JPMorgan Under Investigation (Again) for Proprietary Fund Improprieties
July 25, 2012
JPMorgan—still rocking from its reported $5 billion loss—is under fire once again for alleged improprieties in its marketing practices. According to the New York Times, multiple brokers have admitted that the nation’s largest mutual fund manager emphasized its sales and profits over the financial needs of its clients by promoting its own proprietary funds over competing products even when the outside funds were performing better and would have generated more income for their clients. In fact, the company stands accused of exaggerating the financial viability of at least one of its products in marketing material distributed to investors. The revelation has prompted the SEC, FINRA and other regulatory bodies to open investigations into internal practices at the banking giant.
Morningstar, a third-party research firm, reported that 42% of JPMorgan’s funds failed to outperform the competition even though the firm is amassing assets in its mutual funds at an alarming rate – to the tune of $160 billion.
How is this possible? Some former brokers now say that JPMorgan pressured them into being salesmen rather than financial advisers. Indeed, even current employees are speaking out, though under a veil of anonymity to prevent retaliatory action.
This isn’t the first time that JPMorgan has been accused of promoting its internal funds over options offered by other companies. In 2011, the company was ordered to pay $373 million in an arbitration case because it failed to follow through with an agreement to sell alternative funds from American Century, opting to promote its own products instead.
At issue is the fact that the company earns significant profits through management fees associated with its own funds. JPMorgan levies fees as high as 1.6 percent on these internal mutual funds. The math is simple: the more clients in the fund, the more chance for a big payday for the bank. That simple arithmetic may have created an incentive to push customers into the company’s own funds.
In fact, investigators are questioning the motives behind the company’s marketing materials for the JPMorgan-run Chase Strategic Portfolio. Materials distributed to investors prominently featured “hypothetical returns” rather than actual numbers – which were in reality 1.52 percent lower than that put forth in the promotions.
JPMorgan representatives deny that they promote an sales-centered culture internally and reaffirm that their primary concern is the financial well-being of their clients. Indeed, Melissa Shuffield, a company spokesperson, is quoted as having said that JPMorgan “doesn’t pressure brokers to sell its funds over any other product.” However, several current and former brokers confessed to The New York Times that business practices at individual offices tend to be overly congratulatory of brokers who make big sales. In fact, one New Jersey supervisor sent out a note congratulating a broker for “… taking advantage of the best selling day of the week!” after he persuaded a client to put $75,000 into the Chase Strategic Portfolio.
After these stories broke in the New York Times, several regulatory bodies opened investigations into JPMorgan’s internal practices including Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Manhattan district attorney and officials in New Jersey and Delaware.
The Law Offices of Gibbs Law Group LLP is focused on protecting the rights of all investors, including those who may have been invested in JPMorgan funds. If you invested in JPMorgan funds, call 866-981-4800 to speak with one of our securities attorneys.