bank employees signed the documents without reviewing them -- when the bank sued credit card customers who were behind on payments.
  
  The Consumer Financial Protection Bureau is also investigating the bank's collection and sale of consumer credit card debt.

[Associated Press; By CHRISTINA REXRODE and MARCY GORDON]

Gordon reported from Washington.

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