JPMORGAN CHASE ORDERED TO PAY $100 MILLION FOR DISCLOSURE FAILURES

FROM:  U.S. COMMODITY FUTURES 

CFTC Orders JPMorgan Chase Bank, N.A. to Pay $100 Million for Failure to Disclose Conflicts of Interest

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against JPMorgan Chase Bank, N.A. (JPMCB). The Order finds that JPMCB failed to disclose certain conflicts of interest to clients of its U.S.-based wealth management business, J.P. Morgan Private Bank. Specifically, JPMCB failed to fully disclose its preference for investing its client funds in certain commodity pools or exempt pools, namely hedge funds and mutual funds managed and operated by an affiliate and subsidiary of JP Morgan Chase & Co. (Proprietary Funds). JPMCB also failed to disclose its preference for investing its clients’ funds in third-party-managed hedge funds, each a commodity pool or exempt pool, that shared management and/or performance fees with a JPMCB affiliate. JPMorgan has admitted to facts set forth in the Order and acknowledged that its conduct violated the Commodity Exchange Act and/or related Regulations.

The CFTC Order requires JPMCB to pay a $40 million civil monetary penalty, to pay disgorgement in the amount of $60 million, and to cease and desist from further violations as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank. As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.”

As set forth in the Order, JPMCB serves as the investment manager for certain of its clients’ investment management accounts (IM Accounts) and certain private funds, known as the Global Access Portfolios (GAP), which are also offered to JPMCB clients. Since at least 2008, JPMCB has preferred to invest IM Accounts and GAP private fund assets in Proprietary Funds and has expected that a significant percentage of relevant portfolio assets will be invested in Proprietary Funds. Although JPMCB had historically made some disclosures regarding this preference, JPMCB did not disclose its preference for Proprietary Funds from January 2011 through January 2014, and never disclosed its preference for investment in proprietary hedge funds prior to January 2014.

Additionally, prior to August 2015, JPMCB failed to disclose its preference to invest IM accounts and GAP private funds in third-party hedge funds (each a commodity pool or exempt pool) for which JPMCB acts as the placement agent and earns fees for placement, shareholder servicing and other ongoing services.

These placement agent fees are typically referred to as “retrocessions.” Since at least 2005, JPMCB sought “retrocessions” from third-party hedge fund managers that were under consideration for IM account and GAP private funds investments. During introductory meetings, third-party hedge fund managers were typically asked about their willingness to pay retrocessions. If a manager declined to pay retrocessions, JPMCB typically sought an alternative manager with a similar investment strategy who was willing to pay JPMCB retrocessions. JPMCB did not disclose its preference for retrocession-paying third-party hedge fund managers until August 2015, when it added additional language to certain client documentation.

The CFTC Order is being announced simultaneously with the issuance of an order by the U.S. Securities and Exchange Commission settling charges for related conduct. The CFTC thanks and appreciates the assistance of the U.S. Securities and Exchange Commission.

The CFTC Division of Enforcement staff members responsible for this case are Neel Chopra, Katie Rasor, Chad Silverman (former staff), K. Brent Tomer, Lenel Hickson and Manal Sultan.

FORMER OFFSHORE BROKERAGE HEAD PLEADS GUILTY TO CHARGES STEMMING FROM INTERNATIONAL PUMP AND DUMP SCHEME

FROM:  U.S. JUSTICE DEPARTMENT 

Thursday, December 10, 2015

Former Head of Offshore Brokerage Pleads Guilty to Conspiracy to Commit International Stock Fraud and Money Laundering Scams

A California man pleaded guilty today to two counts of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering in connection with an international “pump and dump” scheme involving stocks traded on the over-the-counter (OTC) market.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Dana J. Boente of the Eastern District of Virginia and Assistant Director in Charge Paul M. Abbate of the FBI’s Washington Field Office made the announcement.

Harold Bailey Gallison II, 58, of Valley Center, California, was charged in an indictment unsealed on July 14, 2015, along with eight other individuals for their roles in complex, international stock manipulation and money laundering schemes.

In entering his guilty plea, Gallison admitted that he conspired to artificially “pump” or inflate the trading volume and price of the shares of Warrior Girl Corp., quoted on the OTC market under the ticker symbol WRGL, and Everock Inc., quoted on the OTC market under the ticker symbol EVRN, by touting business activities and deceptive revenue forecasts and by engaging in coordinated trading activity to create the appearance of increasing market demand.  Gallison admitted that he and others then “dumped” or sold the shares at the inflated prices and laundered proceeds through bank accounts in the United States and overseas.  Gallison further admitted that he facilitated the schemes through an offshore brokerage and money laundering platform that went by various names, including Sandias Azucaradas, Moneyline Brokers and Trinity Asset Services (collectively Moneyline).  Through Moneyline, Gallison created nominee accounts in the names of shell companies to conceal both the true source and ownership of the securities and the flow of funds.  In addition, Gallison pleaded guilty to one count of conspiring to launder the proceeds of a number of securities fraud schemes, including Warrior Girl and Everock, totaling more than $25 million.

Several of Gallison’s co-defendants are scheduled to proceed to trial on Jan. 25, 2016, and are presumed innocent until and unless proven guilty.  Gallison is scheduled to be sentenced on March 18, 2016.

The FBI’s Washington Field Office is investigating the case.  Senior Trial Attorney N. Nathan Dimock and Trial Attorney Michael O’Neill of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Kosta Stojilkovic of the Eastern District of Virginia are prosecuting the case.  Assistant U.S. Attorneys James P. Gillis and G. Zachary Terwilliger of the Eastern District of Virginia assisted in the prosecution.  The Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Criminal Division’s Office of International Affairs also provided significant assistance.