JPMorgan Settles SEC Charges

The Securities and Exchange Commission said on Wednesday that JPMorgan Chase & Company (JPM - Analyst Report) agreed to pay more than $700 million to settle federal regulators' charges for an unlawful payment scheme that helped them win business involving municipal-bond offerings and swap-agreement transactions in Jefferson County , Alabama.

JPMorgan Securities Inc, a division of JPMorgan Chase & Company, and two of its former managing directors, Charles LeCroy and Douglas MacFaddin, made those unlawful payments to win business and earn fees. The scandal was over the county's debt of around $4 billion which was pushing the county into the biggest municipal bankruptcy in U.S. history.

JPMorgan Securities has agreed to pay a fine of $25 million and $50 million to Jefferson County . The company will also lose more than $647 million in claimed termination fees on the swaps.

JPMorgan, LeCroy and MacFaddin were alleged to have made undisclosed payments of about $8 million to close friends of several Jefferson County commissioners. Since July 2002, these two managing directors have solicited the county for a $1.4 billion sewer bond deal.

As a result of the undisclosed payments, the commissioners of the country selected JPMorgan Securities as the managing underwriter of the bond offerings.

In July, the SEC proposed tightening rules governing disclosures about municipal securities to aid investors in a multitrillion-dollar market used to finance schools, roads and hospitals around the country. The current incident further underscores the importance of transparent and timelier disclosures of brokers and dealers for investors in the municipal bonds and other securities market.

JPMorgan’s third quarter earnings came in at 82 cents per share, substantially ahead of the Zacks Consensus Estimate of 49 cents. This compares favorably with 9 cents in the prior-year quarter.

Better-than-expected results were primarily aided by continued strong performance by the Investment Bank group. All the other segments except Consumer Lending and Card Services also delivered solid results during the quarter. However, a continuation of high levels of credit costs in Consumer Lending and Card Services loan portfolios and an increased provision for credit losses were the primary factors that negatively impacted the results.

We anticipate continued synergies from the company’s diversification and strong capital position, but increasing provisions and worsening credit quality will be a drag on upcoming results. Therefore, we are maintaining our Neutral recommendation on the shares of JPMorgan.