SEC Puts the Hurt on Hertz -- but is that fair and balanced?

July 8, 2011

On July 7, 2011, the Department of Justice issued a press release: JPMorgan Chase Admits to Anticompetitive Conduct by Former Employees in the Municipal Bond Investments Market and Agrees to Pay $228 Million to Federal and State Agencies . As part of the non-prosecution agreement,  JPMorgan admits, acknowledges and accepts responsibility for illegal, anti-competitive conduct by its former  municipal derivatives desk employees, who entered into unlawful agreements to manipulate the bidding process and rig bids on municipal investment and related contracts from 2001 through 2006. JPMorgan has agreed to pay restitution to victims of the anti-competitive conduct and to cooperate fully with the Justice Department's Antitrust Division in its ongoing investigation into anti-competitive conduct in the municipal bond derivatives industry.

To date, the Antitrust Division's ongoing investigation has resulted in criminal charges against 18 former executives of various financial services companies and one corporation.   One of these charged executives, James Hertz, is a former JPMorgan employee.   Nine of the 18 executives charged have pleaded guilty, including Hertz.

In The Matter of James L. Hertz

The Securities and Exchange Commission ("SEC") just published In the Matter of James L. Hertz, an ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTIONS 15(b) AND 15B(c) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS (Securities Exchange Act of 1934 Rel. # 64831, Administrative Proceeding # 3-14455, July 7, 2011). Rather than be accused of paraphrasing or taking things out of context, let me offer you, verbatim, the guts of the SEC's Order:

[O]n the basis of this Order and Respondent's Offer, the Commission finds that:
1. Hertz, from 1994 through December 2007, was an employee of J.P. Morgan Securities Inc. ("JPMSI"), a Delaware corporation with its principal place of business in New York, New York. JPMSI has been registered with the Commission, pursuant to Section 15(b) of the Exchange Act, as a broker-dealer since 1986, and is also, pursuant to Section 15B(a) of the Exchange Act, a registered municipal securities dealer. During the relevant time period, Hertz worked in JPMSI's municipal derivatives group, in New York City, as a vice president and marketer of investment agreements and other municipal finance contracts. In that capacity, Hertz was authorized to act as an agent for J.P. Morgan Chase, N.A. ("JPMC Bank"), in marketing investment agreements and other municipal finance contracts. JPMC Bank is a federally-chartered bank, whose primary regulator is the Office of the Comptroller of the Currency. Hertz, age 53, is a resident of Cranford, New Jersey.
2. On November 30, 2010, in United States v. James L. Hertz, Criminal No. 10-cr-1178, Hertz pleaded guilty to two counts of conspiracy in violation of 15 U.S.C. § 1 and 18 U.S.C. § 371, respectively, and to one count of wire fraud in violation of 18 U.S.C. § 1343 before a United States Magistrate Judge in the United States District Court for the Southern District of New York; his plea allocution was subsequently accepted by the District Court on December 6, 2010. Hertz is currently scheduled to be sentenced on September 16, 2011.
3. The criminal information to which Hertz pleaded guilty charged, among other things, that Hertz engaged in fraudulent misconduct in connection with the competitive bidding process for the selection of the firms to provide instruments in which municipal issuers, in accordance with federal tax laws and regulations, temporarily invested the proceeds of tax-exempt municipal bonds. More specifically, the information charged that, from as early as October 2001 until at least November 2006, Hertz conspired to allocate and rig bids for investment agreements or other municipal finance contracts, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. The information further charged that, from as early as 1998 until at least November 2006, Hertz, in violation of 18 U.S.C. § 371, conspired to defraud the United States and an agency thereof, the Internal Revenue Service of the United States Department of Treasury ("IRS"), by impeding, impairing, obstructing, and defeating the lawful government functions of the IRS in the ascertainment, computation, assessment, and collection of revenue due and owing from municipal issuers and in exercising its responsibilities to monitor compliance with Treasury regulations related to tax-exempt municipal bonds. In addition, the information charged that, as a part and an object of the latter conspiracy, Hertz and other persons devised a scheme and artifice to defraud municipal issuers that used a certain unnamed broker and to obtain money and property from these municipal issuers by means of false and fraudulent pretenses, representations and promises, namely a scheme to deprive municipal issuers of money by causing them to award investment agreements and other municipal finance contracts brokered by the unnamed broker at artificially determined or suppressed rates, and to deprive municipal issuers that used the unnamed broker of the property right to control their assets by causing them to make economic decisions based on false and misleading information, and for the purposes of executing such scheme and artifice transmitted and caused to be transmitted certain false and misleading information by means of wire, radio or television communication in interstate or foreign commerce any writings, signs, signals, pictures or sounds, in violation of 18 U.S.C. § 1343.


In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Hertz's Offer.
Accordingly, it is hereby ORDERED:
Pursuant to Sections 15(b)(6) and 15B(c)(4) of the Exchange Act, Respondent Hertz be, and hereby is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of penny stock. . .

Read the full Hertz Order HERE

Hertz is Hurting

Okay, so, let's see if we can agree on some basics of this matter.

Hertz was a JPMSI vice president and marketer of investment agreements and other municipal finance contracts, and authorized to act as an agent for JPMC Bank, in marketing investment agreements and other municipal finance contracts. On November 30, 2010, Hertz pleaded guilty to two counts of conspiracy and to one count of wire fraud in connection with, among other allegations, bid rigging the municipal bond process. In consideration of his guilty pleas and the underlying crimes, the SEC barred Hertz from further association in what is essentially the securities industry.

Then there's that other thing we have to contend with. JPMorgan Chase got off with a non-prosecution agreement by agreeing to pay $228 million.  The firm didn't get shut down - the equivalent of Hertz's bar.  In fact, if past is prologue, we should even expect some nifty legal maneuvering that will deflect a whole host of arrows in the SEC's quiver - darts that were intended to be fired into just such targets as financial services firms who rip off the public.  Oh, and, yes, I know - we must be careful not to conflate all the different monikers by which JPMorgan Chase goes these days; we must respect the differences between and among the various entities bearing all or part of that name. Some are not subject to the SEC's jurisdiction. Some are.

Thought Piece

So - let me ask you? You think that Hertz's punishment from the SEC fit his crimes? You think it's fair that Hertz be barred from further industry affiliation for bid rigging and other antitrust and fraud crimes?

Let say, for argument's sake, that we agree that the answer is "yes."

Fine, now for my tirade.

You know how I'm always chastising regulators and prosecutors for having double standards when it comes to how relatively lightly they punish the misconduct of the big fish (the large financial services companies) versus how they come down on the small fry (the smaller financial firms and their individual employees)? I'm sure that given the somewhat regular drumbeat on that issue that emanates from my Street Sweeper column, you sometimes roll your eyes at my jeremiads. Oh no, Singer's off on another one of his rants!

Fair enough. Let me step back and take a deep breath. How about you do the heavy lifting and hauling here?

Please re-read my recent Street Sweeper column "No Time-Out for UBS. SEC Says All Is Forgiven, For Now." (Street Sweeper, June 9, 2011) about the SEC's kindly treatment of a request from UBS to be relieved of some of the burdensome restrictions on its business - restrictions that would have been imposed because of UBS's recent multimillion-dollar settlement of federal charges of municipal-bond bid-rigging.

Yeah, ain't that the damnedest thing? UBS was chafing under the collar when confronted by the SEC's possible enforcement of fairly strict limits on its ability to do deals as a result of its muni bond shenanigans. Hertz - the individual executive - he gets barred from the industry. Period. End of story. UBS? Oh, well, you know how that goes. They pay settlement money. Of course, come to think of it, UBS is a publicly traded firm, so I guess the bucks actually come out of the shareholders' pockets. Hey, minor detail.

So, anyway, like I was saying, the entire SEC brick wall collapses on Hertz but when it comes to a whale like UBS, those bricks don't exactly crush the firm - it's more like some paint splatters the company and then the SEC is asked to pitch in with the clean up, can you lend us a few rags and some turpentine to clean off? And, to make matters worse, it's not just UBS that gets this regulatory/prosecutorial sympathy. It's virtually a tip of the hat to all the big boys down the line.

After you've read the article linked below, tell me if you think what was good for the goose Hertz turned out to also be good for the gander UBS. Why did Hertz gets barred by the SEC but UBS received unstrained mercy?

Read: "No Time-Out for UBS. SEC Says All Is Forgiven, For Now." (Street Sweeper, June 9, 2011)

July 8, 2011 (3:20 PM ET) Postscript:

A reader sent me the following comment:

Bill, saw your post about James Hertz and UBS. Just so you know, three former UBS employees, including the former head of the municipal derivatives desk, are facing, antitrust, fraud, and other charges in SDNY. SEC also barred a former UBS employee, Mark Zaino, who cooperated with the criminal investigation. .

As you noted, the feds haven't prosecuted the banks.

My reply: I know all of that, and thanks for the head's up.  My point in the article is that DOJ and SEC continue to slam the individual employees, frequently with industry bars, but the member firms/banks always seem to be able to obtain an exemption from the Bad Boy provisions. The UBS and BOA cases are perfect examples.  At what point does the gestalt result in the simple syllogism that if an organization's employees are being indicted and administratively pursued, that it's no longer solely an issue about "our former employees" and becomes an issue about the company itself?  If the SEC won't shut down a UBS or BOA for, say five days, after hundreds of millions in muni fraud, then how about refusing to give the No-Action Letter relief for 3 months, or 6 months, or even a year?