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IN THE MATTER OF:

JPMORGAN CHASE & CO.

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CONSENT ORDER

DOCKET NO. CO-10-7784-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
WHEREAS, certain affiliates of JPMorgan Chase & Co. (“JPMorgan”) are broker-dealers registered in the State of Connecticut;
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking (“Division”), conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of JPMorgan, its subsidiaries and affiliates, to determine whether they, or any of them, had violated, were violating or were about to violate any provisions of the Act or Regulations;
WHEREAS, an investigation into the activities of JPMorgan and its subsidiaries and affiliates, excluding WaMu Investments Inc. (CRD number 599) which JPMorgan Chase & Co. acquired on September 25, 2008, but including J.P. Morgan Securities Inc. (CRD number 79), Chase Investment Services Corp. (CRD number 25574) and Bear Stearns & Co. and affiliates (singly and collectively, the “JPMorgan Broker-dealers”) in connection with certain practices involving the marketing and sale of auction rate securities from approximately January 2006 through the present has been conducted under the auspices of a multistate task force (“Multi-state Task Force”);
WHEREAS, JPMorgan and the JPMorgan Broker-dealers have cooperated with regulators conducting the investigation by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to facts relating to the investigation;
WHEREAS, JPMorgan and the JPMorgan Broker-dealers have advised regulators that they desire to settle and resolve the investigations without admitting or denying the allegations set forth below;
WHEREAS, in resolution of the matters described herein, JPMorgan, on behalf of the JPMorgan Broker-dealers, has agreed, inter alia, to reimburse certain purchasers of auction rate securities, and to pay a total fine of Twenty-five Million Dollars ($25,000,000) to all the jurisdictions, including Connecticut, represented by the Multi-state Task Force;
WHEREAS, Section 36b-15(a) of the Act authorizes the Commissioner to revoke any registration if, inter alia, the commissioner finds that (1) the order is in the public interest, and (2) the registrant has engaged in dishonest or unethical practices in the securities business, or if the registrant has failed to reasonably supervise its agents;
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
WHEREAS, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine of up to One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive”;
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, JPMorgan, on behalf of the JPMorgan Broker-dealers, through its execution of this Consent Order, voluntarily waives the following rights with respect to this Consent Order:

1. To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
2. To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;

NOW THEREFORE, the Commissioner hereby enters this Consent Order.

III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER

1. JPMorgan, on behalf of the JPMorgan Broker-dealers, admits the jurisdiction of the Commissioner, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order, and consents to the entry of this Consent Order by the Commissioner.

IV. FINDINGS OF FACT

2. Auction rate securities (“ARS”) are financial instruments that include auction preferred shares of closed-end funds, municipal auction rate bonds, and student loan-backed auction rate bonds.  While ARS are all long-term instruments, one significant feature of ARS (which historically provided the potential for short-term liquidity) is the interest/dividend reset through periodic auctions.  If an auction is successful (i.e., there are enough buyers for every ARS being offered for sale at the auction), investors are able to sell their ARS on a short-term basis.  If, however, auctions “fail” (i.e., there are not enough buyers for every ARS being offered for sale), investors may be required to hold all or some of their ARS until the next successful auction in order to liquidate their funds.

Marketing and Sales of ARS to Investors

3. Although the JPMorgan Broker-dealers were aware of increasing strains in areas of the ARS market during the approximately six (6) months prior to the mass failure, the JPMorgan Broker-dealers failed to ensure that all of their registered representatives made appropriate disclosures to customers regarding the nature and risks of auction rate securities.  Certain employees of the JPMorgan Broker-dealers stated that auction rate securities were liquid, safe, short-term investments, and did not highlight the risk that, in the event of a failed auction, the securities might become illiquid.
4. J.P. Morgan Securities Inc. and Chase Investment Services Corp. used the proprietary name M-Stars or Municipal Short Term Auction Rate Securities in marketing ARS.  This could have led certain investors to conclude that ARS were short-term instruments.  In fact, ARS were not simply “short-term” instruments.  For example, certain student loan MSTARS had maturities in the year 2039 and full liquidity was only available at an auction if the auction was successful.
5. Starting in the fall of 2007, demand for certain auction rate securities continued to erode and the JPMorgan Broker-dealers’ auction rate securities inventory grew significantly.  The JPMorgan Broker-dealers did not discuss the increasing risks of owning or purchasing auction rate securities with all of their customers.
6. In February 2008, the JPMorgan Broker-dealers stopped uniformly supporting auctions for which they acted as the sole or lead broker.  Without the benefit of support bids from broker-dealers, the auction rate securities market collapsed, leaving certain investors who had believed that these securities were liquid, safe, short-term investments appropriate for managing short-term cash needs, holding long-term securities that could not be sold at par value.

Failure to Supervise Agents who Sold ARS

7. The JPMorgan Broker-dealers did not provide all of their respective sales or marketing staff with the training and information necessary to adequately explain these products or the mechanics of the auction process to their customers.
8. Not all of the JPMorgan Broker-dealers’ registered associated persons were adequately educated in the ARS products they were selling.
9. The JPMorgan Broker-dealers failed to reasonably supervise all their employees, by among other things:

a.
failing to provide adequate training to all their registered agents regarding ARS by, among other things:
i. failing to provide to all of their registered agents timely and comprehensive sales and marketing literature regarding ARS and the mechanics of the auction process;
ii. failing to provide to all of their registered agents all pertinent information concerning the ARS product; and
iii. failing to provide to all of their registered agents all pertinent information regarding the state of the market prior to the mass auction failures in mid-February, 2008;

  

b. failing to review ARS transactions in accounts of certain customers who needed liquidity; and
c. failing to ensure that all their registered personnel were providing adequate information regarding ARS to their customers.

V. CONCLUSIONS OF LAW

1. The Commissioner has jurisdiction over this matter pursuant to the Act.
2. As described in the Findings of Fact above, the JPMorgan Broker-dealers failed to reasonably supervise their agents in contravention of Section 36b-31-6f (b) of the Regulations.
3. As described in the Findings of Fact above, the JPMorgan Broker-dealers, in connection with the offer, sale or purchase of ARS, directly or indirectly engaged in unethical practices in contravention of Section 36b-4(b) of the Act.
4. The Commissioner finds that the entry of this Consent Order and the following relief are necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act.

VI. CONDITIONS PRECEDENT TO ENTRY OF CONSENT ORDER

As conditions precedent to the entry of this Consent Order, JPMorgan represents, through its execution of this Consent Order, that it has, alone and/or through its affiliates, complied with the following:

A. Repurchase of ARS from Individual Investors

1. JPMorgan, alone and/or through its affiliates, offered to buy back, at par, ARS that, since February 12, 2008, were not auctioning from individual investors who purchased those ARS from the JPMorgan Broker-dealers prior to February 12, 2008 (“Individual Investors”).  For purposes of the multi-state settlement, the term “Individual Investors” (a) included charities and small to medium-sized businesses with account values and household values up to $10 million; and (b) excluded senior management of JPMorgan, its affiliates and predecessors as well as financial advisors/registered representatives of the JPMorgan Broker-dealers.  Such buybacks were completed no later than December 16, 2008.
2. JPMorgan, alone and/or through its affiliates, provided notice to customers of the settlement terms and established a dedicated telephone assistance line, with appropriate staff, to respond to questions from customers concerning the terms of the settlement.

B. Relief for Investors Who Sold Below Par

3. No later than December 16, 2008, any JPMorgan Broker-dealer Individual Investors that could be reasonably identified by JPMorgan and its affiliates who sold ARS below par between February 12, 2008 and announcement of the multistate settlement were paid the difference between par and the price at which the investor sold the ARS.

C. Consequential Damages Claims

4. No later than December 16, 2008, JPMorgan, alone and/or through its affiliates, notified those JPMorgan Broker-dealer clients who owned ARS that a public arbitrator (as defined in Section 12100(u) of the NASD Code of Arbitration Procedures for Customer Disputes, eff. April 16, 2007), under the auspices of FINRA, would be available for the exclusive purpose of arbitrating any JPMorgan Broker-dealer Individual Investor’s consequential damages claim.  Arbitration would be conducted by public arbitrators, and JPMorgan and/or its affiliates would pay all applicable forum and filing fees.  Any Individual Investors who chose to pursue such claims would bear the burden of proving that they suffered consequential damages, and that such damages were caused by investors’ inability to access funds consisting of investors’ ARS holdings at the JPMorgan Broker-dealers.  JPMorgan and its affiliates would be able to defend themselves against such claims; provided, however, that JPMorgan and its affiliates would not contest in such arbitrations liability related to the sale of ARS.  Special or punitive damages would not be available in the arbitration proceedings.

D. Institutional Investors

5. JPMorgan and its affiliates endeavored to continue to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously provide liquidity solutions for institutional investors not covered by paragraph A. of these Conditions Precedent that continued to hold ARS purchased from the JPMorgan Broker-dealers (“Institutional Investors”).  Within 45 days of the end of each quarter beginning with a report covering the quarter ended December 31, 2008 (due on February 14, 2009), and continuing through and including a report covering the quarter ended December 31, 2009 (due on February 14, 2010), JPMorgan and its affiliates submitted a quarterly written report detailing their progress with respect to these Conditions Precedent and outlining the efforts in which they engaged, and the results of those efforts, with respect to Institutional Investors’ holdings in ARS.  On several occasions in this time period, representatives of JPMorgan conferred with a representative of the North American Securities Administrators Association, Inc. (“NASAA”) to discuss its progress, and detailed to the NASAA representative any implementational steps required to address concerns communicated by the NASAA representative to JPMorgan.  The quarterly reports and conferences continued until the first quarter of 2010.

E. Relief for Municipal Issuers

6. The JPMorgan Broker-dealers refunded underwriting fees they received from municipal auction rate issuers that issued such securities through the JPMorgan Broker-dealers in the initial primary market between August 1, 2007 and February 12, 2008, and refinanced those securities through the JPMorgan Broker-dealers between February 12, 2008 and June 2, 2009.

VII. CONSENT ORDER

On the basis of the Findings of Fact, Conclusions of Law, and JPMorgan’s consent to the entry of this Consent Order,

IT IS HEREBY ORDERED THAT:

1. Entry of this Consent Order concludes the investigation by the Division and any other action that the Commissioner could commence under the Act on behalf of Connecticut as it relates to JPMorgan and its affiliates’ sales and marketing of auction rate securities at the JPMorgan Broker-dealers; provided, however, that excluded from and not covered by this paragraph are any claims by the Commissioner arising from or relating to violations of the provisions contained in this Consent Order;
2. This Consent Order is entered into solely for the purpose of resolving the referenced Multistate Investigation and is not intended to be used for any other purpose;
3. JPMorgan and its affiliates shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act;
4. Within ten (10) days after the entry of this Consent Order by the Commissioner, JPMorgan shall pay to the “Treasurer, State of Connecticut”, by electronic funds transfer or wire transfer, the sum of Five Hundred Forty-three Thousand Four Hundred Forty-five and 82/100 Dollars ($543,445.82), representing the state’s proportionate share of the multistate settlement, as a fine;
5. In the event another state securities regulator determines not to accept JPMorgan’s settlement offer pursuant to the multistate settlement, the total amount of the payment to the State of Connecticut shall not be affected, and shall remain at Five Hundred Forty-three Thousand Four Hundred Forty-five and 82/100 Dollars ($543,445.82);
6. To the extent that JPMorgan agrees to any subsequent settlement with any North American Securities Administrators Association (NASAA) jurisdiction arising out of the above-referenced coordinated investigations pertaining to JPMorgan’s marketing and sale of ARS to Individual Investors who are natural persons (“Retail ARS Investors”), which includes a term or terms analogous to the terms herein which are more favorable to Retail ARS Investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Connecticut Retail ARS Investors;
7. In consideration of the multistate Settlement, the Commissioner will (a) terminate the investigation under the Act with respect to the JPMorgan Broker-dealers’ marketing and sale of ARS to Individual Investors as defined in paragraph A.1. of the Conditions Precedent herein.  However, nothing herein limits the ability of the Commissioner to pursue any investigation relating to any party other than JPMorgan and the JPMorgan Broker-dealers; and (b) refrain from taking legal action, excluding the entry of this Consent Order, against JPMorgan with respect to Institutional Investors until November 12, 2008;
8. If payment is not made by JPMorgan or if JPMorgan materially defaults in any of its obligations set forth in this Consent Order and fails to cure such a default reasonably after ten (10) days notice from the Division, notwithstanding any other provision of Connecticut law, the Commissioner may vacate this Consent Order at the Commissioner’s sole discretion and without opportunity for administrative hearing;
9. This Consent Order is not intended to indicate that JPMorgan or any of its affiliates or current or former employees shall be subject to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations, or various states’ securities laws, including any disqualifications from relying upon the registration exemptions or safe harbor provisions.  In addition, this Consent Order is not intended to form the basis for any such disqualifications;
10. Nothing herein shall preclude the State of Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions, and corporations (collectively, “State Entities”), other than the Commissioner and only to the extent set forth in paragraph 1 above, and the officers, agents or employees of State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against JPMorgan and its affiliates in connection with certain marketing and sales practices of auction rate securities at the JPMorgan Broker-dealers;
11. Except in an action by the Commissioner to enforce the obligations of JPMorgan and its affiliates pursuant to this Consent Order, this Consent Order may neither be deemed nor used as an admission of or evidence of any alleged fault, omission, or liability of JPMorgan in any civil, criminal, arbitration, or administrative proceeding in any court, administrative agency, or tribunal.  For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against JPMorgan including, without limitation, with respect to the use of any e-mails or other documents of JPMorgan or of others concerning the marketing and/or sales of auction rate securities, limit or create liability of JPMorgan, or limit or create defenses of JPMorgan to any claims;
12. This Consent Order shall not disqualify JPMorgan or any of its affiliates or current or former employees from any business that they otherwise are qualified or licensed to perform under applicable state law and is not intended to form the basis for any disqualification;
13. Any dispute related to this Consent Order shall be construed and enforced in accordance with, and governed by, the laws of the State of Connecticut without regard to any choice of law principles;
14. In consideration of the Commissioner entering into this settlement as reflected in this Consent Order, JPMorgan will remit the penalty described in paragraph 4. above;
15. This Consent Order shall be binding upon JPMorgan and its successors and assigns as well as on the successors and assigns of relevant affiliates with respect to all conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions.

NOW THEREFORE, the Commissioner enters the following:

1. The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against JPMorgan and its affiliates based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by JPMorgan and/or its affiliates and reflected herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when entered.

So ordered at Hartford, Connecticut _______/s/_________
this 2nd day of August 2010. Howard F. Pitkin
Banking Commissioner

CONSENT TO ENTRY OF ORDER

I, Lawrence Chanen, state on behalf of JPMorgan Chase & Co., that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of JPMorgan Chase & Co.; that JPMorgan Chase & Co. agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that JPMorgan Chase & Co. voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  JPMorgan Chase & Co. further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that JPMorgan Chase & Co. shall pay pursuant to the foregoing Consent Order.

JPMorgan Chase & Co.
By: ______/s/__________________
Name: Lawrence Chanen
Title: Senior Vice President and
Associate General Counsel
State of: New York

County of:  New York

On this the 27th day of July, 2010, before me, the undersigned officer, personally appeared Lawrence Chanen, who acknowledged himself to be the Senior Vice President of JPMorgan Chase & Co., a corporation, and that he, as such Senior Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Senior Vice President.

In witness whereof I hereunto set my hand.
_________/s/________________
Notary Public
Date Commission Expires: 9/7/12

Administrative Orders and Settlements
http://www.ct.gov/dob/cwp/view.asp?a=2246&q=463966