The $264 million fine ends inquiry of bank's hiring of connected Chinese 'princelings'

By Aruna Viswanatha

A decade ago, a J.P. Morgan Chase & Co. managing director in Asia sent an email to the investment-banking team: "As you know, the firm does not condone the hiring of the children or other relatives of clients or potential clients...In fact, the firm's policies expressly forbid this," the director wrote.

Within two years, however, the team had begun orchestrating the hiring of dozens of relatives of powerful government officials in Asia with the express purpose of winning business, U.S. authorities said Thursday. The bank had created a separate channel to get unqualified applicants through the hiring process, and it later began tracking profits from any subsequent business awarded because of the hires, they said.

One candidate was described in an email as "the worst [business analyst] candidate they had ever see[n]." Another had a "napping habit" that would be an "eye-opening experience" for New York colleagues. In both instances, the candidates were hired, according to criminal and civil settlements the bank reached with the Justice Department, the Securities and Exchange Commission and the Federal Reserve.

All told, the bank hired around 100 applicants referred by government officials at Chinese state-owned firms, and earned at least $35 million as the result of a "corrupt scheme," according to the settlement documents. The agreement ends a multiyear, high-profile investigation that had called into question whether the U.S. government was threatening to criminalize standard business practices in some countries.

J.P. Morgan agreed to pay $264 million and admitted it violated the Foreign Corrupt Practices Act -- which bars U.S. firms from paying bribes to officials of foreign government in an effort to win business -- through its hiring of so-called princelings. The Wall Street Journal had reported the outlines of the settlement in July. The 75 pages of settlement documents released on Thursday lay bare how the bank had set up a formal structure -- dubbed the Sons and Daughters program -- to leverage internships and win hundreds of millions of dollars in deals.

Between December 2010 and March 2011, one Asia-based employee maintained a spreadsheet that linked hires to specific clients, and tracked revenue attributable to those hires, the documents show.

"Some have argued that employment of a child, friend or relative could not possibly induce a foreign official to take action. Today's action demonstrates the falsity of that assertion," SEC enforcement director Andrew Ceresney told reporters.

"The so-called Sons and Daughters Program was nothing more than bribery by another name," said Leslie Caldwell, the head of the Justice Department's criminal division.

J.P. Morgan spokesman Brian Marchiony said in a statement the bank is "pleased that our cooperation was acknowledged in resolving these investigations" and that the conduct was "unacceptable." Mr. Marchiony said the bank stopped the hiring program in 2013 and "took action againstthe individuals involved." He added that the bank is still committed to the Asia-Pacific region. The agreement said more than two dozen employees had been let go or disciplined in connection with the investigation.

Several other banks are also under investigation for similar hiring practices, including Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG, according to regulatory filings. The banks declined to comment. Mr. Ceresney said he expected additional cases to follow the J.P. Morgan settlement.

The settlement documents cite emails in which J.P. Morgan officials discuss similar tactics they believed other banks were using.

In 2011, one employee asked for a hire to be switched into a permanent job, despite the person's "undeniable underperformance" because the "deal is large enough [and] we are pregnant enough with this person, that we'd becrazy not to accommodate her father's wants," according to an email cited in the agreement.

Also in 2011, one employee asked whether one hire did substantive work. "We get real [investment banking] productivity from [the referral hire] or is she a photocopier[?]" "Photocopier," was the response.

The agreements also show executives questioning why the bank wasn't doing a better job of leveraging hires.

"We have more [lines of business] in China therefore in theory we can accommodate more 'powerful' sons and daughters that could benefit the entire platform," one of the bank's managing directors in Asia said in 2009.

In a 2008 exchange, one executive responded when asked about a prospective hire related to a potential client preparing for an IPO: "A couple of points...to discuss and agree prior to any offer being made to her: how do you get the best quid pro quo from the relationship upon confirmation of the offer?"

--Emily Glazer contributed to this article.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

(END) Dow Jones Newswires

November 18, 2016 02:47 ET (07:47 GMT)

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