Op risk data: What a whopper – record $920m fine for JP metals ploy

Also: counting the cost of Covid cons; Citi audio dynamite. Data by ORX News


JP Morgan paid a huge $920 million in September’s largest op risk loss – and the largest penalty order ever issued by the US derivatives watchdog. Three separate regulators found the firm’s traders had engaged in spoofing and market manipulation of precious metals futures and US Treasury markets from 2008 to 2016.

Traders would place large orders on both sides of these markets – one of which they had no intention of executing – to manipulate prices and benefit the firm over its competitors.

The Commodity Futures Trading Commission (CFTC), the Department of Justice (DoJ), and the Securities and Exchange Commission (SEC) all found that JP Morgan traders had engaged in misconduct during the eight-year period.

The CFTC ordered JP Morgan to pay restitution to the amount of $311 million, representing the damage done to other market participants by the spoofing scheme; a disgorgement of $172 million, representing the profits it had made from the scheme; and a civil monetary penalty of $436 million. The DoJ and SEC also ordered the bank to pay penalties for the spoofing scheme, but these amounts were offset by the CFTC’s order.


In September’s second-largest loss, investors in London Capital & Finance sued its executives for £178 million ($227 million) over an alleged fraudulent mini-bond scheme.

LCF’s administrators claimed that company directors had induced thousands of retail investors to purchase bonds in the group, purporting to invest in a series of arm’s-length property loans. Instead, investors alleged, almost £136 million ($174 million) was channelled to the firm’s executives, either directly or via loans, to companies they controlled or were connected to.

LCF collapsed in 2019 after the Financial Conduct Authority found the company’s marketing of unregulated mini-bonds misleading. The company’s collapse left 11,000 investors with a loss of around £237 million ($303 million).

September’s third-largest loss, incurred by Dutch lender Rabobank, was a historic one, in which up to €160 million ($186 million) of physical collateral was appropriated and subsequently devalued. In 2014, the Mexican government seized nine ships, pledged to the bank as collateral on loans of around €236 million ($274 million) to offshore vessel operator Oceanografia, dating back to 2007.

When Rabobank eventually regained control of the ships, they had fallen sharply in value through lack of maintenance. The sale of the fleet generated only a small portion of the €220 million ($255 million) the operator owed. As of September 4, 2020, Rabobank had registered a case to recover around €150 million ($174 million) in damages from the Mexican government.

In September’s fourth-largest loss, the Mutual of Omaha insurance company agreed to pay $6.7 million to settle a class action suit filed in January 2018. The suit alleged that the firm had breached the Employee Retirement Income Security Act (ERISA) and its fiduciary duty towards its 401(k) investors. Court documents revealed that the firm selected investment funds from its subsidiary, United of Omaha. The subsidiary had invested all investors’ money in publicly available investment funds, managed by an unrelated third party, for which investors had paid a fee to the subsidiary on top of the fees charged by the funds.

In agreeing to the settlement, Mutual of Omaha did not admit any wrongdoing. As of 21 September 2020, the settlement is awaiting final approval from a federal judge in Nebraska.

Macquarie Group suffered September’s fifth-largest loss, paying A$7 million (US$5 million) to settle an investor’s claims that its advisers had caused them to invest in a worthless company. An investment adviser at Macquarie Private Wealth advised its client to buy shares in Cleveland Mining Group, which had acquired Brazilian iron ore mine Ferradura. The mine was expected to deliver more than 10 billion tonnes of iron ore, with an initial valuation of A$34 billion ($24 billion). But even after the mining group received confirmation that its prognostication had been wrong, the adviser continued to advise clients to buy its stock. The mining group’s stock price fell and in May 2018, it called in voluntary administrators.

Macquarie did not make any admissions about broker conduct in the confidential settlement, but agreed to pay the complainant A$6 million ($4.3 million) and A$1 million (US$700,000) in legal fees.


Spotlight: Citi cited for wiping subpoenaed audio

In September 2020, the Commodity Futures Trading Commission (CFTC) ordered three Citigroup entities to pay $4.5 million over a design flaw which allowed subpoenaed recordings to be deleted from the bank’s audio system.

In December 2017, the regulator had subpoenaed audio recordings pertinent to its investigations of the bank. But the flaw in the bank’s audio preservation system had caused it to delete recordings that were two years old as soon as the system reached 95% of storage capacity. In December 2018, when it was obliged to repeat its request for the recordings, the regulator was informed of the deletions.

The resulting investigation found that senior management responsible for the audio preservation system had been aware of the design flaw since at least 2014. The regulator also found Citi’s management responsible for not adequately staffing the company with trained employees and for not documenting changes to the system, which led to the recordings being deleted.

Citi was found to be in violation of CFTC Regulation 166.3 for not adequately supervising its subsidiary and fined $4.5 million.

In Focus: Covid relief loans catch a cold from crooks

Since the Covid-19 outbreak, governments around the globe have rolled out relief packages to aid enterprise and individuals in weathering the economic twister. But fraudsters began to seize the opportunity to abuse or scam such programmes for their own gain, as Risk.net has reported, with implications for operational losses at a systemic level.

In Europe, lenders were heavily encouraged to allow borrowers moratoriums on loan, mortgage and other debt repayments. In April, the European Banking Authority published guidelines on the implementation of coronavirus-related credit moratoriums. The EBA’s report, which was updated advice in August, said that the repercussions of Covid-19 could have implications for the incidence of operational risk events, with an impact on credit exposures, and that such impacts are at the “boundaries with credit risk”.

In the UK, even as the government rolled out three schemes to help employers pay wages, rent and other business costs, firms expressed fears about the rapid roll-out of these relief packages while terms and controls were still being put into place.

The UK tax agency HM Revenue & Customs has already made its first arrest for fraud relating to its government’s Covid-19 relief packages. The BBC reported in September that criminals in the UK have begun to set up fake businesses on an industrial scale to fraudulently claim relief funds.

The German State of North Rhine-Westphalia was targeted by phishing attacks aimed at acquiring data provided by applicants to the state’s coronavirus aid website. The state has reportedly lost up to €100 million ($116 million) from such fraud, according to the ORX database.

And in Brazil, Caixa Bank was ordered by the Brazilian Ministry of Citizenship to block 1.3 million accounts after reports that those individuals had fraudulently claimed coronavirus relief funds. On July 21, thousands of accounts had to be blocked after hackers had broken into some accounts and redirected the emergency aid.

EIDL hands

At least one firm has also seen internal attempts to defraud the relief packages it was handling. JP Morgan dismissed several employees who allegedly took bailout funds that were supposed to help businesses dealing with the crisis. The Financial Times reports that several of its employees had fraudulently received money under the US Economic Injury Disaster Loan (EIDL) programme. The bank found the former employees had deposited suspicious EIDL funds into their proprietary checking accounts. However, the FT noted that those cases account for a “very small” percentage of suspicious activity uncovered by the bank in relation to Covid-19 relief funds. According to the report, the bank had circulated a company-wide memo warning that it had discovered “conduct that does not live up to our business and ethical principles”. This misconduct allegedly includes customers misusing loans from the US Paycheck Protection Program, unemployment benefits and other government programmes.

According to US lawmakers, the various economic packages offered to businesses and employees have widespread potential for fraud. Democrats say the US Small Business Administration and the US Treasury have been inadequate in reviewing the US government’s handling of relief packages. They cite instances of companies receiving multiple loans, loans to companies that should have been blocked from federal contracts, and applications that are missing names, addresses and other basic data.

It begs the questions as to how these potentially fraudulent applications were able to slip through the controls and procedures in place to prevent fraud. All lenders are required to test their new loan products to meet suitability criteria, such as whether a client needs the product in question. Controls are put in place to protect customers – and lenders – but the speed with which the relief packages needed to be rolled out has put an inevitable strain on operations.

Not only is there a risk of banks and government relief packages falling victim to fraudsters, but there is the risk that lenders could be fined or sued if relief funds are given out in a way that does not follow due procedure or diligence.

Editing by Louise Marshall

All information included in this report and held in ORX News comes from public sources only. It does not include any information from other services run by ORX, and we have not confirmed any of the information shown with any member of ORX.

While ORX endeavours to provide accurate, complete and up-to-date information, ORX makes no representation as to the accuracy, reliability or completeness of this information.

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