By David Henry
NEW YORK (Reuters) - A federal bribery investigation into whether JPMorgan Chase & Co.
Dimon piloted the bank through the financial crisis, but it is now facing at least a dozen investigations from federal agencies and state and foreign governments, including over the "London Whale" trading scandal that cost it more than $6.2 billion.
In the latest probe, the Securities and Exchange Commission (SEC) is looking at whether the bank's Hong Kong office hired the children of powerful heads of state-owned companies in China with the express purpose of winning underwriting business and other contracts, a person familiar with the matter said.
The SEC is questioning JPMorgan's relationships with at least two families in China that may have legitimate explanations, the source said.
U.S. law does not stop companies from hiring politically well-connected executives. But hiring people in order to win business from relatives can be bribery, and the SEC is investigating JPMorgan's actions under the U.S. Foreign Corrupt Practices Act.
SEC spokeswoman Florence Harmon declined to comment on the investigation. A Hong Kong-based spokeswoman for the bank declined to comment beyond what was in the bank's regulatory filings and said the bank was cooperating with probes.
Whatever the outcome of the latest investigation, Dimon's time is increasingly being consumed by legal and regulatory matters.
The Department of Justice is investigating whether the bank manipulated U.S. energy markets, the Wall Street Journal reported on Monday. Last month, the bank agreed to pay a $285 million penalty and give back $125 million of trading profits in a settlement with the Federal Energy Regulatory Commission for alleged power market manipulation. JPMorgan neither admitted nor denied violations.
Federal prosecutors last week brought criminal charges against two former JPMorgan traders, accusing the pair of deliberately understating losses in the "Whale" scandal. The SEC is seeking an admission of wrongdoing from the bank in a parallel civil action, a rare step for the government agency.
Earlier this month, the bank revealed that it was facing parallel criminal and civil probes by the U.S. Department of Justice in California into mortgage bonds that it sold before the financial crisis.
Since 2011, the bank has been writing in its quarterly filings with regulators that it "is currently experiencing an unprecedented increase in regulation and supervision, and such changes could have a significant impact on how the firm conducts business." In its last quarter, JPMorgan estimated that it could have legal losses that are $6.8 billion beyond an undisclosed sum that it has already set aside to cover those charges.
Wall Street analysts may be understating the extent of the bank's future litigation expenses, said independent analyst Charlie Peabody of Portales Partners.
JPMorgan's annual litigation costs have been around $4.9 billion for each of the last two years, and Peabody expects the cost will be $1.5 billion to $2 billion over each of the next two quarters. On average Wall Street expects roughly $300 million to $500 million per quarter, he added.
While major U.S. banks have faced a litany of probes since the financial crisis, Dimon has repeatedly griped in public about how regulations designed to prevent the next financial crisis are stifling banking and its ability to help the economy.
A report from a U.S. Senate subcommittee described an episode where Dimon shouted at his then-chief financial officer for giving information to a regulator. The bank's board of directors has made it clear to the chairman and chief executive that he must improve his relationship with regulators, a source familiar with the matter told Reuters earlier this year.
Even with heavy litigation costs, JPMorgan posted $21.28 billion of net income last year, its highest level ever even after it suffered from $6.2 billion of trading losses from the bad derivatives bets made by Bruno Iksil, the trader nicknamed the "London Whale."
In the China case, the New York Times said that JPMorgan at one point hired Tang Xiaoning, the son of Tang Shuangning, chairman of the China Everbright Group, a state-controlled financial conglomerate. He also had been a Chinese banking regulator, the Times reported.
After the younger Tang joined JPMorgan, the bank secured several important assignments from the Chinese conglomerate, including advising a subsidiary on a stock offering, according to the newspaper.
Another matter the SEC is investigating is JPMorgan's hiring of Zhang Xixi, the daughter of a now-disgraced Chinese railway official. The bank went on to help advise the official's company, which builds railways for the Chinese government, on its plans to go public, the Times said.
The bank has not been accused of wrongdoing, the New York Times said, citing a government document. There is no documentary evidence that Zhang Xixi or Tang Xiaoning were unqualified, but the SEC is checking whether the bank's Hong Kong office routinely won business from companies connected to its employees, the newspaper reported.
Marie Cheung, a Hong Kong-based spokeswoman for the bank, said on Sunday that the bank had publicly disclosed the investigation in its quarterly regulatory filing earlier this month and was cooperating with regulators.
The quarterly filing said that the SEC's enforcement division had requested "information and documents relating to, among other matters, the firm's employment of certain former employees in Hong Kong and its business relationships with certain clients".
The practice of hiring politically connected bankers in China was widespread in the early to mid-2000s, when Wall Street firms engaged in so-called 'elephant hunting', a term used to describe the chasing of mandates to manage the multi-billion dollar stock offerings of the country's big state-owned enterprises.
One of the more well-known China bankers from that era is Margaret Ren, the daughter-in-law of former Chinese Premier Zhao Ziyang, who has worked at several banks. Most major investment banks have employed a politically connected Chinese banker, whether a high level professional such as Ren or a college age associate, at some stage in the last decade.
Many senior investment bankers in China now feel that the heyday for such underwriting contracts has passed, with far fewer jumbo state-owned company listings happening. But banks and private equity firms alike still prize connections to top decision makers.
(Additional reporting by Michael Flaherty and Lawrence White in Asia, Tom Brown and Ian Simpson in the United States; Editing by Dan Wilchins, Peter Henderson, Alex Richardson and Ken Wills)