## Facts

- JPMorgan Chase & Co., a public company, maintained a large credit-derivatives position called the Synthetic Credit Portfolio (SCP) within its Chief Investment Office.
- During 2012, the SCP generated significant trading losses; JPMorgan publicly disclosed a roughly $2 billion loss by May 10, 2012, and losses later increased to nearly $6 billion.
- The enforcement action focused on JPMorgan’s first-quarter 2012 periodic reporting and related investor communications.
- In its original Q1 2012 Form 10‑Q, JPMorgan represented that, based on management’s evaluation, its disclosure controls and procedures were effective as of quarter-end.
- In July 2012, JPMorgan announced it would reissue its Q1 2012 quarterly financial reports and disclosed insufficient internal controls over financial reporting.
- The SEC alleged that JPMorgan (1) failed to timely and accurately disclose SCP losses in Q1 2012 and (2) failed to disclose that its disclosure controls and procedures were not effective during that period.
- The SEC instituted Exchange Act § 21C cease-and-desist proceedings based on JPMorgan’s offer of settlement; JPMorgan admitted the facts, admitted jurisdiction, and consented to the order.

## Issues

1. Whether JPMorgan made material misstatements or omissions in SEC filings and public statements by failing to timely and accurately disclose Q1 2012 SCP losses and related risks.
2. Whether JPMorgan misstated the effectiveness of its disclosure controls and procedures in its Q1 2012 Form 10‑Q.
3. Whether JPMorgan’s internal accounting controls and disclosure controls and procedures satisfied Exchange Act and Sarbanes-Oxley requirements during Q1 2012.

## Decision

- The SEC found JPMorgan violated federal securities law provisions and rules requiring accurate periodic reporting and truthful disclosure regarding controls.
- The SEC determined JPMorgan made material misstatements in Commission filings by not timely and accurately disclosing Q1 2012 SCP losses.
- The SEC determined JPMorgan failed to disclose, and affirmatively misstated, that its disclosure controls and procedures were ineffective.
- The SEC ordered JPMorgan to cease and desist from committing or causing future violations of the cited provisions.
- The SEC imposed a $200 million civil money penalty, made eligible for distribution to harmed investors through a Fair Fund mechanism.

## Legal Principles

- Public companies must maintain internal accounting controls sufficient to provide reasonable assurances that transactions are recorded to permit preparation of reliable financial statements.
- Public companies must maintain disclosure controls and procedures designed to ensure that required information is accumulated and communicated to management to allow timely disclosure decisions in periodic filings.
- Management must evaluate, on a quarterly basis, the effectiveness of disclosure controls and procedures and disclose its conclusion in the quarterly report; materially false conclusions or omissions can violate the Exchange Act and related rules.
- Material misstatements or omissions regarding significant trading losses and the effectiveness of disclosure controls in periodic reports can support cease-and-desist relief and civil penalties in SEC administrative proceedings.

## Conclusion

The SEC issued a settled cease-and-desist order against JPMorgan for materially misleading Q1 2012 disclosures concerning SCP losses and for misstating the effectiveness of disclosure controls and procedures, imposing a $200 million penalty eligible for investor distribution.


In re JPMorgan Chase & Co., Exchange Act Release No. 70458, Accounting & Auditing Enf’t Release No. 3490, 2013 WL 5275772 (Sept. 19, 2013)