JPMorgan fined $48.6m in Britain

By Caroline Binham
Bloomberg News / June 4, 2010

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LONDON — The London unit of JPMorgan Chase has been fined a record $48.6 million by Britain’s financial regulator for not properly separating client money from the firm’s accounts.

An average of $8.6 billion was not properly segregated by JPMorgan Securities in an error that went undetected for seven years, the Financial Services Authority said yesterday. As much as $23 billion of client money held by the bank’s futures and options business was not put in separate overnight customer accounts between 2002 and 2009, the authority said.

The bankruptcy of Lehman Brothers Holdings, which roiled financial markets worldwide in 2008, forced the authority to put financial companies on notice that they must properly separate client funds. New York-based Lehman’s creditors filed more than $830 billion of claims, and regulators are trying to unravel how money moved through its global units.

“The FSA has repeatedly emphasized the importance of ensuring that client money is adequately protected,’’ said Margaret Cole, the authority’s enforcement director. “This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated in accordance with FSA rules. Firms need to sit up and take notice of this action. We have several more cases in the pipeline.’’

If the company had gone bankrupt, clients could have lost their money because they would have been unsecured creditors, the regulator said.

JPMorgan spokesman David Wells declined to comment.

The New York-based bank escaped a $69.7 million fine by cooperating with the regulator, according to the authority’s statement. No clients lost money, and the mistake did not affect the bank’s financial reporting, the authority said.

JPMorgan said in August that it may have mixed $12.4 billion of clients’ money with its own funds.

“The settlement involves us paying a fine based on a fixed formula of 1 percent of the average amount of client money held by our F&O business,’’ JPMorgan Securities chief executive Daniel Pinto said in an internal memo obtained by Bloomberg News.

“As the FSA acknowledges, JPMorgan Securities Ltd. is one of the largest holders of client money in the UK, and the size of the fine reflects that.’’

The error stemmed from the 2000 merger of JPMorgan with Chase Manhattan, according to the authority’s investigative report.

After the merger, the combined treasury function did not recognize client money from the futures and options business, according to the report.