Yesterday, Reuters reported that the SEC has imposed a 4 million USD fine on JP Morgan Chase.
What is really curious is why such a fine was imposed.
The SEC’s $4 million charge against JP Morgan’s wrongdoing
Reading the text of the order issued by the SEC reveals that it is a subsidiary of JPMorgan Chase, namely JP Morgan Securities LLC, that is being fined.
In this text, the SEC writes that JPMorgan deleted about 47 million electronic communications, emails, in about 8,700 inboxes, related to the period from 1 January to 23 April 2018.
Many of these emails were business records that had to be retained under the Exchange Act and Rule.
Thus it relates to events five years ago, and the offense being charged is purely administrative in nature.
Indeed, the text of the SEC‘s order reveals that since 2016 JPMorgan had undertaken a project to delete from its system older documents and communications that were no longer required to be retained by law.
However, they also mistakenly deleted documents and communications that by law should have been retained for a while.
SEC: JP Morgan’s $4 million mistake
The SEC writes:
“The deletion tasks implemented by JPMorgan employees in connection with the project experienced glitches, with the identified documents not, in fact, being expunged.
In June 2019, while troubleshooting the issue, firm employees executed deletion tasks on electronic communications from the first quarter of 2018, erroneously believing, based on written representations from JPMorgan’s archiving vendor, that all the documents were coded in a way to prevent permanent deletion of records still within the thirty-six month regulatory retention period required by Section 17(a) of the Exchange Act and Rule 17a-4(b) thereunder.”
The problem identified is that this retention service provider failed to apply the correct retention settings , and thus many of the communications that were to be retained were permanently deleted, and are now unrecoverable.
The fine
A relatively trivial mistake like this, apparently due to miscommunication between the parties involved and perhaps a bit of negligence, cost JP Morgan dearly.
In fact, the SEC ordered it to pay within 14 days a fine in the amount of four million dollars ($4,000,000.00) to the Securities and
Exchange Commission, which will then be transferred to the general fund of the US Treasury.
Additional interest will also be charged in the event of failure to pay on time.
The amount of the penalty seems particularly high, relative to the seriousness of the offense, but the SEC writes that it considers this appropriate in the public interest.
The reasons for the fine
The problem is that JPMorgan deliberately violated Sections 17(a) and 17a-4(b)(4) of the Exchange Act, which require that originals of all communications received and copies of all communications sent be retained for at least three years.
That “deliberately” might provide some insight into the SEC’s motives for imposing such a hefty fine, not least because just before they write that JPMorgan had received subpoenas and document requests in at least twelve securities-related investigations, eight of which were conducted by the SEC itself.
Communications from some of those investigations can now no longer be retrieved.
In addition, it appears that JPMorgan notified the SEC of the loss of documents and communications in only one of the SEC’s eight investigations into the matter.
In this regard, the SEC writes:
“Because the deleted records are unrecoverable, it is unknown – and unknowable – how the lost records may have affected the regulatory investigations. Indeed, a member of JPMorgan’s compliance department acknowledged in an internal email after the deletion event was discovered that lost documents could relate to potential future investigations, legal matters and regulatory inquiries.”
The suspicion therefore is that “deliberately” refers to a voluntary act, perhaps to get something potentially compromising out of the way.
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