UNITED STATES OF AMERICA
In the Matter of
J.P. Morgan Securities Inc.,
ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 15(b)(4) AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER, PENALTY, AND OTHER RELIEF
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings pursuant to Section 15(b)(4) and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), be and hereby are, instituted against J.P. Morgan Securities Inc. ("Respondent" or "JPMSI").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Respondent, without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, consents to the entry of this Order Instituting Proceedings Pursuant to Section 15(b)(4) and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Cease-and-Desist Order, Penalty, and Other Relief ("Order").
On the basis of this Order and Respondent's Offer, the Commission finds that:
J.P. Morgan Securities Inc. is a subsidiary of JPMorgan Chase & Co. ("JPMC"), a Delaware corporation with its principal place of business in New York, New York. Respondent is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act and is a member of the New York Stock Exchange, Inc. ("NYSE") and NASD, Inc. ("NASD") and engages in a nationwide securities business. Respondent provides equity research, sales, trading services, merger and acquisition advisory services, private banking services and underwriting services.
This action concerns Respondent's violations of the record-keeping requirements of Section 17(a) of the Exchange Act and Rule 17a-4 thereunder during the period of July 1, 1999 to June 30, 2002 (the "relevant period"). During all or part of the relevant period, Respondent failed to preserve for three years, the first two of which in an easily accessible place, all electronic mail communications (including inter-office memoranda and communications) received and sent by its employees that related to its business as a member of an exchange, broker or dealer. Respondent lacked adequate systems or procedures for the preservation of electronic mail communications. The Commission, NYSE, and NASD (collectively, "the regulators") discovered these deficiencies during an inquiry into the supervision of Respondent's research and investment banking activities.
During the relevant period, Respondent and its predecessor entities engaged in both research and investment banking activities. In 1999, JPMSI was a subsidiary of J.P. Morgan & Co. Incorporated ("JPM"), and Chase Securities Inc. ("CSI") was a subsidiary of The Chase Manhattan Corporation ("Chase"). That year, Chase acquired Hambrecht & Quist LLC ("H&Q"), which engaged in research and investment banking activities. H&Q was merged into CSI, which operated under the name CSI and the trade name Chase H&Q until the merger of JPMSI and CSI.1 In December 2000, Chase acquired JPM, creating JPMC. In May 2001, CSI and JPMSI merged and assumed the name J.P. Morgan Securities Inc.
For purposes of this Order, JPMSI and its predecessor entities that engaged in both research and investment banking activities - H&Q, CSI, and JPMSI - shall be referred to, collectively, individually, or in any combination, as "Respondent" or "JPMSI."
In April 2002, the regulators commenced an inquiry into the research and investment banking activities of Respondent and other broker-dealers during the period of July 1, 1999 to June 30, 2001 (the "Phase I inquiry"). During this time, employees of Respondent used electronic communications to conduct business for the firm as a broker-dealer and member of an exchange.
Pursuant to the Phase I inquiry, the regulators made multiple requests to JPMSI for electronic mail ("e-mail") of research analysts and investment bankers. Respondent produced e-mail in response to these requests and subsequently indicated that e-mail production had been completed for certain individuals. The communications and other information contained in the e-mail provided evidence that, among other things, JPMSI had engaged in acts and practices that imposed conflicts of interest on research analysts.
In April 2003, the regulators initiated and settled enforcement actions against JPMSI and other broker-dealers for various violations involving their research and investment banking activities. See SEC v. J.P. Morgan Securities Inc., 04 Civ. 2939 (S.D.N.Y. Apr. 28, 2003); J.P. Morgan Securities Inc., Hearing Panel Decision 03-68 (Apr. 22, 2003); J.P. Morgan Securities Inc., NASD Letter of Acceptance Waiver and Consent No. CAF 030019 (April 24, 2003).
In May 2003, the regulators focused their inquiry on the supervision of the research and investment banking activities of Respondent and other broker-dealers during the period of July 1, 1999 to June 30, 2002 (the "Phase II inquiry"). The regulators requested that Respondent produce e-mail for various supervisory personnel and other employees. Respondent produced certain e-mail in response to these requests.
In August 2003, in response to requests by the regulators, Respondent indicated that e-mail productions for certain individuals were complete. Respondent stated that it had conducted a thorough review of internal logs to identify relevant "backup tapes" used to preserve e-mail responsive to the regulators' requests for information and that e-mail for certain individuals identified in the request had been produced.
In November 2003, the regulators requested that Respondent provide information regarding its ability to locate and restore backup tapes containing e-mail responsive to the regulators' requests during the investigation. Respondent subsequently advised the regulators that it had failed to retain or was unable to locate all responsive e-mail requested during those inquiries. Respondent's failure to retain all responsive e-mail was attributable to the following causes: certain backup tapes containing responsive e-mail could not be located in the storage facilities; certain backup tapes were damaged, contained data or media errors, or otherwise could not be restored; and Respondent failed to create or properly maintain backup tapes for certain time periods. Prior to November 2003, Respondent did not inform the regulators of its failure to retain responsive e-mail.
During the relevant period, Respondent had systems and procedures requiring the retention of certain electronic communications. However, those systems and procedures were inadequate to ensure that all electronic communications relating to Respondent's business were preserved for three years and for the first two years in an easily accessible place.
Section 17(a)(1) of the Exchange Act provides that each member of a national securities exchange, broker, or dealer "shall make and keep for prescribed periods such records, furnish copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title."
The Commission has emphasized the importance of the records required by the rules as "the basic source documents" of a broker-dealer. Statement Regarding the Maintenance of Current Books and Records by Brokers and Dealers, 4 SEC Docket 195 (April 26, 1974). The record-keeping rules are a "keystone of the surveillance of brokers and dealers by [Commission] staff and by the securities industry's self-regulatory bodies." Edward J. Mawod & Co., 46 S.E.C. 865, 873 n. 39 (1977) (citation omitted), aff'd sub nom. Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979).
Pursuant to its authority under Section 17(a)(1) of the Exchange Act, the Commission promulgated Rule 17a-4. Rule 17a-4(b)(4), in turn, requires Respondent to "preserve for a period of not less than three years, the first two years in an easily accessible place…. [o]riginals of all communications received and copies of all communications sent … by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such[.]" Rule 17a-4 is not by its terms limited to physical documents. The Commission has stated that internal electronic mail communications fall within the purview of Rule 17a-4 and that for the purposes of Rule 17a-4, "the content of the electronic communication is determinative" as to whether that communication is required to be retained and accessible. In the Matter of Deutsche Bank Securities, Inc., et al., Rel. No. 34-46937 (Dec. 3, 2002) (citing Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Rel. No. 34-38245 (Feb. 5, 1997)); see also In re Janney Montgomery Scott LLC, Rel. No. 34-50252 (Aug. 25, 2004); In the Matter of Robertson Stephens, Inc., Rel. No. 34-47144 (Jan. 9, 2003).
Based on the foregoing and Respondent's Offer of Settlement, the Commission finds that Respondent willfully violated Section 17(a) of the Exchange Act and Rule 17a-4 promulgated thereunder by failing to preserve electronic mail communications for three years, the first two of which in an easily accessible place.2
A. Respondent undertakes and agrees to pay penalties and fines totaling $2.1 million to resolve this proceeding and related actions by NYSE and NASD. In addition to the $700,000 civil penalty Respondent shall pay to the U.S. Treasury pursuant to this Order, Respondent undertakes and agrees to pay fines in the amount of $700,000 to NYSE and $700,000 to NASD.
B. Respondent has undertaken to review its procedures regarding the preservation of electronic mail communications for compliance with the federal securities laws and regulations, and the rules of NYSE and NASD. Within 90 days of the issuance of this Order, unless otherwise extended by the staff of the Commission for good cause shown, Respondent undertakes and agrees to inform the Commission in writing that it has completed its review and that it has established systems and procedures reasonably designed to achieve compliance with those laws, regulations, and rules concerning the preservation of electronic mail communications.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED THAT:
A. Respondent cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-4 promulgated thereunder, pursuant to Section 21C of the Exchange Act;
B. Respondent is censured pursuant to Section 15(b)(4) of the Exchange Act;
C. Pursuant to Section 15(b)(4) and Section 21B of the Exchange Act, Respondent shall pay $700,000 to the U.S. Treasury as a civil penalty within ten (10) days after the entry of the Order. The payment shall be: (A) made by United States postal money order, certified check, bank cashier's check, or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover of a letter that identifies the payor as Respondent in these proceedings and the file number of these proceedings. A copy of the cover letter and money order or check shall be sent to Antonia Chion, Associate Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street N.W., Washington, D.C. 20549-0801; and
D. Respondent shall comply with the undertaking contained in Section IV.B, above.
By the Commission.
Jonathan G. Katz
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