Is JPMorgan Immune from Investigation into Spring-Loading of Options Grants?

As readers will recall, JP Morgan (JPM) received the first large bailout from the New York Fed of $55 billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.

JP Morgan also recently received another $25 Billion in TARP payments from the Treasury.

This article is about how JP Morgan's executives, instead of receiving easy-to-detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field.

SARs are very similar to employee stock options and Restricted Stock Units are very similar to Restricted Stock.

These SARs were granted on January 20, 2009, the day that JP Morgan stock reached its lowest in five years. The stock quickly rebounded as illustrated in the graph below. The arrow indicates the day and the price of the stock when the grant was made.

On January 22, 2008, we see a repetition of the grants of SARs with the stock hitting a low point followed by a substantial rebound in the next days.

Let's examine the size of the bonuses of the top 15 executives at JP Morgan, that were granted on January, 20, 2009 and reported two days later. See here.

Stock Appreciation Rights Granted

SARs Amounts Name of Exercise Value 2/4/09
Granted Grantee Price

700,000 Winters 19.49 $11,300,000
700,000 Black 19.49 $11,300,000
500,000 Staley 19.49 $8,100,000
300,000 Scharf 19.49 $4,890,000
250,000 Drew 19.49 $4,075,000
200,000 Miller 19.49 $3,260,000
200,000 Rauchenberger 19.49 $3,260,000
200,000 Smith 19.49 $3,260,000
200,000 Zubrow 19.49 $3,260,000
200,000 Bisignano 19.49 $3,260,000
200,000 Mandelbaum 19.49 $3,260,000
200,000 Cavanaugh 19.49 $3,260,000
200,000 Cutler 19.49 $3,260,000
200,000 Maclin 19.49 $3,260,000
100,000 Daley 19.49 $1,630,000
----------------------------------------------------------------------------------------
Total value (2/6/09) of SARs Granted = $81,405,000

Restricted Stock Units Granted

RSUs Amounts Name of Market Value RSUs Value
Granted Grantee of stock 2/4/09 2/4/09

115,474 Staley 24.10 $2,782,923
102,644 Miller 24.10 $2,473,720
102,644 Scharf 24.10 $2,473,720
102,644 Smith 24.10 $2,473,720
102,644 Bisignano 24.10 $2,473,720
102,644 Cavanaugh 24.10 $2,473,720
102,644 Drew 24.10 $2,473,720
102,644 Maclin 24.10 $2,473,720
89,813 Zubrow 24.10 $2,164,493
89,813 Cutler 24.10 $2,164,493
59,662 Daley 24.10 $1,364,542
35,926 Rauchenberger 24.10 $865,816
--------------------------------------------------------------------------------------------------
Total value (2/6/09) of RSUs Granted = $30,500,000

Total value (2/6/09) of Grants to top 15 executives = $111,905,000

These totals are far more than the top executives of Merrill Lynch were to receive as their year end bonuses in cash and equity. The New York Attorney General is supposedly investigating Merrill's executives for criminal wrong doing.

Merrill CEO Thain was granting himself just $10 million whereas at least three Morgan executives exceeded that in equity compensation alone.

An interesting question arises from an examination of the fact that for the past two years grants were made on or around January 20. It just happened that the stock dropped prior to the grant and moved upward immediately after the grants. It's hard to accept the idea that those executives just got very lucky for two years in a row. Yes, I am suggesting collusion in the manipulation of the stock to accommodate the grants of options, etc.

Some refer to this as spring-loading the options grants.

Is JP Morgan immune from investigation?

Now what we find is that bankers' errand boy extraordinaire CEO James Dimon is popping off about the ridiculous idea that JP Morgan does not need further bailout money after Morgan grabbed $55 billion in the Bear Sterns deal and another $25 billion of TARP money in banker welfare payments. See here.

If they do not need the bailouts, let Morgan and Goldman (GS) return the welfare payments.

Perhaps also an explanation is in order as to why James Dimon is not prosecuted for violations of Title 18 Section 208 U.S.C. in his role as Director of the New York Federal Bank in approving the JP Morgan/Bear Stearns deal.

Neither JP Morgan, Goldman Sachs or any other bank will return the TARP monies because the actual values of the Preferred Stock and Warrant packages were 50% lower than what the taxpayers were forced to pay. And the actual values of those packages have dropped considerably in every case since the welfare payments to Goldman, Morgan, Bank of America (BAC) etc. were made.

In the case of Bank of America and Merrill, the warrants purchased by the Treasury are down over 88% since the bailout.

Note: A full reading of the SEC Form 4.com link above shows that there were sales of stock by most of the 15 executives at 23.2 in the days following the issues of the SARs and RSUs granted when the stock was 19.49. Mr. Jamie Dimon also sold 137,033 shares of stock at 23.2.

The sales and the grants are trades of equity securities within 6 months and are considered matching trades for Section 16 b of the Securities Act of 1934. Section 16 b requires those profits from the buys and sales to be "short swing" profits and are returnable to JP Morgan.

Now, securities attorneys will say that the grants of the SARs and RSUs are exempt under SEC Rule 16 b-3. However, the Rule effectively defeats the Statute and therefore is beyond the SEC's rule-making authority and is void. SEC Rule 16 b-3 is just another part of the SEC accommodating the executive compensation abuses including back-dating and spring loading.

If you are a holder of JP Morgan stock you can request that Jamie and his boys return their "short swing" profits. If they do not return the money, any shareholder has a private right of action against Jamie and his boys to get the profits returned to the shareholders.

Disclosure: None

Comments

[SugarDaddy:]

Outstanding article, will it ever make the MSM news, NO !

Feb 09 06:05 AM

[investfarm:]

Three U.S. Senators are moving to create a "9/11 Commission on the financial crisis" which would conduct a one-year investigation of who caused it and how, issuing reports to Congress and the President and referring criminal wrongdoing to U.S. Attorneys and state attorneys' general as necessary. The legislation, S-298, was introduced on Jan. 22, after calls for "a new Pecora Commission" modeled on the 1932-24 Senate Pecora hearings which exposed the scandals of Wall Street banks triggering the Great Depression collapse.

Republican Sens. Johnny Isakson and Saxby Chambliss of Georgia and Democratic Sen. Kent Conrad of North Dakota are seeking more sponsors of the Financial Markets Commission Act of 2009, hoping to pass it "rapidly after the stimulus bill." It would set up a 7-member bipartisan commission with investigative staff and subpoena power to "examine all causes, domestic and global, of the current financial and economic crisis in the United States, including the collapse of major financial and commercial firms," including investigating the role of a series of government regulatory agencies, and of the government bank bailouts themselves.

Under current circumstances, the proposal is "a stalling tactic, which would lose momentum." A new Pecora Commission must start up immediately. Such hearings and exposures are "needed as leverage during the fight for bankruptcy reorganization."

The original Pecora Commission hearings of the Senate Banking Committee focussed the great anger of the American people then against Wall Street bankers, whom President Franklin Roosevelt had just called "the money changers who have fled form their high seats in the temple of our civlization." Chief investigator Ferdinand Pecora mobilized that anger in a way that helped make FDR's "100 Days'' recovery and regulation legislation possible.

Feb 09 06:23 AM

[Jason Rines...:]

'Is JP Morgan immune from investigation?'

Allow me the net out answer: YES Is the citizenship above the law? NO

Feb 09 12:32 PM

[Adam Sharp:]

Excellent research. JPM's eternal-golden-boy status continues to amaze me. It's almost like they're too important to the market's psyche to get busted.

Busting Jamie Dimon would be like telling a 7-year old that there's no Santa Claus.

Feb 09 05:17 PM

[Kinabalu:]

"SARs are very similar to employee stock options and Restricted Stock Units are very similar to Restricted Stock."

"Total value (2/6/09) of SARs Granted = $81,405,000"

The author doesn't understand what Stock Appreciation Rights are. SARs entitle the holder to a cash payout, at a point described in the grant document, of an amount calculated as the difference between the stock price on the grant date times the number of shares granted ($84,781,000 in this case - 4,350,000 shares at a grant price of $19.49) and a similar amount calculated at the date of payout ($105,835,000 using Mr. Olagues $24.10 price a few days later - 4,350,000 shares at $24.10). Mr Olagues shows this value at 2/6/09 as $81,405,000. Done correctly, the difference, and the value of the SARs, would be $20 million, not $81 million.

Despite this disconcerting $61 million error the point of the article is still somewhat valid even if overstated. It is particularly suspicious that JPM has made these grants 2 years in a row at the lowest prices. There is certainly valid reason to expect JPM board members to object if they are conscientious.

Feb 09 07:32 PM

[monday1929:]

Can anyone ask Jamie why Chase customer service reps deny that Chase received any bailout money when asked?

Feb 11 10:12 AM

[NITRAM:]

JAMIE DIAMOND IS THE ONE OF THE WORST CULPRITS.HOW DID HE WIND UP WITH BEAR STERNS ANS WAMU FOR NOTHING. OH, HE USED TAXPAYER MONEY WHICH HE DIDNT WANT. WHY DOES OUR COURT JESTER OF A CONGRESS MAKE HIM THE POSTER BOY OF GOOD. HE SCREWED HIS OWN CUSTOMERS. HE SOLD OUT OF MADOFF BEFORE THE SHIT HIT THE FAN. OH I AM SORRY , I FORGOT TO TELL MY CLIENTS.


On Feb 09 05:17 PM Adam Sharp wrote:

> Excellent research. JPM's eternal-golden-boy status continues to
> amaze me. It's almost like they're too important to the market's
> psyche to get busted.
>
> Busting Jamie Dimon would be like telling a 7-year old that there's
> no Santa Claus.

Feb 14 10:03 AM