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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 17149 / September 24, 2001

SECURITIES AND EXCHANGE COMMISSION V. THE CHASE MANHATTAN BANK, U.S. District Court for the Northern District of Illinois, Civil Action No. 01 C 7364 (N.D. Il. September 24, 2001)

On September 24, 2001, the Securities and Exchange Commission (Commission) filed a complaint seeking a $1 million civil penalty against The Chase Manhattan Bank (Chase) in the United States District Court for the Northern District of Illinois alleging that Chase committed recordkeeping and reporting violations while acting as a registered transfer agent for numerous corporate and municipal bond issues. Chase consented to the imposition of the penalty without admitting or denying the allegations in the Complaint. Chase, a New York banking corporation wholly owned by J.P. Morgan Chase & Co., and based in New York, New York, is a registered transfer agent. According to the Complaint, by March 1998, Chase, and companies with which it had merged, had identified but failed to reconcile inaccuracies in its computerized bond recordkeeping system totaling more than $46.8 billion. Chase reasonably and correctly believed that the $46.8 billion did not reflect a liability of anywhere near this magnitude. Chase based its belief upon, among other reasons, the cash management systems it had in place, which were generally accurate and did not reflect any liability at the time. The Complaint further alleges that Chase did not fully reconcile these records until June 2000. During this two-year period, according to the Complaint, Chase:

  • Filed false TA-2 Reports (annual reports required of transfer agents);
     
  • Discovered that its computerized records of the outstanding dollar amount of bonds held by bondholders, which the Commission requires a transfer agent to maintain, contained significant errors. These records are maintained in its master securityholder files;
     
  • Discovered that its records, by issuer, of the dollar amount of bonds issued and outstanding, which the Commission requires a transfer agent to maintain, often were not readily accessible or reliable. These records are maintained in control books;
     
  • Failed to provide the required notice in the prescribed manner to the appropriate regulators, or to issuers, that its records showed significant differences between its master securityholder files and its control books for a large number of bond issues.

The Complaint alleges that ultimately Chase was able to reconcile the vast bulk of the inaccuracies in its bond recordkeeping system. It wrote off or reserved $45.8 million, largely attributable to prior processing errors on historical systems. Approximately $28.8 million of that amount resulted from payment errors, including situations where Chase had erroneously paid bondholders who were not entitled to the money. The balance, or approximately $17 million was reserved to pay additional claims that may be presented. These amounts were not material to any financial reports filed by J. P. Morgan Chase or its predecessors.

The Complaint alleges that as a result of the conduct described above Chase violated Section 17A(d)(1) of the Securities Exchange Act of 1934 and Rules 17Ac2-2, 17Ad-10(a), 17Ad-10(b), 17Ad-10(e), 17Ad-11(b), and 17Ad-11(c) thereunder. The Commission also simultaneously entered a cease-and-desist order prohibiting Chase from future violations of these recordkeeping and reporting violations in a related action before the Commission. Chase consented to the cease-and-desist order without admitting or denying the findings in the order. The Commission thanks the Federal Reserve Bank of New York and the State of New York Banking Department for their assistance in this matter.

 

http://www.sec.gov/litigation/litreleases/lr17149.htm


Modified: 09/18/2001