Hong Kong's Privileged Adults Need Work
It appears JPMorgan Chase & Co (JPM), along with its CEO Jamie Dimon, are in the news again for their Hong Kong activities. This time, however, it is not for wrongdoing but for withdrawing from a potentially lucrative underwriting deal for a major I.P.O.
Sons And Daughters Program
Currently, JPMorgan's hiring practices in Asia are under investigation in the "sons and daughters" program, in which the bank has been known to hire the children of influential Chinese decision makers in Hong Kong.
This regulatory scrutiny has made JPMorgan's New York compliance department wary. The latest news is that the bank has decided to withdraw from serving as an underwriter in a $1 billion share sale by Tianhe Chemicals Group--because it previously hired the daughter of the chairman of the chemical company as a junior banker.
According to Hong Kong security regulators, the bank hired Joyce Wei, a licensed financial professional, who worked at JP Morgan's Hong Kong unit, from January 2012 to August 2013. Joyce is the daughter of Qi Wei, the chairman of Tianhe Chemicals Group. JPM's withdrawal leaves the field open to Bank of America Merill Lynch (BAC), UBS (UBS), and Morgan Stanley (MS) to lead plans to raise $1 billion during the share sale, although no formal announcement has been made about which bank has been hired to make the deal.
Second Major I.P.O. Dropout
This is the second major I.P.O. of a Chinese company that J.P. Morgan has bowed out of as federal prosecutors in Brooklyn and the Securities and Exchange Commission continue their investigation into the "sons and daughters program." JPM previously decided to withdraw as an underwriter of China Everbright Bank, a government-owned entity, because it had previously hired the son of the chairman of the China Everbright Group, Tang Shuangning. The bank's IPO went on to raise $3 billion and it paid huge fees to the underwriters.
Foreign Corrupt Practices Act
The Securities and Exchange Investigation is concerned about violations of the Foreign Corrupt Practices Act. This was a law enacted in 1977 that made it illegal for US companies to make any valuable exchanges with the officials of foreign countries in exchange for an unfair advantage in business.
If J.P. Morgan had been involved with the China Everbright Bank, they could have violated the Foreign Corrupt Practices Act, because the bank was government-owned. The Foreign Corrupt Practices Act would not have been affected if J.P. Morgan had decided to pursue participation in the Tianhe Chemical Company's I.P.O. because it was a private company; however, the Hong Kong authorities would have been interested in the bank's ties to the company.
A Checkered Banking History
J.P. Morgan is in a delicate position. The titan must be very careful as two countries, numerous state regulators, and no less than seven federal agencies are investing the bank.
At times deemed "too big to fail," J.P. Morgan unfortunately appears to have taken part in every serious banking scandal of the new century. A quick recap: In the Libor case, JPM bank settled for $108 million; in the long legal battle over risky mortgage practices, it settled for $13 billion; in the Bernard L. Madoff case the settlement was $1.7 billion for failing to alert authorities; and in the London Whale Trading Loss, it settled for $100 million.
The bank has also been involved in flawed loan modifications leading to foreclosure abuses; lax controls allowing for money laundering; letting payday lenders dodge interest rate restrictions; manipulating energy markets, and questionable credit card debt collection methods.
What Should Investors Do
Investors should be wary of taking JPM's current bowing out of the Tianhe Chemicals Group IPO as graceful-rather, given the bank's disturbing track record, all investors should continue to exercise caution with JPM going forward in 2014.
We continue to believe that JPM's legacy problems will continue in 2014 and investors would be wise to take some profits in the run up of the stock and reinvest the proceeds in better run banks like U.S. Bancorp (USB) which Goldman Sachs recently upgraded to their conviction list, PNC Financial (PNC) and Berkshire Bank (BHLB).