In Brief

  • Case against JPMorgan Chase vice president illustrates the benefits of a robust compliance program as federal prosecutors turn to mid-level executive to expose company’s practices related to municipal bond offerings.

James L. Hertz, a former JPMorgan Chase & Co. vice president, was the first JPMorgan employee to cooperate in the federal investigation of the company’s alleged bid rigging for re-investment of municipal bond offering proceeds pending their use. That cooperation, according to Hertz’s filings, netted the government $674 million in settlements and 16 convictions.

In 2010, Hertz pleaded guilty to the charges against him. Last month, a New York federal judge sentenced him to no prison time, no probation, and no fines – despite his guilty plea. United States v. Hertz, No. 10-cr-1178 (S.D.N.Y. 2013). Hertz faced up to 20 years in prison and over $1 million in fines for various charges.

State and local governments use municipal bond offerings to raise money for operating funds or specific construction or other projects. But, these projects are typically multi-year, while bond offerings result in up-front payments. Thus, municipal bond derivatives are used to invest the proceeds in the meantime.

Municipalities generally select the providers of their investment agreements through competitive bidding procedures that are designed to comply with federal laws and regulations regarding their tax-exempt status. Among other things, these regulations require that no bidder be given a “last look” at the status of the bidding before the deal closes and that a certain number of bidders participate in each deal. The government’s allegation against JPMorgan, Hertz, and others was that they colluded to “rig” bids by soliciting courtesy (or intentionally losing) bids, refraining from bidding, and providing “last looks,” among other things.

Hertz admittedly engaged in a bid-rigging conspiracy from 2001 to 2006. But, in court papers, he claimed that he attempted unsuccessfully to stop the misconduct at JPMorgan. And, his early cooperation with the government cost him years of pay and bonuses. These factors, and others, likely led to his light sentence.

The takeaways here are several. First, as Hertz did, if an employee suspects institutional misconduct, he or she should be encouraged to report those concerns to his or her employer through a robust compliance program that involves internal reporting, unbiased investigation, and effective resolution of employee concerns. A more effective program may have prevented Hertz from becoming a government whistleblower. Second, in an institutional setting, someone is likely to cooperate with the government in exchange for a favorable deal. When an investigation is pending, caution and circumspection are key. Finally, the government regularly targets for prosecution mid-level executives like Hertz who are likely to cooperate. If trouble is brewing, being in the middle of the corporate ladder is no defense.