In re JPMorgan Chase & Co.

   
 
UNITED STATES OF AMERICA 
Before the 
SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 70458 / September 19, 2013 
 
ACCOUNTING AND AUDITING ENFORCEMENT 
Release No. 3490 / September 19, 2013 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-15507 
 
In the Matter of 
JPMorgan Chase & Co., 
Respondent. 
 
ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS PURSUANT TO 
SECTION 21C OF THE SECURITIES 
EXCHANGE ACT OF 1934, MAKING 
FINDINGS, AND IMPOSING A CEASE-
AND-DESIST ORDER  
I. 
The Securities and Exchange Commission (“Commission”) deems it appropriate that 
cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 
Securities Exchange Act of 1934 (“Exchange Act”) against JPMorgan Chase & Co. 
(“JPMorgan”). 
II. 
In anticipation of the institution of these proceedings, JPMorgan has submitted an 
Offer of Settlement (“Offer”) that the Commission has determined to accept.  JPMorgan admits 
the facts contained in Annex A attached hereto, the Commission’s jurisdiction over it, and the 
subject matter of these proceedings; and consents to the entry of this Order Instituting Cease-
and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making 
Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. 

   
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III. 
On the basis of this Order, the Offer, and the facts contained in Annex A attached hereto, 
the Commission finds
1
 that: 
1. Public companies are responsible for devising and maintaining a system of 
internal accounting controls sufficient to, among other things, provide reasonable assurances that 
transactions are recorded as necessary to permit preparation of reliable financial statements.  In 
addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established important 
requirements for public companies and their management with respect to corporate governance 
and disclosure.  For example, public companies are obligated to maintain disclosure controls and 
procedures that are designed to ensure that important information flows to the appropriate 
persons so that timely decisions can be made regarding disclosure in public filings.  Commission 
regulations implementing Sarbanes-Oxley therefore require management to evaluate on a 
quarterly basis the effectiveness of the company’s disclosure controls and procedures and the 
company to disclose management’s conclusion regarding their effectiveness in its quarterly 
filings. 
2. On an investor call conducted in connection with the filing of its quarterly report 
on May 10, 2012, JPMorgan publicly disclosed a trading loss of approximately $2 billion since 
the start of the second quarter in a large portfolio of credit derivatives known as the Synthetic 
Credit Portfolio (“SCP”) held by the firm’s Chief Investment Office (“CIO”).  In the quarterly 
report, JPMorgan stated that, based upon management’s evaluation at the time, its disclosure 
controls and procedures were effective as of the end of the quarter. 
3. Over the next few months, as JPMorgan sought to bring down risk in the SCP, the 
losses in the SCP grew to nearly $6 billion.  Nevertheless, the full extent of the trading losses 
that had occurred during the first quarter was not detected and reported, in part, because of the 
ineffectiveness of an internal control function within CIO, known as the Valuation Control 
Group (“CIO-VCG”).  Within JPMorgan and other financial institutions and investment firms, 
valuation control units frequently serve as an essential internal control by helping to ensure that 
traders and other market professionals record accurate valuations for trading positions.  
Valuation control units must be sufficiently independent from the trading desks, and clear and 
effective written policies are necessary in order to guard against the risk that a company’s 
investment assets will be improperly valued—and its public filings misstated.  
4.  In the case of CIO, its VCG unit was unequipped to cope with the increase in the 
size and complexity of the SCP in early 2012, and did not function as an effective internal 
control in the first quarter of the year.  The unit was understaffed, insufficiently supervised, and 
did not adequately document its actual price-testing policies.  Moreover, the actual price-testing 
methodology employed by CIO-VCG in the first quarter of 2012 was subjective and 
insufficiently independent from the SCP traders, which enabled the traders to improperly 
                                                           
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  The findings herein are made pursuant to JPMorgan’s Offer and are not binding on any other 
person or entity in this or any other proceeding. 

   
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influence the VCG process.  In addition, during the first quarter of 2012, CIO-VCG failed to 
escalate to CIO and JPMorgan management significant information that management required in 
order to make informed decisions about disclosure of the firm’s financial results for the first 
quarter of 2012.  As a result, JPMorgan did not timely detect or effectively challenge 
questionable valuations by the SCP traders as the portfolio’s losses accumulated in the first 
quarter of 2012 and publicly misstated its financial results for that period. 
5. JPMorgan’s response to the CIO trading losses also was affected by inadequate 
communication between JPMorgan’s Senior Management and the Audit Committee of 
JPMorgan’s Board of Directors (the “Audit Committee”).  In April 2012, after learning of large 
counterparty valuation disputes relating to SCP positions, JPMorgan Senior Management 
initiated several reviews of the SCP marks and of CIO-VCG.  By early May 2012, the various 
reviews had alerted JPMorgan Senior Management to serious issues about CIO-VCG’s 
effectiveness in price-testing the values SCP traders had assigned to positions in the SCP during 
the first quarter of 2012.  These issues, among others, prompted JPMorgan Senior Management 
to take several actions, including recommending delaying the filing of the firm’s quarterly report 
with the Commission, and substantially revising CIO-VCG policies in early May 2012 to 
eliminate what Senior Management believed was an undue amount of subjectivity in a control 
function.   
6. Consistent with Sarbanes-Oxley’s emphasis on the role that the audit committee 
of a public company’s board of directors should play in corporate governance, JPMorgan’s 
internal controls include a requirement that its management keep the Audit Committee informed 
of, among other things, the identification of any significant deficiencies or material weaknesses 
in the firm’s internal control over financial reporting.  Such updates are necessary for the Audit 
Committee to fulfill its oversight role and help to assure the integrity and accuracy of 
information JPMorgan discloses in its public filings. 
7. Before JPMorgan filed its quarterly report on May 10, 2012, however, JPMorgan 
Senior Management did not adequately update the Audit Committee concerning the facts learned 
during the reviews of CIO-VCG.  Nor did it adequately update the Audit Committee on 
important observations made by the management-commissioned reviews of control breakdowns 
at CIO-VCG that amounted to, at a minimum, a significant deficiency.  Three primary issues 
relating to the sharing and synthesis of relevant information contributed to the inadequate 
communications with the Audit Committee.  First, several employees involved in conducting the 
reviews of CIO-VCG failed to timely escalate important facts regarding control deficiencies at 
CIO-VCG.  Second, JPMorgan Senior Management was concerned about the market sensitivity 
of the SCP positions and the confidential nature of the review, and required that the review teams 
keep their work strictly confidential, which had the effect of impeding the exchange of 
information among the review teams and their ability to analyze collectively the information 
generated by these reviews.  Third, despite learning of important information concerning control 
deficiencies at CIO-VCG, JPMorgan Senior Management did not make a considered assessment 
of the significance of that information to determine if it revealed a significant deficiency or 
material weakness at CIO-VCG that had to be disclosed to the Audit Committee.   
8. On July 13, 2012, JPMorgan announced that it would restate its results for the 
first quarter of 2012 because it was no longer confident that the SCP marks used to prepare the 

   
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first quarter results, which CIO-VCG was responsible for price testing, “reflect good faith 
estimates of fair value at quarter end.”  Also on this date, JPMorgan disclosed to investors that a 
material weakness in internal control over financial reporting had existed at CIO as of March 31, 
2012 based on deficiencies in the CIO-VCG process. 
9. On August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results 
for the first quarter of 2012.  The restatement had the effect of moving certain SCP losses from 
the second quarter to the first quarter.  These misstated first quarter results were disclosed not 
only in the quarterly report filed on Form 10-Q on May 10, 2012, but also in JPMorgan’s 
earnings release for the first quarter, which was filed on Form 8-K with the Commission on April 
13, 2012.  Also on August 9, 2012, JPMorgan disclosed that its disclosure controls and 
procedures as of March 31, 2012 were not effective and that management’s prior conclusion in 
the firm’s May 10, 2012 quarterly report that they were effective was incorrect. 
10. As a result of its failure to maintain effective internal control over financial 
reporting as of March 31, 2012, and disclosure controls and procedures, and as a result of its 
filing of inaccurate reports with the Commission (specifically, the Form 8-K filed on April 13, 
2012, and the Form 10-Q filed on May 10, 2012), JPMorgan violated Sections 13(a), 
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 
thereunder. 
11. In response to the Commission’s investigation, JPMorgan provided substantial 
cooperation to Commission staff.  JPMorgan has also voluntarily undertaken a comprehensive 
program of remediation to address, among other things, the internal control deficiencies that are 
the subject of this proceeding.  Most notably, JPMorgan has substantially strengthened the 
valuation control function within CIO to ensure that price verification procedures are conducted 
with the appropriate degree of independence and supervision. 
IV. 
RELEVANT ENTITIES AND PERSONS 
12. JPMorgan, a Delaware corporation headquartered in New York, New York, 
is a global banking and financial services firm whose common stock is registered with the 
Commission under Section 12(b) of the Exchange Act and traded on The New York Stock 
Exchange under the symbol “JPM.” 
13. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity 
reporting segment.  Among other things, CIO is responsible for investing excess deposits from 
JPMorgan’s banking arm.  CIO maintains offices in New York, New York and London, United 
Kingdom.  
14. JPMorgan “Senior Management,” as that term is used herein, refers to one or 
more of the following individuals who held the listed positions as of May 10, 2012:  the 
JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief 
Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. 

   
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THE MISMARKING OF JPMORGAN’S 
SYNTHETIC CREDIT PORTFOLIO 
JPMorgan, CIO, and the Synthetic Credit Portfolio 
15. In 2007, CIO created an investment portfolio, the SCP, which was designed to 
provide a hedge against adverse credit events.  It invested in derivatives that could be expected to 
generate profit during adverse credit events, such as widespread corporate defaults.  The 
positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those 
indices, both of which were constructed to track a collection of credit default swaps (“CDS”) 
referencing the debt of corporate issuers. 
16. The SCP was invested in two primary index groups: CDX, a group of North 
American and Emerging Markets indices, and iTraxx, a group of European and Asian indices.  
Some indices referenced companies considered to be investment grade and others referenced 
companies considered to be high-yield (which generally means that their credit risk is viewed as 
higher).  Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is 
equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a 
buyer of CDS protection. 
17. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a 
net short risk position in high-yield indices and tranches, which meant that the SCP was 
positioned to realize gains if high-yield companies were to default on their corporate debt.  The 
composition of the book changed from time to time in response to CIO’s assessment of market 
conditions. 
18. In December 2011, in preparation for complying with the capital adequacy 
standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of 
regulatory capital.  To achieve this—and, in light of improving economic conditions, to reduce 
the SCP’s credit protection profile—CIO management and the traders in charge of the SCP 
considered reducing the size of the SCP’s short risk position in high-yield investments.  There 
were substantial costs associated with this strategy.  To avoid these costs, CIO management and 
traders therefore decided to add investments to the SCP’s existing long risk investment-grade 
positions to offset the short risk high-yield position.  However, as CIO built its long risk 
investment-grade positions, which included a large investment in an index known as the CDX 
North American Investment Grade Index Series 9 10-year, it also added substantially to its 
existing high-yield short position.  JPMorgan did not have risk limits restricting the notional size 
of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP.  
During the first quarter of 2012, CIO tripled the net notional amount of the SCP.  As of March 
31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately 
$157 billion. 
Traders Mismark the SCP as Losses Mount 
19. Like many other public companies, JPMorgan reported its results, which 
incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in 
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  Under JPMorgan 

   
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policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the 
SCP at fair value.  Both GAAP and JPMorgan’s accounting policy required that the SCP traders 
do so by making a good-faith estimate of the fair value of each SCP position based on 
information available in the marketplace.  Under GAAP, the positions in the SCP had to be 
marked “within the bid-ask spread” at the point that is “most representative of fair value in the 
circumstances,” with a particular emphasis on the price where the traders could reasonably 
expect to transact.  GAAP also allows for the use of mid-market pricing “as a practical expedient 
for fair value measurements within a bid-ask spread.”  
20. At the end of each business day, the SCP traders had to mark the positions in the 
SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and 
losses for the day.  Additionally, the traders had to provide their valuations for the SCP to the 
middle office at CIO so that the information could be incorporated into the books and records of 
JPMorgan. 
21. The SCP generated sizeable profits for JPMorgan over the period from 2007 to 
2011.  In the first quarter of 2012, however, it began experiencing substantial mark-to-market 
losses.  By early March 2012, the most senior SCP trader, who was a managing director within 
CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there 
was a market-moving event that could easily explain the losses.  In response, a junior SCP trader 
changed his daily marking methodology for the SCP.  Previously, he had derived for each SCP 
position a bid-offer spread from dealer quotes he had received and then assigned a mark that was 
generally equivalent to the mid-point in that spread.  In response to the most senior trader’s 
instruction, the junior trader began to assign marks that often were at the most aggressive point 
in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the 
SCP positions).  For some SCP positions, the junior trader assigned marks in March that were 
altogether outside every dealer’s bid and offer received that day. As a result of these marking 
practices, the SCP traders intentionally understated mark-to-market losses in the SCP. 
22. In March 2012, the junior trader began to maintain a spreadsheet which showed 
that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and 
the average mid-market point between the best bids and offers he had received from dealers had 
grown to $292 million.  Within a few days, the difference had grown further to $432 million.  
The traders, however, revealed significantly smaller losses in daily reports to CIO management 
about the portfolio’s performance than were indicated by mid-market pricing. 
23. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP 
traders informed the most senior trader in the morning that losses for that day alone could reach 
$250 million.  In response, the most senior trader directed the junior trader not to mark the SCP 
at the close of business in London, as JPMorgan policy required, but instead to wait for the 
markets in New York to close because trading information from New York might support higher 
valuations for the SCP positions. 
24. The most senior trader also instructed the junior trader to use the “best” prices 
(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP.  On March 
30, the junior trader marked the SCP positions in accordance with these instructions, and 
reported to CIO management an estimated loss of $138 million.  Over the next several weeks, the 

   
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traders continued to understate mark-to-market losses in the SCP until their authority over the 
portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior 
Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take 
responsibility for the portfolio. 
JPMorgan Issues Its First Quarter  
Results and Subsequently Issues a Restatement 
25. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending 
March 31, 2012, which was filed on Form 8-K with the Commission.  Also on April 13, 
JPMorgan Senior Management conducted an earnings call with analysts and investors.  The 
earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax 
expense was $7.641 billion.  These results included the understated losses for the SCP, which 
was based on the SCP traders’ marks as of March 30, 2012. 
26. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for 
the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced 
significant mark-to-market losses in the SCP during the second quarter to date.  Also on May 10, 
2012, JPMorgan Senior Management conducted a call with analysts, during which the firm 
disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to 
date and that there could be additional losses, that the trading strategy that resulted in the losses 
was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve 
had teams from audit, legal, risk, and various control functions . . . involved in extensive review 
of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there 
are many errors, sloppiness, and bad judgment.”  The $2 billion calculation was based on marks 
for positions in the SCP that were derived from independent pricing sources and not from the 
SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent 
conclusions concerning the integrity of the SCP traders’ marks. 
27. Two months later, on July 13, 2012, JPMorgan announced that it would restate its 
results for the first quarter of 2012 because it had discovered “information that raises questions 
about the integrity of the [SCP] marks” and was no longer confident that the marks used to 
prepare the first quarter results “reflect good faith estimates of fair value at quarter end.”  On 
August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter.  
The restatement had the effect of moving certain SCP losses from the second quarter to the first 
quarter.  Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private 
Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 
billion, and the firm’s consolidated quarterly income before income tax expense from the 
previously-reported $7.641 billion to $6.981 billion. 
JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS  
AND DISCLOSURE CONTROLS AND PROCEDURES 
28. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial 
statements for the first quarter of the year, management’s discussion of the firm’s various 
businesses, and other information.  In addition, the report stated that JPMorgan’s management 

   
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evaluated the effectiveness of its disclosure controls and procedures and concluded that they 
were effective. 
29. As discussed below, between late April and May 10, 2012, JPMorgan engaged in 
an extensive process involving work performed by the Controller’s office, the Internal Audit 
department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), 
and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to 
understand the CIO valuation control process and the differences between that process and the 
valuation control process of the IB.  As a result, by May 10, various executives and employees of 
the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls.  Due to 
failures to timely escalate information and instructions that had the effect of hindering the 
sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior 
Management prior to May 10, 2012.  And, as to the information that was escalated, JPMorgan 
Senior Management did not make a considered assessment as to whether critical facts existed—
including any significant deficiency or material weakness in internal controls—that had to be 
disclosed to the Audit Committee.  Consequently, JPMorgan Senior Management did not 
disclose the existence of any significant deficiencies or material weaknesses to the Audit 
Committee before JPMorgan filed its quarterly report on May 10, 2012. 
30. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would 
restate its results for the first quarter of 2012, the firm announced that a material weakness in 
internal control over financial reporting had existed at CIO as of March 31, 2012.  As a result of 
the material weakness, JPMorgan also announced that its management had concluded that 
JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. 
CIO Internal Controls in the First Quarter of 2012 
31. As part of fulfilling the requirements to devise and maintain systems of internal 
accounting controls, financial institutions such as JPMorgan need to have internal controls that 
adequately monitor and test the accuracy and integrity of, among other things, the valuations of 
the firm’s trading portfolios such as the SCP.  CIO-VCG served as a significant control for 
ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were 
measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the 
quarterly and annual reports the firm filed with the Commission. 
32. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks 
that the SCP traders assigned to the portfolio’s positions on the last business day of every month.  
Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price-
testing function by undertaking the following steps: 
a. First, CIO-VCG had to calculate, as a benchmark, an independent price for 
each of the SCP positions.  A CIO-VCG policy and procedure document 
indicates that, for index positions, these independent prices were to be 
obtained from Markit Limited Group (“Markit”), a service that provides 
consensus-based prices for indices.  For tranches, CIO-VCG obtained 
independent prices from dealer quotes, which it checked against Totem, 

   
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another consensus pricing service offered by Markit, for any significant 
discrepancies. 
b. After calculating an independent price for each SCP position, CIO-VCG 
had to establish and apply a threshold (or tolerance) around each price that 
represented the average bid-offer spread for the security based on quotes 
received from dealers.  While it had authority to make an adjustment to 
trader marks that fell within these thresholds, CIO-VCG considered such 
marks to be presumptively marked at fair value and would not make any 
adjustment to those marks. 
c. If the SCP traders’ mark for a given position fell outside of the threshold, 
CIO-VCG would record the excess as a loss (or profit) and make a 
corresponding adjustment to the mark-to-market profit and loss for the 
SCP. 
d. Finally, if CIO-VCG determined that the market for a particular position 
had become illiquid, CIO-VCG applied a pre-established formula to 
calculate and record a liquidity reserve to account for the risk that certain 
SCP positions could not be sold at fair value due to reduced liquidity in 
the marketplace. 
33. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at 
the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office.  
That person was also responsible for price testing all of CIO’s other London-based portfolios. 
34. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for 
the end of March 2012.  It applied the relevant thresholds to adjust downward the fair value of 
the SCP by approximately $17 million compared to the traders’ marks and maintained the 
previous month’s liquidity reserve of approximately $31 million.   
35. During its price-testing process for quarter-end marks, CIO-VCG observed that 
most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread.  CIO-
VCG questioned one of the SCP traders about this shift.  The trader did not explain the shift but 
merely stated, “Talk to management.”  CIO-VCG did not disclose to anyone its observations 
concerning the shift in the SCP traders’ marking methodology until questions were being raised 
about a collateral dispute, which is summarized below, on April 20, 2012.  CIO-VCG also did 
not share the details of its exchange with the SCP trader. 
36. CIO-VCG calculated a significant difference between its independent prices and 
the SCP traders’ marks.  During its price-testing process, it calculated that the mid-market value 
of the SCP based on its independent prices was approximately $192 million less than the value 
based on the SCP traders’ marks.  It subsequently identified an error in its calculations, which 
increased the difference from $192 million to approximately $275 million.  A March 30, 2012 
Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should 
disclose this discrepancy to CIO management.  However, that action plan was not required to be 
fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value 

   
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adjustment based on marks that fell outside of its thresholds.  Consequently, CIO management 
was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG 
calculated mid-market valuations, which warranted further analysis. 
37. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management 
and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 
million, based on a determination that certain tranches in the SCP portfolio had become illiquid 
as of March 30.  The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the 
financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in 
the firm’s May 10, 2012 report for the first quarter of 2012.   
Large Collateral Calls and Increasing Losses Prompt  
Multiple Reviews of CIO-VCG and the Traders’ Marks 
38. On April 20, 2012, JPMorgan Senior Management was informed that the firm had 
received several collateral calls—requests from trading counterparties for payment or the posting 
of collateral based on their differing views of the fair value—concerning positions in the SCP.  
The total amount in dispute was approximately $520 million. 
39. A collateral dispute with a CDS counterparty can sometimes be an indication that 
a firm’s internal price for an instrument does not accurately reflect its fair value.  Accordingly, in 
April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior 
Management about the pricing of the SCP positions.  In an April 20, 2012 email, a member of 
JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our 
valuation process” in the SCP. 
40. At the same time that the collateral disputes were being escalated to JPMorgan 
Senior Management, the SCP was also sustaining large daily losses.  This development was 
inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April 
13 earnings release, and JPMorgan Senior Management was concerned about the losses and the 
traders’ explanations of what was happening to the SCP positions and their strategy for dealing 
with the risks to the SCP.  On or about April 27, JPMorgan Senior Management asked a senior 
trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis.  Shortly 
afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in 
the SCP, and the SCP traders were relieved of all trading and pricing responsibilities.  
Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus 
mid-market prices published by Markit. 
41. In late April and early May, JPMorgan Senior Management mobilized resources 
from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior 
experience with CIO-VCG’s price-testing process, and the Controller’s office, which included 
JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law 
firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process.  At the 
time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 
in early May 2012.  In part due to the questions being raised about the valuation of the SCP, 
JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the 
filing to May 10.  JPMorgan Senior Management delayed the filing so that it had additional time 

   
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to assess whether CIO’s first quarter results, which had been publicly released on April 13, were 
in fact compliant with GAAP and should be disclosed again in the quarterly report. 
The Investment Bank’s Review 
42. On April 25, 2012, a member of JPMorgan Senior Management asked the 
Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for 
March 30, 2012 as if the positions had been held by the IB.  IB-VCG also reviewed the price-
testing work that had been done by CIO-VCG at the end of March 2012.  The IB-VCG review 
was conducted under the supervision of the IB’s Chief Financial Officer. 
IB-VCG Valuation “In Line with the Counterparties” 
43. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ 
marks.  On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG 
that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market 
differences you see on the collateral calls. . . .  In terms of dollar value, the number seems pretty 
much in line . . . with the counterparties.”  In other words, IB-VCG’s preliminary valuation of 
the SCP positions was in line with those of CIO’s trading counterparties, who had valued the 
SCP at several hundreds of millions of dollars less than the SCP traders did. 
44. During the conference call, CIO-VCG explained to IB-VCG staff that in setting 
thresholds around independent prices during its month-end price-testing process, it often 
consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they 
have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et 
cetera.”  CIO-VCG also informed IB-VCG that, when completing its price-testing process, it 
used dealer quotes selected by SCP traders.  IB-VCG staff believed that this process of 
consulting the traders had the potential to significantly impair the independence and 
effectiveness of the CIO-VCG process. 
45. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior 
Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP 
traders’ marks.  He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to 
date (“IB-VCG Spreadsheet”).  At that meeting, at least one of the positions in the IB-VCG 
Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in 
each individual column. 
46. As of this time, JPMorgan Senior Management and CIO management knew that 
the SCP traders’ marks were $275 million greater than independent mid-market prices computed 
by CIO-VCG based on a combination of broker quotes and data from consensus pricing services.  
IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet 
calculated that the SCP traders’ marks were approximately $767 million greater than the values 
placed on the SCP positions by consensus mid-market prices published by Markit and Totem. 
47. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, 
based on market information from March 30, 2012, for six SCP positions, including several of 
the largest positions and some with the greatest total dollar value differences between trader 
marks and IB-VCG’s consensus pricing.  The IB-VCG Spreadsheet contained data regarding 133 

   
12 
positions and reflected, among other things, that for the six positions for which it calculated an 
approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads 
that IB-VCG had approximated.    
48. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit-
and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather 
than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell 
at prices that are inferior to the consensus, mid-market Markit or Totem prices).  This analysis 
showed that adjusting marks to the conservative end of the bid-offer spread would have further 
reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion 
difference between the traders’ marks and a price-taker’s marks at the conservative end of the 
bid-offer spread.  JPMorgan Senior Management elected not to pursue this marking methodology 
with respect to the March 2012 quarter-end marks because, among other reasons, it understood 
that using mid-market prices was acceptable under GAAP. 
Spreadsheet Errors 
49. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ 
quarter-end marks.  During this review, IB-VCG learned that in March 2012 CIO-VCG used a 
spreadsheet in its price-testing process into which data had been manually entered, and that this 
spreadsheet contained certain errors and reflected differences from the IB-VCG methodology 
that may have had the effect of understating the difference between the traders’ marks and the 
independent mid-market prices derived by CIO-VCG.  On May 8, 2012, IB-VCG forwarded an 
email to one member of JPMorgan Senior Management explaining these issues.  IB-VCG and 
CIO-VCG were instructed to work together to address the errors and other issues. 
50. The next day, IB-VCG corrected one such error, which involved the calculation of 
the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s 
independent prices.  Before the correction, the difference was believed to be approximately $275 
million.  After the correction, the difference increased to $512 million.  IB-VCG informed 
JPMorgan Senior Management of the correction and the quantitative impact it had.   
51. Based on the price-testing work of IB-VCG and other information, the 
management of the IB expressed concerns to JPMorgan Senior Management about the potential 
for mismarking of the SCP and whether CIO VCG was an effective control over the SCP.  On 
May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior 
Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., 
could effectively be priced in the marketplace) and that he could not recall a variance between 
trader marks and independent prices in the IB “greater than $50mm that remained at any month 
end across the ENTIRE IB’s positions.”  
52. In light of their concerns relating to CIO, two senior IB executives initially 
expressed some reservations regarding the scope of their sub-certifications that JPMorgan 
required officers in the various business lines to provide in connection with its quarterly and 
annual filings.
  
One of the executives apprised JPMorgan Senior Management that in light of the 
CIO related information to which he was privy, he had a conversation with an outside lawyer 
concerning the scope of his certification obligations.  After relaying that conversation to the 

   
13 
other Investment Bank executive with certification obligations, both executives signed their sub-
certifications. 
The Internal Audit Review 
53. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior 
Management instructed Internal Audit to review the CIO-VCG process, including whether it had 
been applied consistently over past quarters.
  
Also on May 2, at the end of a meeting of the Audit 
Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed 
of the losses recently suffered, separately requested that Internal Audit review CIO. 
54. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG 
had applied at March 30.  As noted above, JPMorgan policy required that CIO-VCG set a 
threshold around its independent price for each SCP position that was representative of the 
average spread between the bids and the offers received from dealers for the position.  Because 
the threshold was applied on each side of the independent price, in order to reflect the bid-offer 
spread the threshold on each side would be one-half of the entire spread. 
55. By May 9, 2012, the Internal Audit team learned that in validating the SCP 
traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid-
offer spread (rather than one half of the spread) on each side of its independent prices.
  
The result 
was a threshold that was twice the size of the bid-offer spread and beyond the range of 
reasonable fair value estimates.  The Internal Audit team calculated that, had CIO-VCG applied 
the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by 
$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made 
at month end. 
56. On May 10, the Internal Audit team collected its work in a draft memo (“Internal 
Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the 
application of [its] own thresholds.” 
57. Although Internal Audit completed this work in the days prior to May 10, it did 
not fully share this information with JPMorgan Senior Management and did not circulate the 
Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. 
The Controller’s Review 
58. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to 
assess whether the traders’ quarter-end marks complied with GAAP and to review the 
effectiveness of CIO-VCG’s quarter-end internal control process. 
59. The Controller’s staff made several significant observations.  One was that, as 
losses in the SCP increased in March 2012, the traders departed from their historical practice of 
marking the positions close to the mid-point between the bids and offers received from dealers.  
Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they 
marked the positions in a manner that resulted in smaller mark-to-market losses.  JPMorgan 
Senior Management was informed of this fact in late April 2012.  The traders justified their 
marks to the Controller’s staff by explaining that the market had become volatile and dislocated.  

   
14 
This volatility, the SCP traders claimed, caused significant intraday price movements that may 
help explain the difference between the SCP traders’ marks and consensus pricing services.  To 
test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and 
determined that the difference between the SCP traders’ marks and the mid-market prices was 
less than the average daily price movement.  While accepting the SCP traders’ justification, 
however, the Controller’s staff failed to adequately assess whether CIO could transact at the 
price where the SCP was marked. 
60. For two quarter end marks assigned by the SCP traders, the Controller’s staff also 
detected significant differences from mid-market consensus pricing that were not supported by 
pricing data received by the SCP traders on the date that the mark was assigned.  When the 
Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide 
as compared to the mid-market price.  This fact had not been adequately considered by CIO-
VCG during its actual price testing process in connection with the first quarter of 2012, nor was 
this fact given appropriate scrutiny by the Controller’s staff.  Consequently, the Controller’s staff 
did not escalate this information to JPMorgan Senior Management. 
The Special Review by Outside Counsel 
61. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan 
retained an outside law firm to provide advice regarding disclosure and to review, among other 
things, whether the independence of the CIO-VCG process had been improperly compromised 
by the involvement of the SCP traders.
 
 By May 10, 2012, when JPMorgan filed its first quarter 
report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP 
marks, the executive to whom he reported, and other members of CIO management.
  
The law 
firm also had collected and reviewed a limited number of the relevant emails and Bloomberg 
chats from the first quarter of 2012. 
The Process for Synthesizing and  
Escalating Information from the Various Reviews 
62. JPMorgan Senior Management led a process that involved daily—sometimes 
twice daily—meetings and calls in which participants involved in the different reviews discussed 
what they and their teams were doing and learning. Despite that process, a number of significant 
facts learned in the course of the various reviews were not shared in these group meetings and 
calls and were not otherwise escalated to JPMorgan Senior Management.  This in turn led to 
JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March 
2012.   
63. JPMorgan Senior Management’s emphasis on confidentiality and sharing 
information on a need-to-know basis contributed to this incomplete understanding.  JPMorgan 
Senior Management was concerned about sensitive information relating to CIO’s positions being 
widely distributed and imposed restrictions on the creation and sharing of work product relating 
to those positions.  These instructions affected the ability of those conducting the reviews to 
share, learn from, and build upon each other’s work. 

   
15 
64. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] 
with people outside the immediate group” and to exercise caution in committing its findings to 
writing. 
65. A member of JPMorgan Senior Management also instructed IB-VCG to “keep 
[its] analysis in a relatively tight group.”
  
On April 29, 2012, an IB executive confirmed to the 
member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the 
Controller’s staff, “without getting my express approval first.”
  
 
66. Finally, the Internal Audit team was instructed to maintain strict confidentiality in 
connection with its review.
 
  
67. JPMorgan Senior Management did not receive all relevant information for another 
reason: some employees conducting the reviews failed to appreciate the significance of certain of 
the facts they had learned and their relevance to the quarterly report that was about to be filed.  
For example, in looking back on his work after learning in late June that the integrity of the 
traders’ marks was in question, a London-based employee primarily responsible for the 
Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better 
understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP 
traders’ quarter-end marks and Markit and Totem consensus, mid-market prices.
  
The employee 
further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) 
were determined” and “should have picked up that the tolerances determined by adding whole 
bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012.  
Although executives were in contact with those responsible for the various reviews, some of 
those employees failed to timely analyze and escalate to JPMorgan Senior Management 
important facts that they had discovered. 
JPMorgan Senior Management’s  
Response to the Information It Received 
68. Despite the inadequate information sharing and escalation described above, 
significant information learned in the management-commissioned reviews was escalated to 
JPMorgan Senior Management.  This information, which related to the adequacy of the CIO-
VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end 
marks, included the following: 
a. As losses began to mount, SCP traders began consistently marking at or 
near the very edge of the advantageous side of the bid-offer spread. 
b. There was a collateral dispute of over $500 million. 
c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks 
was “in line with . . . the counterparties.”  Specifically, the value of the 
SCP based on trader marks was approximately $767 million more than the 
value based on mid-point consensus pricing. 
69. Management also learned of the following facts that directly related to CIO-VCG 
and the processes it was using in March 2012:  

   
16 
a. The CIO-VCG process relied on manual spreadsheets that contained 
errors, one of which caused CIO-VCG to understate the disparity between 
its independent prices and the traders’ marks by $237 million. 
b. The SCP traders provided some of the quotes that were used in CIO-
VCG’s price-testing process and this process “need[ed] to be enhanced to 
ensure independence.” 
70. In response to what it was learning prior to May 10, JPMorgan Senior 
Management decided to enhance CIO-VCG’s valuation policies.
  
To assist with this task, the 
persons conducting the reviews recommended certain changes, and a member of JPMorgan 
Senior Management drafted revisions to CIO-VCG procedures, which were shared with 
JPMorgan Senior Management and CIO management on May 5, 2012.
  
On May 7, 2012, a senior 
CIO executive circulated a “proposed operational approach to VCG price testing” that contained 
additional policy revisions.  Both sets of changes were implemented before May 10, 2012. 
71. Collectively, the new policies were intended to remediate several of the issues 
discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: 
a. Disparity between CIO-VCG independent prices and traders’ marks.  The 
revised policies significantly curtailed the size of thresholds that CIO-VCG 
could apply, directing that the difference between a trader’s mark and CIO-
VCG’s independent price could not exceed $500,000 for an index position 
and $2,000,000 for a tranche position. 
b. Trader involvement in the VCG process.  The revised policies required CIO-
VCG to “source broker quotes independently from the market,” rather than 
through the traders, thereby “eliminating any reliance on [the traders] for 
sourcing of market data.”
  
 
c. Variance between Markit and CIO-VCG’s independent prices.  The revised 
policies stated that, for positions where CIO-VCG could rely on dealer 
quotes in calculating independent prices, CIO-VCG must obtain at least two 
quotes and, if two are not available, it must use Markit or Totem as an input.  
The revised policies also provided that, even when dealer quotes are 
obtained, “mid prices derived from selected dealer quotes should be 
compared . . . to Markit/Totem sourced data and any material differences . . . 
must be reported to the CFO of CIO and must be reconciled.” 
d. Inadequate oversight over sole CIO-VCG price-tester.  The revised policies 
introduced a new protocol for escalating to management valuation disputes 
between CIO-VCG and the traders, requiring the involvement of JPMorgan 
risk personnel and the Chief Financial Officer of CIO. 
72. In addition to these policy changes, in early May the staff of IB-VCG prepared a 
remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing 
process, and to ensure proper review of the spreadsheets.
  
On May 8, 2012, after CIO finance 

   
17 
management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan 
Senior Management. 
The Reviews of CIO-VCG Are Not 
Addressed with the Audit Committee 
73. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s 
stockholders—including oversight of management’s responsibilities for internal controls—
ultimately rests with JPMorgan’s Board of Directors.
  
The Board, in turn, discharges its oversight 
function through several Board committees.  One of the principal committees is the Audit 
Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective 
internal controls, which are critical to the integrity of the firm’s financial reports and compliance 
with applicable policies and laws. 
74. To assist the Audit Committee in carrying out its responsibility, the Audit 
Committee’s Charter requires JPMorgan management to provide updates to the Committee on all 
“significant operating and control issues in internal audit reports,” the “initiation and status of 
significant special investigations,” the “identification and resolution status of material 
weaknesses” in controls, and any “reportable conditions in the internal control environment, 
including any significant deficiencies.”  These updates serve an important internal control 
function, allowing the Audit Committee to fulfill its oversight role by, among other things, 
keeping the Board up-to-date on significant matters, assessing whether to approve the filing of 
quarterly and annual reports, and evaluating whether the Committee should conduct its own 
independent investigation of any issues raised with it. 
75. In late April and early May 2012, while JPMorgan’s Senior Management was 
devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure 
to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also 
was in contact with members of the Audit Committee. 
76. However, while JPMorgan Senior Management was informed of, and was 
addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management 
did not engage in a considered assessment, before the firm filed its first quarter report on May 
10, 2012, to determine if these matters constituted a significant deficiency or material weakness 
in the firm’s internal control over financial reporting and therefore had to be disclosed to the 
firm’s Audit Committee.  Nor, more broadly, did JPMorgan Senior Management disclose to the 
Audit Committee its concerns regarding the operation of CIO-VCG. 
77. On May 2, 2012, the Audit Committee met with some members of JPMorgan 
Senior Management.  The focus of the meeting was on the mounting losses in the SCP portfolio. 
Despite the requirement to keep the Audit Committee apprised of the significant control issues 
that were under review, there was no discussion of the IB-VCG or Controller reviews related to 
CIO-VCG and the traders’ marks, although that work was underway.  There was also no 
discussion of the fact that an outside law firm had been retained to advise on disclosures to be 
made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO-
VCG process, including whether the SCP traders exercised undue influence on the process.
  
 

   
18 
78. During a full meeting of the Board of Directors hours before the filing of 
JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that 
reviews of what occurred in CIO were underway, including by Internal Audit, legal, the 
Controller’s staff, and risk management.  But, JPMorgan Senior Management did not discuss the 
details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. 
79. Because the Audit Committee was not apprised of the initiation of the reviews or 
facts learned as a result of those reviews, it was unable to provide input on the issues before the 
filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to 
ensure that it was sufficient from the perspective of the Audit Committee. 
80. As noted above, the Audit Committee was not made aware before JPMorgan filed 
its first quarter report of the facts learned by various members of the review teams, including that 
CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors,
 
that SCP 
traders may have exerted influence over that process,
 
or that CIO-VCG applied valuation 
thresholds that were in some instances twice the applicable spread. 
81. Other information learned by various members of the review teams that further 
called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with 
the Audit Committee.  At the end of the first quarter, CIO-VCG made a fair value adjustment of 
$17 million to the traders’ marks.  However, certain facts raised issues as to the adequacy of this 
adjustment and the process through which it was made, including the $520 million in collateral 
disputes over SCP positions,
 
the $767 million disparity between the SCP traders’ marks and 
consensus, mid-market prices,
 
the fact that the traders marked some of the largest notional SCP 
positions outside the bid-offer spread approximated by IB-VCG,
 
and the fact that the traders 
began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. 
82. Finally, the Audit Committee was not apprised of, or included in, JPMorgan 
Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation 
policies to ensure proper oversight by CIO management.
  
As a result, the Audit Committee did 
not have any input into the proposed changes or an understanding of the reasons that motivated 
them. 
Subsequent Disclosures by JPMorgan 
83. Based on the information available to it, the Audit Committee approved of the 
content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012.  On July 
13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over 
financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of 
the synthetic credit portfolio.”  In its amended Form 10-Q for the first quarter of 2012 filed on 
August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues 
in certain interrelated and interdependent control elements comprising that process, including 
insufficient engagement of CIO senior finance management in the valuation control process in 
light of the increased size and heightened risk profile of the synthetic credit portfolio during the 
first quarter of 2012, and in the effectiveness of certain procedures employed during the first 
quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” 

   
19 
84. JPMorgan also corrected prior statements concerning its disclosure controls and 
procedures.  In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by 
this report, an evaluation was carried out under the supervision and with the participation of the 
Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial 
Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-
15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Chairman and 
Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls 
and procedures were effective.”  On August 9, 2012, when JPMorgan disclosed that it had 
determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, 
“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief 
Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined 
in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, 
2012.” 
V. 
As a result of the conduct described above, JPMorgan violated Sections 13(a), 
13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 
thereunder. 
In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
agreed to in JPMorgan’s Offer. 
Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: 
A. JPMorgan cease and desist from committing or causing any violations and any 
future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 
13a-11, 13a-13, and 13a-15 thereunder. 
 
B. JPMorgan shall, within ten (10) business days of the entry of this Order, pay a 
civil money penalty in the amount of $200,000,000 to the Securities and Exchange Commission.  
If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. 
Payment must be made in one of the following ways: 
 
(1)  JPMorgan may transmit payment electronically to the 
Commission, which will provide detailed ACH transfer/ 
Fedwire instructions upon request; 
(2)  JPMorgan may make direct payment from a bank account via 
Pay.gov through the SEC website at 
http://www.sec.gov/about/offices/ofm.htm; or 
(3)  JPMorgan may pay by certified check, bank cashier’s check, or 
United States postal money order, made payable to the Securities 
and Exchange Commission and hand- delivered or mailed to: 
 
 

   
20 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying 
JPMorgan Chase & Co. as Respondent in these proceedings, and the file number of these 
proceedings; a copy of the cover letter and check or money order must be sent to Andrew M. 
Calamari, Regional Director – New York Regional Office, Division of Enforcement, Securities 
and Exchange Commission, 3 World Financial Center, Suite 400, New York, NY 10281. 
C. Such civil money penalty may be distributed pursuant to Section 308(a) of the 
Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”).  Regardless of whether any 
Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to 
this Order shall be treated as penalties paid to the government for all purposes, including all tax 
purposes.  To preserve the deterrent effect of the civil penalty, JPMorgan agrees that in any 
Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or 
reduction of any award of compensatory damages by the amount of any part of JPMorgan’s 
payment of a civil penalty in this action (“Penalty Offset”).  If the court in any Related Investor 
Action grants such a Penalty Offset, JPMorgan agrees that it shall, within 30 days after entry of a 
final order granting the Penalty Offset, notify the Commission's counsel in this action and pay 
the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the 
Commission directs.  Such a payment shall not be deemed an additional civil penalty and shall 
not be deemed to change the amount of the civil penalty imposed in this proceeding.  For 
purposes of this paragraph, a “Related Investor Action” means a private damages action brought 
against Respondent by or on behalf of one or more investors based on substantially the same 
facts as alleged in the Order instituted by the Commission in this proceeding. 
 
D. JPMorgan shall pay all reasonable administrative costs and expenses of any 
distribution, including the fees and expenses of a tax administrator, within thirty (30) days after 
receipt of an invoice for such services. 
 
By the Commission. 
 
 
 
      Elizabeth M. Murphy 
      Secretary 

   
 
ANNEX A 
 
 JPMorgan Chase & Co. (“JPMorgan”) admits to the facts set forth below and 
acknowledges that its conduct violated the federal securities laws: 
 
RELEVANT ENTITIES AND PERSONS 
1. JPMorgan, a Delaware corporation headquartered in New York, New York, 
is a global banking and financial services firm whose common stock is registered with the 
Commission under Section 12(b) of the Exchange Act and traded on The New York Stock 
Exchange under the symbol “JPM.” 
2. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity 
reporting segment.  Among other things, CIO is responsible for investing excess deposits from 
JPMorgan’s banking arm.  CIO maintains offices in New York, New York and London, United 
Kingdom.  
3. JPMorgan “Senior Management,” as that term is used herein, refers to one or 
more of the following individuals who held the listed positions as of May 10, 2012:  the 
JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief 
Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. 
THE MISMARKING OF JPMORGAN’S 
SYNTHETIC CREDIT PORTFOLIO 
JPMorgan, CIO, and the Synthetic Credit Portfolio 
4. In 2007, CIO created an investment portfolio, the SCP, which was designed to 
provide a hedge against adverse credit events.  It invested in derivatives that could be expected to 
generate profit during adverse credit events, such as widespread corporate defaults.  The 
positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those 
indices, both of which were constructed to track a collection of credit default swaps (“CDS”) 
referencing the debt of corporate issuers. 
5. The SCP was invested in two primary index groups: CDX, a group of North 
American and Emerging Markets indices, and iTraxx, a group of European and Asian indices.  
Some indices referenced companies considered to be investment grade and others referenced 
companies considered to be high-yield (which generally means that their credit risk is viewed as 
higher).  Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is 
equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a 
buyer of CDS protection. 
6. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a 
net short risk position in high-yield indices and tranches, which meant that the SCP was 
positioned to realize gains if high-yield companies were to default on their corporate debt.  The 
composition of the book changed from time to time in response to CIO’s assessment of market 
conditions. 

   
2 
7. In December 2011, in preparation for complying with the capital adequacy 
standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of 
regulatory capital.  To achieve this—and, in light of improving economic conditions, to reduce 
the SCP’s credit protection profile—CIO management and the traders in charge of the SCP 
considered reducing the size of the SCP’s short risk position in high-yield investments.  There 
were substantial costs associated with this strategy.  To avoid these costs, CIO management and 
traders therefore decided to add investments to the SCP’s existing long risk investment-grade 
positions to offset the short risk high-yield position.  However, as CIO built its long risk 
investment-grade positions, which included a large investment in an index known as the CDX 
North American Investment Grade Index Series 9 10-year, it also added substantially to its 
existing high-yield short position.  JPMorgan did not have risk limits restricting the notional size 
of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP.  
During the first quarter of 2012, CIO tripled the net notional amount of the SCP.  As of March 
31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately 
$157 billion. 
Traders Mismark the SCP as Losses Mount 
8. Like many other public companies, JPMorgan reported its results, which 
incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in 
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  Under JPMorgan 
policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the 
SCP at fair value.  Both GAAP and JPMorgan’s accounting policy required that the SCP traders 
do so by making a good-faith estimate of the fair value of each SCP position based on 
information available in the marketplace.  Under GAAP, the positions in the SCP had to be 
marked “within the bid-ask spread” at the point that is “most representative of fair value in the 
circumstances,” with a particular emphasis on the price where the traders could reasonably 
expect to transact.  GAAP also allows for the use of mid-market pricing “as a practical expedient 
for fair value measurements within a bid-ask spread.”  
9. At the end of each business day, the SCP traders had to mark the positions in the 
SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and 
losses for the day.  Additionally, the traders had to provide their valuations for the SCP to the 
middle office at CIO so that the information could be incorporated into the books and records of 
JPMorgan. 
10. The SCP generated sizeable profits for JPMorgan over the period from 2007 to 
2011.  In the first quarter of 2012, however, it began experiencing substantial mark-to-market 
losses.  By early March 2012, the most senior SCP trader, who was a managing director within 
CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there 
was a market-moving event that could easily explain the losses.  In response, a junior SCP trader 
changed his daily marking methodology for the SCP.  Previously, he had derived for each SCP 
position a bid-offer spread from dealer quotes he had received and then assigned a mark that was 
generally equivalent to the mid-point in that spread.  In response to the most senior trader’s 
instruction, the junior trader began to assign marks that often were at the most aggressive point 
in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the 
SCP positions).  For some SCP positions, the junior trader assigned marks in March that were 

   
3 
altogether outside every dealer’s bid and offer received that day. As a result of these marking 
practices, the SCP traders intentionally understated mark-to-market losses in the SCP. 
11. In March 2012, the junior trader began to maintain a spreadsheet which showed 
that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and 
the average mid-market point between the best bids and offers he had received from dealers had 
grown to $292 million.  Within a few days, the difference had grown further to $432 million.  
The traders, however, revealed significantly smaller losses in daily reports to CIO management 
about the portfolio’s performance than were indicated by mid-market pricing. 
12. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP 
traders informed the most senior trader in the morning that losses for that day alone could reach 
$250 million.  In response, the most senior trader directed the junior trader not to mark the SCP 
at the close of business in London, as JPMorgan policy required, but instead to wait for the 
markets in New York to close because trading information from New York might support higher 
valuations for the SCP positions. 
13. The most senior trader also instructed the junior trader to use the “best” prices 
(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP.  On March 
30, the junior trader marked the SCP positions in accordance with these instructions, and 
reported to CIO management an estimated loss of $138 million.  Over the next several weeks, the 
traders continued to understate mark-to-market losses in the SCP until their authority over the 
portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior 
Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take 
responsibility for the portfolio. 
JPMorgan Issues Its First Quarter  
Results and Subsequently Issues a Restatement 
14. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending 
March 31, 2012, which was filed on Form 8-K with the Commission.  Also on April 13, 
JPMorgan Senior Management conducted an earnings call with analysts and investors.  The 
earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax 
expense was $7.641 billion.  These results included the understated losses for the SCP, which 
was based on the SCP traders’ marks as of March 30, 2012. 
15. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for 
the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced 
significant mark-to-market losses in the SCP during the second quarter to date.  Also on May 10, 
2012, JPMorgan Senior Management conducted a call with analysts, during which the firm 
disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to 
date and that there could be additional losses, that the trading strategy that resulted in the losses 
was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve 
had teams from audit, legal, risk, and various control functions . . . involved in extensive review 
of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there 
are many errors, sloppiness, and bad judgment.”  The $2 billion calculation was based on marks 
for positions in the SCP that were derived from independent pricing sources and not from the 

   
4 
SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent 
conclusions concerning the integrity of the SCP traders’ marks. 
16. Two months later, on July 13, 2012, JPMorgan announced that it would restate its 
results for the first quarter of 2012 because it had discovered “information that raises questions 
about the integrity of the [SCP] marks” and was no longer confident that the marks used to 
prepare the first quarter results “reflect good faith estimates of fair value at quarter end.”  On 
August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter.  
The restatement had the effect of moving certain SCP losses from the second quarter to the first 
quarter.  Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private 
Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 
billion, and the firm’s consolidated quarterly income before income tax expense from the 
previously-reported $7.641 billion to $6.981 billion. 
JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS  
AND DISCLOSURE CONTROLS AND PROCEDURES 
17. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial 
statements for the first quarter of the year, management’s discussion of the firm’s various 
businesses, and other information.  In addition, the report stated that JPMorgan’s management 
evaluated the effectiveness of its disclosure controls and procedures and concluded that they 
were effective. 
18. As discussed below, between late April and May 10, 2012, JPMorgan engaged in 
an extensive process involving work performed by the Controller’s office, the Internal Audit 
department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), 
and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to 
understand the CIO valuation control process and the differences between that process and the 
valuation control process of the IB.  As a result, by May 10, various executives and employees of 
the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls.  Due to 
failures to timely escalate information and instructions that had the effect of hindering the 
sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior 
Management prior to May 10, 2012.  And, as to the information that was escalated, JPMorgan 
Senior Management did not make a considered assessment as to whether critical facts existed—
including any significant deficiency or material weakness in internal controls—that had to be 
disclosed to the Audit Committee.  Consequently, JPMorgan Senior Management did not 
disclose the existence of any significant deficiencies or material weaknesses to the Audit 
Committee before JPMorgan filed its quarterly report on May 10, 2012. 
19. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would 
restate its results for the first quarter of 2012, the firm announced that a material weakness in 
internal control over financial reporting had existed at CIO as of March 31, 2012.  As a result of 
the material weakness, JPMorgan also announced that its management had concluded that 
JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. 

   
5 
CIO Internal Controls in the First Quarter of 2012 
20. As part of fulfilling the requirements to devise and maintain systems of internal 
accounting controls, financial institutions such as JPMorgan need to have internal controls that 
adequately monitor and test the accuracy and integrity of, among other things, the valuations of 
the firm’s trading portfolios such as the SCP.  CIO-VCG served as a significant control for 
ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were 
measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the 
quarterly and annual reports the firm filed with the Commission. 
21. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks 
that the SCP traders assigned to the portfolio’s positions on the last business day of every month.  
Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price-
testing function by undertaking the following steps: 
a. First, CIO-VCG had to calculate, as a benchmark, an independent price for 
each of the SCP positions.  A CIO-VCG policy and procedure document 
indicates that, for index positions, these independent prices were to be 
obtained from Markit Limited Group (“Markit”), a service that provides 
consensus-based prices for indices.  For tranches, CIO-VCG obtained 
independent prices from dealer quotes, which it checked against Totem, 
another consensus pricing service offered by Markit, for any significant 
discrepancies. 
b. After calculating an independent price for each SCP position, CIO-VCG 
had to establish and apply a threshold (or tolerance) around each price that 
represented the average bid-offer spread for the security based on quotes 
received from dealers.  While it had authority to make an adjustment to 
trader marks that fell within these thresholds, CIO-VCG considered such 
marks to be presumptively marked at fair value and would not make any 
adjustment to those marks. 
c. If the SCP traders’ mark for a given position fell outside of the threshold, 
CIO-VCG would record the excess as a loss (or profit) and make a 
corresponding adjustment to the mark-to-market profit and loss for the 
SCP. 
d. Finally, if CIO-VCG determined that the market for a particular position 
had become illiquid, CIO-VCG applied a pre-established formula to 
calculate and record a liquidity reserve to account for the risk that certain 
SCP positions could not be sold at fair value due to reduced liquidity in 
the marketplace. 
22. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at 
the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office.  
That person was also responsible for price testing all of CIO’s other London-based portfolios. 

   
6 
23. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for 
the end of March 2012.  It applied the relevant thresholds to adjust downward the fair value of 
the SCP by approximately $17 million compared to the traders’ marks and maintained the 
previous month’s liquidity reserve of approximately $31 million.   
24. During its price-testing process for quarter-end marks, CIO-VCG observed that 
most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread.  CIO-
VCG questioned one of the SCP traders about this shift.  The trader did not explain the shift but 
merely stated, “Talk to management.”  CIO-VCG did not disclose to anyone its observations 
concerning the shift in the SCP traders’ marking methodology until questions were being raised 
about a collateral dispute, which is summarized below, on April 20, 2012.  CIO-VCG also did 
not share the details of its exchange with the SCP trader. 
25. CIO-VCG calculated a significant difference between its independent prices and 
the SCP traders’ marks.  During its price-testing process, it calculated that the mid-market value 
of the SCP based on its independent prices was approximately $192 million less than the value 
based on the SCP traders’ marks.  It subsequently identified an error in its calculations, which 
increased the difference from $192 million to approximately $275 million.  A March 30, 2012 
Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should 
disclose this discrepancy to CIO management.  However, that action plan was not required to be 
fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value 
adjustment based on marks that fell outside of its thresholds.  Consequently, CIO management 
was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG 
calculated mid-market valuations, which warranted further analysis. 
26. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management 
and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 
million, based on a determination that certain tranches in the SCP portfolio had become illiquid 
as of March 30.  The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the 
financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in 
the firm’s May 10, 2012 report for the first quarter of 2012.   
Large Collateral Calls and Increasing Losses Prompt  
Multiple Reviews of CIO-VCG and the Traders’ Marks 
27. On April 20, 2012, JPMorgan Senior Management was informed that the firm had 
received several collateral calls—requests from trading counterparties for payment or the posting 
of collateral based on their differing views of the fair value—concerning positions in the SCP.  
The total amount in dispute was approximately $520 million. 
28. A collateral dispute with a CDS counterparty can sometimes be an indication that 
a firm’s internal price for an instrument does not accurately reflect its fair value.  Accordingly, in 
April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior 
Management about the pricing of the SCP positions.  In an April 20, 2012 email, a member of 
JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our 
valuation process” in the SCP. 

   
7 
29. At the same time that the collateral disputes were being escalated to JPMorgan 
Senior Management, the SCP was also sustaining large daily losses.  This development was 
inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April 
13 earnings release, and JPMorgan Senior Management was concerned about the losses and the 
traders’ explanations of what was happening to the SCP positions and their strategy for dealing 
with the risks to the SCP.  On or about April 27, JPMorgan Senior Management asked a senior 
trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis.  Shortly 
afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in 
the SCP, and the SCP traders were relieved of all trading and pricing responsibilities.  
Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus 
mid-market prices published by Markit. 
30. In late April and early May, JPMorgan Senior Management mobilized resources 
from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior 
experience with CIO-VCG’s price-testing process, and the Controller’s office, which included 
JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law 
firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process.  At the 
time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 
in early May 2012.  In part due to the questions being raised about the valuation of the SCP, 
JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the 
filing to May 10.  JPMorgan Senior Management delayed the filing so that it had additional time 
to assess whether CIO’s first quarter results, which had been publicly released on April 13, were 
in fact compliant with GAAP and should be disclosed again in the quarterly report. 
The Investment Bank’s Review 
31. On April 25, 2012, a member of JPMorgan Senior Management asked the 
Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for 
March 30, 2012 as if the positions had been held by the IB.  IB-VCG also reviewed the price-
testing work that had been done by CIO-VCG at the end of March 2012.  The IB-VCG review 
was conducted under the supervision of the IB’s Chief Financial Officer. 
IB-VCG Valuation “In Line with the Counterparties” 
32. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ 
marks.  On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG 
that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market 
differences you see on the collateral calls. . . .  In terms of dollar value, the number seems pretty 
much in line . . . with the counterparties.”  In other words, IB-VCG’s preliminary valuation of 
the SCP positions was in line with those of CIO’s trading counterparties, who had valued the 
SCP at several hundreds of millions of dollars less than the SCP traders did. 
33. During the conference call, CIO-VCG explained to IB-VCG staff that in setting 
thresholds around independent prices during its month-end price-testing process, it often 
consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they 
have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et 
cetera.”  CIO-VCG also informed IB-VCG that, when completing its price-testing process, it 

   
8 
used dealer quotes selected by SCP traders.  IB-VCG staff believed that this process of 
consulting the traders had the potential to significantly impair the independence and 
effectiveness of the CIO-VCG process. 
34. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior 
Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP 
traders’ marks.  He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to 
date (“IB-VCG Spreadsheet”).  At that meeting, at least one of the positions in the IB-VCG 
Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in 
each individual column. 
35. As of this time, JPMorgan Senior Management and CIO management knew that 
the SCP traders’ marks were $275 million greater than independent mid-market prices computed 
by CIO-VCG based on a combination of broker quotes and data from consensus pricing services.  
IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet 
calculated that the SCP traders’ marks were approximately $767 million greater than the values 
placed on the SCP positions by consensus mid-market prices published by Markit and Totem. 
36. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, 
based on market information from March 30, 2012, for six SCP positions, including several of 
the largest positions and some with the greatest total dollar value differences between trader 
marks and IB-VCG’s consensus pricing.  The IB-VCG Spreadsheet contained data regarding 133 
positions and reflected, among other things, that for the six positions for which it calculated an 
approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads 
that IB-VCG had approximated.    
37. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit-
and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather 
than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell 
at prices that are inferior to the consensus, mid-market Markit or Totem prices).  This analysis 
showed that adjusting marks to the conservative end of the bid-offer spread would have further 
reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion 
difference between the traders’ marks and a price-taker’s marks at the conservative end of the 
bid-offer spread.  JPMorgan Senior Management elected not to pursue this marking methodology 
with respect to the March 2012 quarter-end marks because, among other reasons, it understood 
that using mid-market prices was acceptable under GAAP. 
Spreadsheet Errors 
38. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ 
quarter-end marks.  During this review, IB-VCG learned that in March 2012 CIO-VCG used a 
spreadsheet in its price-testing process into which data had been manually entered, and that this 
spreadsheet contained certain errors and reflected differences from the IB-VCG methodology 
that may have had the effect of understating the difference between the traders’ marks and the 
independent mid-market prices derived by CIO-VCG.  On May 8, 2012, IB-VCG forwarded an 
email to one member of JPMorgan Senior Management explaining these issues.  IB-VCG and 
CIO-VCG were instructed to work together to address the errors and other issues. 

   
9 
39. The next day, IB-VCG corrected one such error, which involved the calculation of 
the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s 
independent prices.  Before the correction, the difference was believed to be approximately $275 
million.  After the correction, the difference increased to $512 million.  IB-VCG informed 
JPMorgan Senior Management of the correction and the quantitative impact it had.   
40. Based on the price-testing work of IB-VCG and other information, the 
management of the IB expressed concerns to JPMorgan Senior Management about the potential 
for mismarking of the SCP and whether CIO VCG was an effective control over the SCP.  On 
May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior 
Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., 
could effectively be priced in the marketplace) and that he could not recall a variance between 
trader marks and independent prices in the IB “greater than $50mm that remained at any month 
end across the ENTIRE IB’s positions.”  
41. In light of their concerns relating to CIO, two senior IB executives initially 
expressed some reservations regarding the scope of their sub-certifications that JPMorgan 
required officers in the various business lines to provide in connection with its quarterly and 
annual filings.
  
One of the executives apprised JPMorgan Senior Management that in light of the 
CIO related information to which he was privy, he had a conversation with an outside lawyer 
concerning the scope of his certification obligations.  After relaying that conversation to the 
other Investment Bank executive with certification obligations, both executives signed their sub-
certifications. 
The Internal Audit Review 
42. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior 
Management instructed Internal Audit to review the CIO-VCG process, including whether it had 
been applied consistently over past quarters.
  
Also on May 2, at the end of a meeting of the Audit 
Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed 
of the losses recently suffered, separately requested that Internal Audit review CIO. 
43. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG 
had applied at March 30.  As noted above, JPMorgan policy required that CIO-VCG set a 
threshold around its independent price for each SCP position that was representative of the 
average spread between the bids and the offers received from dealers for the position.  Because 
the threshold was applied on each side of the independent price, in order to reflect the bid-offer 
spread the threshold on each side would be one-half of the entire spread. 
44. By May 9, 2012, the Internal Audit team learned that in validating the SCP 
traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid-
offer spread (rather than one half of the spread) on each side of its independent prices.
  
The result 
was a threshold that was twice the size of the bid-offer spread and beyond the range of 
reasonable fair value estimates.  The Internal Audit team calculated that, had CIO-VCG applied 
the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by 
$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made 
at month end. 

   
10 
45. On May 10, the Internal Audit team collected its work in a draft memo (“Internal 
Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the 
application of [its] own thresholds.” 
46. Although Internal Audit completed this work in the days prior to May 10, it did 
not fully share this information with JPMorgan Senior Management and did not circulate the 
Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. 
The Controller’s Review 
47. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to 
assess whether the traders’ quarter-end marks complied with GAAP and to review the 
effectiveness of CIO-VCG’s quarter-end internal control process. 
48. The Controller’s staff made several significant observations.  One was that, as 
losses in the SCP increased in March 2012, the traders departed from their historical practice of 
marking the positions close to the mid-point between the bids and offers received from dealers.  
Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they 
marked the positions in a manner that resulted in smaller mark-to-market losses.  JPMorgan 
Senior Management was informed of this fact in late April 2012.  The traders justified their 
marks to the Controller’s staff by explaining that the market had become volatile and dislocated.  
This volatility, the SCP traders claimed, caused significant intraday price movements that may 
help explain the difference between the SCP traders’ marks and consensus pricing services.  To 
test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and 
determined that the difference between the SCP traders’ marks and the mid-market prices was 
less than the average daily price movement.  While accepting the SCP traders’ justification, 
however, the Controller’s staff failed to adequately assess whether CIO could transact at the 
price where the SCP was marked. 
49. For two quarter end marks assigned by the SCP traders, the Controller’s staff also 
detected significant differences from mid-market consensus pricing that were not supported by 
pricing data received by the SCP traders on the date that the mark was assigned.  When the 
Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide 
as compared to the mid-market price.  This fact had not been adequately considered by CIO-
VCG during its actual price testing process in connection with the first quarter of 2012, nor was 
this fact given appropriate scrutiny by the Controller’s staff.  Consequently, the Controller’s staff 
did not escalate this information to JPMorgan Senior Management. 
The Special Review by Outside Counsel 
50. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan 
retained an outside law firm to provide advice regarding disclosure and to review, among other 
things, whether the independence of the CIO-VCG process had been improperly compromised 
by the involvement of the SCP traders.
 
 By May 10, 2012, when JPMorgan filed its first quarter 
report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP 
marks, the executive to whom he reported, and other members of CIO management.
  
The law 

   
11 
firm also had collected and reviewed a limited number of the relevant emails and Bloomberg 
chats from the first quarter of 2012. 
The Process for Synthesizing and  
Escalating Information from the Various Reviews 
51. JPMorgan Senior Management led a process that involved daily—sometimes 
twice daily—meetings and calls in which participants involved in the different reviews discussed 
what they and their teams were doing and learning. Despite that process, a number of significant 
facts learned in the course of the various reviews were not shared in these group meetings and 
calls and were not otherwise escalated to JPMorgan Senior Management.  This in turn led to 
JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March 
2012.   
52. JPMorgan Senior Management’s emphasis on confidentiality and sharing 
information on a need-to-know basis contributed to this incomplete understanding.  JPMorgan 
Senior Management was concerned about sensitive information relating to CIO’s positions being 
widely distributed and imposed restrictions on the creation and sharing of work product relating 
to those positions.  These instructions affected the ability of those conducting the reviews to 
share, learn from, and build upon each other’s work. 
53. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] 
with people outside the immediate group” and to exercise caution in committing its findings to 
writing. 
54. A member of JPMorgan Senior Management also instructed IB-VCG to “keep 
[its] analysis in a relatively tight group.”
  
On April 29, 2012, an IB executive confirmed to the 
member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the 
Controller’s staff, “without getting my express approval first.”
  
 
55. Finally, the Internal Audit team was instructed to maintain strict confidentiality in 
connection with its review.
 
  
56. JPMorgan Senior Management did not receive all relevant information for another 
reason: some employees conducting the reviews failed to appreciate the significance of certain of 
the facts they had learned and their relevance to the quarterly report that was about to be filed.  
For example, in looking back on his work after learning in late June that the integrity of the 
traders’ marks was in question, a London-based employee primarily responsible for the 
Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better 
understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP 
traders’ quarter-end marks and Markit and Totem consensus, mid-market prices.
  
The employee 
further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) 
were determined” and “should have picked up that the tolerances determined by adding whole 
bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012.  
Although executives were in contact with those responsible for the various reviews, some of 
those employees failed to timely analyze and escalate to JPMorgan Senior Management 
important facts that they had discovered. 

   
12 
JPMorgan Senior Management’s  
Response to the Information It Received 
57. Despite the inadequate information sharing and escalation described above, 
significant information learned in the management-commissioned reviews was escalated to 
JPMorgan Senior Management.  This information, which related to the adequacy of the CIO-
VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end 
marks, included the following: 
a. As losses began to mount, SCP traders began consistently marking at or 
near the very edge of the advantageous side of the bid-offer spread. 
b. There was a collateral dispute of over $500 million. 
c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks 
was “in line with . . . the counterparties.”  Specifically, the value of the 
SCP based on trader marks was approximately $767 million more than the 
value based on mid-point consensus pricing. 
58. Management also learned of the following facts that directly related to CIO-VCG 
and the processes it was using in March 2012:  
a. The CIO-VCG process relied on manual spreadsheets that contained 
errors, one of which caused CIO-VCG to understate the disparity between 
its independent prices and the traders’ marks by $237 million. 
b. The SCP traders provided some of the quotes that were used in CIO-
VCG’s price-testing process and this process “need[ed] to be enhanced to 
ensure independence.” 
59. In response to what it was learning prior to May 10, JPMorgan Senior 
Management decided to enhance CIO-VCG’s valuation policies.
  
To assist with this task, the 
persons conducting the reviews recommended certain changes, and a member of JPMorgan 
Senior Management drafted revisions to CIO-VCG procedures, which were shared with 
JPMorgan Senior Management and CIO management on May 5, 2012.
  
On May 7, 2012, a senior 
CIO executive circulated a “proposed operational approach to VCG price testing” that contained 
additional policy revisions.  Both sets of changes were implemented before May 10, 2012. 
60. Collectively, the new policies were intended to remediate several of the issues 
discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: 
a. Disparity between CIO-VCG independent prices and traders’ marks.  The 
revised policies significantly curtailed the size of thresholds that CIO-VCG 
could apply, directing that the difference between a trader’s mark and CIO-
VCG’s independent price could not exceed $500,000 for an index position 
and $2,000,000 for a tranche position. 

   
13 
b. Trader involvement in the VCG process.  The revised policies required CIO-
VCG to “source broker quotes independently from the market,” rather than 
through the traders, thereby “eliminating any reliance on [the traders] for 
sourcing of market data.”
  
 
c. Variance between Markit and CIO-VCG’s independent prices.  The revised 
policies stated that, for positions where CIO-VCG could rely on dealer 
quotes in calculating independent prices, CIO-VCG must obtain at least two 
quotes and, if two are not available, it must use Markit or Totem as an input.  
The revised policies also provided that, even when dealer quotes are 
obtained, “mid prices derived from selected dealer quotes should be 
compared . . . to Markit/Totem sourced data and any material differences . . . 
must be reported to the CFO of CIO and must be reconciled.” 
d. Inadequate oversight over sole CIO-VCG price-tester.  The revised policies 
introduced a new protocol for escalating to management valuation disputes 
between CIO-VCG and the traders, requiring the involvement of JPMorgan 
risk personnel and the Chief Financial Officer of CIO. 
61. In addition to these policy changes, in early May the staff of IB-VCG prepared a 
remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing 
process, and to ensure proper review of the spreadsheets.
  
On May 8, 2012, after CIO finance 
management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan 
Senior Management. 
The Reviews of CIO-VCG Are Not 
Addressed with the Audit Committee 
62. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s 
stockholders—including oversight of management’s responsibilities for internal controls—
ultimately rests with JPMorgan’s Board of Directors.
  
The Board, in turn, discharges its oversight 
function through several Board committees.  One of the principal committees is the Audit 
Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective 
internal controls, which are critical to the integrity of the firm’s financial reports and compliance 
with applicable policies and laws. 
63. To assist the Audit Committee in carrying out its responsibility, the Audit 
Committee’s Charter requires JPMorgan management to provide updates to the Committee on all 
“significant operating and control issues in internal audit reports,” the “initiation and status of 
significant special investigations,” the “identification and resolution status of material 
weaknesses” in controls, and any “reportable conditions in the internal control environment, 
including any significant deficiencies.”  These updates serve an important internal control 
function, allowing the Audit Committee to fulfill its oversight role by, among other things, 
keeping the Board up-to-date on significant matters, assessing whether to approve the filing of 
quarterly and annual reports, and evaluating whether the Committee should conduct its own 
independent investigation of any issues raised with it. 

   
14 
64. In late April and early May 2012, while JPMorgan’s Senior Management was 
devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure 
to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also 
was in contact with members of the Audit Committee. 
65. However, while JPMorgan Senior Management was informed of, and was 
addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management 
did not engage in a considered assessment, before the firm filed its first quarter report on May 
10, 2012, to determine if these matters constituted a significant deficiency or material weakness 
in the firm’s internal control over financial reporting and therefore had to be disclosed to the 
firm’s Audit Committee.  Nor, more broadly, did JPMorgan Senior Management disclose to the 
Audit Committee its concerns regarding the operation of CIO-VCG. 
66. On May 2, 2012, the Audit Committee met with some members of JPMorgan 
Senior Management.  The focus of the meeting was on the mounting losses in the SCP portfolio. 
Despite the requirement to keep the Audit Committee apprised of the significant control issues 
that were under review, there was no discussion of the IB-VCG or Controller reviews related to 
CIO-VCG and the traders’ marks, although that work was underway.  There was also no 
discussion of the fact that an outside law firm had been retained to advise on disclosures to be 
made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO-
VCG process, including whether the SCP traders exercised undue influence on the process.
  
 
67. During a full meeting of the Board of Directors hours before the filing of 
JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that 
reviews of what occurred in CIO were underway, including by Internal Audit, legal, the 
Controller’s staff, and risk management.  But, JPMorgan Senior Management did not discuss the 
details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. 
68. Because the Audit Committee was not apprised of the initiation of the reviews or 
facts learned as a result of those reviews, it was unable to provide input on the issues before the 
filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to 
ensure that it was sufficient from the perspective of the Audit Committee. 
69. As noted above, the Audit Committee was not made aware before JPMorgan filed 
its first quarter report of the facts learned by various members of the review teams, including that 
CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors,
 
that SCP 
traders may have exerted influence over that process,
 
or that CIO-VCG applied valuation 
thresholds that were in some instances twice the applicable spread. 
70. Other information learned by various members of the review teams that further 
called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with 
the Audit Committee.  At the end of the first quarter, CIO-VCG made a fair value adjustment of 
$17 million to the traders’ marks.  However, certain facts raised issues as to the adequacy of this 
adjustment and the process through which it was made, including the $520 million in collateral 
disputes over SCP positions,
 
the $767 million disparity between the SCP traders’ marks and 
consensus, mid-market prices,
 
the fact that the traders marked some of the largest notional SCP 

   
15 
positions outside the bid-offer spread approximated by IB-VCG,
 
and the fact that the traders 
began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. 
71. Finally, the Audit Committee was not apprised of, or included in, JPMorgan 
Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation 
policies to ensure proper oversight by CIO management.
  
As a result, the Audit Committee did 
not have any input into the proposed changes or an understanding of the reasons that motivated 
them. 
Subsequent Disclosures by JPMorgan 
72. Based on the information available to it, the Audit Committee approved of the 
content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012.  On July 
13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over 
financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of 
the synthetic credit portfolio.”  In its amended Form 10-Q for the first quarter of 2012 filed on 
August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues 
in certain interrelated and interdependent control elements comprising that process, including 
insufficient engagement of CIO senior finance management in the valuation control process in 
light of the increased size and heightened risk profile of the synthetic credit portfolio during the 
first quarter of 2012, and in the effectiveness of certain procedures employed during the first 
quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” 
73. JPMorgan also corrected prior statements concerning its disclosure controls and 
procedures.  In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by 
this report, an evaluation was carried out under the supervision and with the participation of the 
Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial 
Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-
15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Chairman and 
Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls 
and procedures were effective.”  On August 9, 2012, when JPMorgan disclosed that it had 
determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, 
“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief 
Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined 
in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, 
2012.” 

UNITED STATES OF AMERICA 

Before the 

SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 70458 / September 19, 2013 

 

ACCOUNTING AND AUDITING ENFORCEMENT 

Release No. 3490 / September 19, 2013 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-15507 

 

In the Matter of 

JPMorgan Chase & Co., 

Respondent. 

 

ORDER INSTITUTING CEASE-AND-

DESIST PROCEEDINGS PURSUANT TO 

SECTION 21C OF THE SECURITIES 

EXCHANGE ACT OF 1934, MAKING 

FINDINGS, AND IMPOSING A CEASE-

AND-DESIST ORDER  

I. 

The Securities and Exchange Commission (“Commission”) deems it appropriate that 

cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 

Securities Exchange Act of 1934 (“Exchange Act”) against JPMorgan Chase & Co. 

(“JPMorgan”). 

II. 

In anticipation of the institution of these proceedings, JPMorgan has submitted an 

Offer of Settlement (“Offer”) that the Commission has determined to accept.  JPMorgan admits 

the facts contained in Annex A attached hereto, the Commission’s jurisdiction over it, and the 

subject matter of these proceedings; and consents to the entry of this Order Instituting Cease-

and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making 

Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. 



   

2 

III. 

On the basis of this Order, the Offer, and the facts contained in Annex A attached hereto, 

the Commission finds
1
 that: 

1. Public companies are responsible for devising and maintaining a system of 

internal accounting controls sufficient to, among other things, provide reasonable assurances that 

transactions are recorded as necessary to permit preparation of reliable financial statements.  In 

addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established important 

requirements for public companies and their management with respect to corporate governance 

and disclosure.  For example, public companies are obligated to maintain disclosure controls and 

procedures that are designed to ensure that important information flows to the appropriate 

persons so that timely decisions can be made regarding disclosure in public filings.  Commission 

regulations implementing Sarbanes-Oxley therefore require management to evaluate on a 

quarterly basis the effectiveness of the company’s disclosure controls and procedures and the 

company to disclose management’s conclusion regarding their effectiveness in its quarterly 

filings. 

2. On an investor call conducted in connection with the filing of its quarterly report 

on May 10, 2012, JPMorgan publicly disclosed a trading loss of approximately $2 billion since 

the start of the second quarter in a large portfolio of credit derivatives known as the Synthetic 

Credit Portfolio (“SCP”) held by the firm’s Chief Investment Office (“CIO”).  In the quarterly 

report, JPMorgan stated that, based upon management’s evaluation at the time, its disclosure 

controls and procedures were effective as of the end of the quarter. 

3. Over the next few months, as JPMorgan sought to bring down risk in the SCP, the 

losses in the SCP grew to nearly $6 billion.  Nevertheless, the full extent of the trading losses 

that had occurred during the first quarter was not detected and reported, in part, because of the 

ineffectiveness of an internal control function within CIO, known as the Valuation Control 

Group (“CIO-VCG”).  Within JPMorgan and other financial institutions and investment firms, 

valuation control units frequently serve as an essential internal control by helping to ensure that 

traders and other market professionals record accurate valuations for trading positions.  

Valuation control units must be sufficiently independent from the trading desks, and clear and 

effective written policies are necessary in order to guard against the risk that a company’s 

investment assets will be improperly valued—and its public filings misstated.  

4.  In the case of CIO, its VCG unit was unequipped to cope with the increase in the 

size and complexity of the SCP in early 2012, and did not function as an effective internal 

control in the first quarter of the year.  The unit was understaffed, insufficiently supervised, and 

did not adequately document its actual price-testing policies.  Moreover, the actual price-testing 

methodology employed by CIO-VCG in the first quarter of 2012 was subjective and 

insufficiently independent from the SCP traders, which enabled the traders to improperly 

                                                           

1
  The findings herein are made pursuant to JPMorgan’s Offer and are not binding on any other 

person or entity in this or any other proceeding. 



   

3 

influence the VCG process.  In addition, during the first quarter of 2012, CIO-VCG failed to 

escalate to CIO and JPMorgan management significant information that management required in 

order to make informed decisions about disclosure of the firm’s financial results for the first 

quarter of 2012.  As a result, JPMorgan did not timely detect or effectively challenge 

questionable valuations by the SCP traders as the portfolio’s losses accumulated in the first 

quarter of 2012 and publicly misstated its financial results for that period. 

5. JPMorgan’s response to the CIO trading losses also was affected by inadequate 

communication between JPMorgan’s Senior Management and the Audit Committee of 

JPMorgan’s Board of Directors (the “Audit Committee”).  In April 2012, after learning of large 

counterparty valuation disputes relating to SCP positions, JPMorgan Senior Management 

initiated several reviews of the SCP marks and of CIO-VCG.  By early May 2012, the various 

reviews had alerted JPMorgan Senior Management to serious issues about CIO-VCG’s 

effectiveness in price-testing the values SCP traders had assigned to positions in the SCP during 

the first quarter of 2012.  These issues, among others, prompted JPMorgan Senior Management 

to take several actions, including recommending delaying the filing of the firm’s quarterly report 

with the Commission, and substantially revising CIO-VCG policies in early May 2012 to 

eliminate what Senior Management believed was an undue amount of subjectivity in a control 

function.   

6. Consistent with Sarbanes-Oxley’s emphasis on the role that the audit committee 

of a public company’s board of directors should play in corporate governance, JPMorgan’s 

internal controls include a requirement that its management keep the Audit Committee informed 

of, among other things, the identification of any significant deficiencies or material weaknesses 

in the firm’s internal control over financial reporting.  Such updates are necessary for the Audit 

Committee to fulfill its oversight role and help to assure the integrity and accuracy of 

information JPMorgan discloses in its public filings. 

7. Before JPMorgan filed its quarterly report on May 10, 2012, however, JPMorgan 

Senior Management did not adequately update the Audit Committee concerning the facts learned 

during the reviews of CIO-VCG.  Nor did it adequately update the Audit Committee on 

important observations made by the management-commissioned reviews of control breakdowns 

at CIO-VCG that amounted to, at a minimum, a significant deficiency.  Three primary issues 

relating to the sharing and synthesis of relevant information contributed to the inadequate 

communications with the Audit Committee.  First, several employees involved in conducting the 

reviews of CIO-VCG failed to timely escalate important facts regarding control deficiencies at 

CIO-VCG.  Second, JPMorgan Senior Management was concerned about the market sensitivity 

of the SCP positions and the confidential nature of the review, and required that the review teams 

keep their work strictly confidential, which had the effect of impeding the exchange of 

information among the review teams and their ability to analyze collectively the information 

generated by these reviews.  Third, despite learning of important information concerning control 

deficiencies at CIO-VCG, JPMorgan Senior Management did not make a considered assessment 

of the significance of that information to determine if it revealed a significant deficiency or 

material weakness at CIO-VCG that had to be disclosed to the Audit Committee.   

8. On July 13, 2012, JPMorgan announced that it would restate its results for the 

first quarter of 2012 because it was no longer confident that the SCP marks used to prepare the 



   

4 

first quarter results, which CIO-VCG was responsible for price testing, “reflect good faith 

estimates of fair value at quarter end.”  Also on this date, JPMorgan disclosed to investors that a 

material weakness in internal control over financial reporting had existed at CIO as of March 31, 

2012 based on deficiencies in the CIO-VCG process. 

9. On August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results 

for the first quarter of 2012.  The restatement had the effect of moving certain SCP losses from 

the second quarter to the first quarter.  These misstated first quarter results were disclosed not 

only in the quarterly report filed on Form 10-Q on May 10, 2012, but also in JPMorgan’s 

earnings release for the first quarter, which was filed on Form 8-K with the Commission on April 

13, 2012.  Also on August 9, 2012, JPMorgan disclosed that its disclosure controls and 

procedures as of March 31, 2012 were not effective and that management’s prior conclusion in 

the firm’s May 10, 2012 quarterly report that they were effective was incorrect. 

10. As a result of its failure to maintain effective internal control over financial 

reporting as of March 31, 2012, and disclosure controls and procedures, and as a result of its 

filing of inaccurate reports with the Commission (specifically, the Form 8-K filed on April 13, 

2012, and the Form 10-Q filed on May 10, 2012), JPMorgan violated Sections 13(a), 

13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 

thereunder. 

11. In response to the Commission’s investigation, JPMorgan provided substantial 

cooperation to Commission staff.  JPMorgan has also voluntarily undertaken a comprehensive 

program of remediation to address, among other things, the internal control deficiencies that are 

the subject of this proceeding.  Most notably, JPMorgan has substantially strengthened the 

valuation control function within CIO to ensure that price verification procedures are conducted 

with the appropriate degree of independence and supervision. 

IV. 

RELEVANT ENTITIES AND PERSONS 

12. JPMorgan, a Delaware corporation headquartered in New York, New York, 

is a global banking and financial services firm whose common stock is registered with the 

Commission under Section 12(b) of the Exchange Act and traded on The New York Stock 

Exchange under the symbol “JPM.” 

13. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity 

reporting segment.  Among other things, CIO is responsible for investing excess deposits from 

JPMorgan’s banking arm.  CIO maintains offices in New York, New York and London, United 

Kingdom.  

14. JPMorgan “Senior Management,” as that term is used herein, refers to one or 

more of the following individuals who held the listed positions as of May 10, 2012:  the 

JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief 

Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. 



   

5 

THE MISMARKING OF JPMORGAN’S 

SYNTHETIC CREDIT PORTFOLIO 

JPMorgan, CIO, and the Synthetic Credit Portfolio 

15. In 2007, CIO created an investment portfolio, the SCP, which was designed to 

provide a hedge against adverse credit events.  It invested in derivatives that could be expected to 

generate profit during adverse credit events, such as widespread corporate defaults.  The 

positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those 

indices, both of which were constructed to track a collection of credit default swaps (“CDS”) 

referencing the debt of corporate issuers. 

16. The SCP was invested in two primary index groups: CDX, a group of North 

American and Emerging Markets indices, and iTraxx, a group of European and Asian indices.  

Some indices referenced companies considered to be investment grade and others referenced 

companies considered to be high-yield (which generally means that their credit risk is viewed as 

higher).  Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is 

equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a 

buyer of CDS protection. 

17. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a 

net short risk position in high-yield indices and tranches, which meant that the SCP was 

positioned to realize gains if high-yield companies were to default on their corporate debt.  The 

composition of the book changed from time to time in response to CIO’s assessment of market 

conditions. 

18. In December 2011, in preparation for complying with the capital adequacy 

standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of 

regulatory capital.  To achieve this—and, in light of improving economic conditions, to reduce 

the SCP’s credit protection profile—CIO management and the traders in charge of the SCP 

considered reducing the size of the SCP’s short risk position in high-yield investments.  There 

were substantial costs associated with this strategy.  To avoid these costs, CIO management and 

traders therefore decided to add investments to the SCP’s existing long risk investment-grade 

positions to offset the short risk high-yield position.  However, as CIO built its long risk 

investment-grade positions, which included a large investment in an index known as the CDX 

North American Investment Grade Index Series 9 10-year, it also added substantially to its 

existing high-yield short position.  JPMorgan did not have risk limits restricting the notional size 

of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP.  

During the first quarter of 2012, CIO tripled the net notional amount of the SCP.  As of March 

31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately 

$157 billion. 

Traders Mismark the SCP as Losses Mount 

19. Like many other public companies, JPMorgan reported its results, which 

incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in 

accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  Under JPMorgan 



   

6 

policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the 

SCP at fair value.  Both GAAP and JPMorgan’s accounting policy required that the SCP traders 

do so by making a good-faith estimate of the fair value of each SCP position based on 

information available in the marketplace.  Under GAAP, the positions in the SCP had to be 

marked “within the bid-ask spread” at the point that is “most representative of fair value in the 

circumstances,” with a particular emphasis on the price where the traders could reasonably 

expect to transact.  GAAP also allows for the use of mid-market pricing “as a practical expedient 

for fair value measurements within a bid-ask spread.”  

20. At the end of each business day, the SCP traders had to mark the positions in the 

SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and 

losses for the day.  Additionally, the traders had to provide their valuations for the SCP to the 

middle office at CIO so that the information could be incorporated into the books and records of 

JPMorgan. 

21. The SCP generated sizeable profits for JPMorgan over the period from 2007 to 

2011.  In the first quarter of 2012, however, it began experiencing substantial mark-to-market 

losses.  By early March 2012, the most senior SCP trader, who was a managing director within 

CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there 

was a market-moving event that could easily explain the losses.  In response, a junior SCP trader 

changed his daily marking methodology for the SCP.  Previously, he had derived for each SCP 

position a bid-offer spread from dealer quotes he had received and then assigned a mark that was 

generally equivalent to the mid-point in that spread.  In response to the most senior trader’s 

instruction, the junior trader began to assign marks that often were at the most aggressive point 

in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the 

SCP positions).  For some SCP positions, the junior trader assigned marks in March that were 

altogether outside every dealer’s bid and offer received that day. As a result of these marking 

practices, the SCP traders intentionally understated mark-to-market losses in the SCP. 

22. In March 2012, the junior trader began to maintain a spreadsheet which showed 

that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and 

the average mid-market point between the best bids and offers he had received from dealers had 

grown to $292 million.  Within a few days, the difference had grown further to $432 million.  

The traders, however, revealed significantly smaller losses in daily reports to CIO management 

about the portfolio’s performance than were indicated by mid-market pricing. 

23. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP 

traders informed the most senior trader in the morning that losses for that day alone could reach 

$250 million.  In response, the most senior trader directed the junior trader not to mark the SCP 

at the close of business in London, as JPMorgan policy required, but instead to wait for the 

markets in New York to close because trading information from New York might support higher 

valuations for the SCP positions. 

24. The most senior trader also instructed the junior trader to use the “best” prices 

(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP.  On March 

30, the junior trader marked the SCP positions in accordance with these instructions, and 

reported to CIO management an estimated loss of $138 million.  Over the next several weeks, the 



   

7 

traders continued to understate mark-to-market losses in the SCP until their authority over the 

portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior 

Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take 

responsibility for the portfolio. 

JPMorgan Issues Its First Quarter  

Results and Subsequently Issues a Restatement 

25. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending 

March 31, 2012, which was filed on Form 8-K with the Commission.  Also on April 13, 

JPMorgan Senior Management conducted an earnings call with analysts and investors.  The 

earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax 

expense was $7.641 billion.  These results included the understated losses for the SCP, which 

was based on the SCP traders’ marks as of March 30, 2012. 

26. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for 

the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced 

significant mark-to-market losses in the SCP during the second quarter to date.  Also on May 10, 

2012, JPMorgan Senior Management conducted a call with analysts, during which the firm 

disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to 

date and that there could be additional losses, that the trading strategy that resulted in the losses 

was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve 

had teams from audit, legal, risk, and various control functions . . . involved in extensive review 

of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there 

are many errors, sloppiness, and bad judgment.”  The $2 billion calculation was based on marks 

for positions in the SCP that were derived from independent pricing sources and not from the 

SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent 

conclusions concerning the integrity of the SCP traders’ marks. 

27. Two months later, on July 13, 2012, JPMorgan announced that it would restate its 

results for the first quarter of 2012 because it had discovered “information that raises questions 

about the integrity of the [SCP] marks” and was no longer confident that the marks used to 

prepare the first quarter results “reflect good faith estimates of fair value at quarter end.”  On 

August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter.  

The restatement had the effect of moving certain SCP losses from the second quarter to the first 

quarter.  Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private 

Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 

billion, and the firm’s consolidated quarterly income before income tax expense from the 

previously-reported $7.641 billion to $6.981 billion. 

JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS  

AND DISCLOSURE CONTROLS AND PROCEDURES 

28. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial 

statements for the first quarter of the year, management’s discussion of the firm’s various 

businesses, and other information.  In addition, the report stated that JPMorgan’s management 



   

8 

evaluated the effectiveness of its disclosure controls and procedures and concluded that they 

were effective. 

29. As discussed below, between late April and May 10, 2012, JPMorgan engaged in 

an extensive process involving work performed by the Controller’s office, the Internal Audit 

department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), 

and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to 

understand the CIO valuation control process and the differences between that process and the 

valuation control process of the IB.  As a result, by May 10, various executives and employees of 

the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls.  Due to 

failures to timely escalate information and instructions that had the effect of hindering the 

sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior 

Management prior to May 10, 2012.  And, as to the information that was escalated, JPMorgan 

Senior Management did not make a considered assessment as to whether critical facts existed—

including any significant deficiency or material weakness in internal controls—that had to be 

disclosed to the Audit Committee.  Consequently, JPMorgan Senior Management did not 

disclose the existence of any significant deficiencies or material weaknesses to the Audit 

Committee before JPMorgan filed its quarterly report on May 10, 2012. 

30. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would 

restate its results for the first quarter of 2012, the firm announced that a material weakness in 

internal control over financial reporting had existed at CIO as of March 31, 2012.  As a result of 

the material weakness, JPMorgan also announced that its management had concluded that 

JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. 

CIO Internal Controls in the First Quarter of 2012 

31. As part of fulfilling the requirements to devise and maintain systems of internal 

accounting controls, financial institutions such as JPMorgan need to have internal controls that 

adequately monitor and test the accuracy and integrity of, among other things, the valuations of 

the firm’s trading portfolios such as the SCP.  CIO-VCG served as a significant control for 

ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were 

measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the 

quarterly and annual reports the firm filed with the Commission. 

32. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks 

that the SCP traders assigned to the portfolio’s positions on the last business day of every month.  

Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price-

testing function by undertaking the following steps: 

a. First, CIO-VCG had to calculate, as a benchmark, an independent price for 

each of the SCP positions.  A CIO-VCG policy and procedure document 

indicates that, for index positions, these independent prices were to be 

obtained from Markit Limited Group (“Markit”), a service that provides 

consensus-based prices for indices.  For tranches, CIO-VCG obtained 

independent prices from dealer quotes, which it checked against Totem, 



   

9 

another consensus pricing service offered by Markit, for any significant 

discrepancies. 

b. After calculating an independent price for each SCP position, CIO-VCG 

had to establish and apply a threshold (or tolerance) around each price that 

represented the average bid-offer spread for the security based on quotes 

received from dealers.  While it had authority to make an adjustment to 

trader marks that fell within these thresholds, CIO-VCG considered such 

marks to be presumptively marked at fair value and would not make any 

adjustment to those marks. 

c. If the SCP traders’ mark for a given position fell outside of the threshold, 

CIO-VCG would record the excess as a loss (or profit) and make a 

corresponding adjustment to the mark-to-market profit and loss for the 

SCP. 

d. Finally, if CIO-VCG determined that the market for a particular position 

had become illiquid, CIO-VCG applied a pre-established formula to 

calculate and record a liquidity reserve to account for the risk that certain 

SCP positions could not be sold at fair value due to reduced liquidity in 

the marketplace. 

33. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at 

the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office.  

That person was also responsible for price testing all of CIO’s other London-based portfolios. 

34. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for 

the end of March 2012.  It applied the relevant thresholds to adjust downward the fair value of 

the SCP by approximately $17 million compared to the traders’ marks and maintained the 

previous month’s liquidity reserve of approximately $31 million.   

35. During its price-testing process for quarter-end marks, CIO-VCG observed that 

most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread.  CIO-

VCG questioned one of the SCP traders about this shift.  The trader did not explain the shift but 

merely stated, “Talk to management.”  CIO-VCG did not disclose to anyone its observations 

concerning the shift in the SCP traders’ marking methodology until questions were being raised 

about a collateral dispute, which is summarized below, on April 20, 2012.  CIO-VCG also did 

not share the details of its exchange with the SCP trader. 

36. CIO-VCG calculated a significant difference between its independent prices and 

the SCP traders’ marks.  During its price-testing process, it calculated that the mid-market value 

of the SCP based on its independent prices was approximately $192 million less than the value 

based on the SCP traders’ marks.  It subsequently identified an error in its calculations, which 

increased the difference from $192 million to approximately $275 million.  A March 30, 2012 

Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should 

disclose this discrepancy to CIO management.  However, that action plan was not required to be 

fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value 



   

10 

adjustment based on marks that fell outside of its thresholds.  Consequently, CIO management 

was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG 

calculated mid-market valuations, which warranted further analysis. 

37. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management 

and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 

million, based on a determination that certain tranches in the SCP portfolio had become illiquid 

as of March 30.  The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the 

financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in 

the firm’s May 10, 2012 report for the first quarter of 2012.   

Large Collateral Calls and Increasing Losses Prompt  

Multiple Reviews of CIO-VCG and the Traders’ Marks 

38. On April 20, 2012, JPMorgan Senior Management was informed that the firm had 

received several collateral calls—requests from trading counterparties for payment or the posting 

of collateral based on their differing views of the fair value—concerning positions in the SCP.  

The total amount in dispute was approximately $520 million. 

39. A collateral dispute with a CDS counterparty can sometimes be an indication that 

a firm’s internal price for an instrument does not accurately reflect its fair value.  Accordingly, in 

April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior 

Management about the pricing of the SCP positions.  In an April 20, 2012 email, a member of 

JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our 

valuation process” in the SCP. 

40. At the same time that the collateral disputes were being escalated to JPMorgan 

Senior Management, the SCP was also sustaining large daily losses.  This development was 

inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April 

13 earnings release, and JPMorgan Senior Management was concerned about the losses and the 

traders’ explanations of what was happening to the SCP positions and their strategy for dealing 

with the risks to the SCP.  On or about April 27, JPMorgan Senior Management asked a senior 

trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis.  Shortly 

afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in 

the SCP, and the SCP traders were relieved of all trading and pricing responsibilities.  

Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus 

mid-market prices published by Markit. 

41. In late April and early May, JPMorgan Senior Management mobilized resources 

from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior 

experience with CIO-VCG’s price-testing process, and the Controller’s office, which included 

JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law 

firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process.  At the 

time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 

in early May 2012.  In part due to the questions being raised about the valuation of the SCP, 

JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the 

filing to May 10.  JPMorgan Senior Management delayed the filing so that it had additional time 



   

11 

to assess whether CIO’s first quarter results, which had been publicly released on April 13, were 

in fact compliant with GAAP and should be disclosed again in the quarterly report. 

The Investment Bank’s Review 

42. On April 25, 2012, a member of JPMorgan Senior Management asked the 

Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for 

March 30, 2012 as if the positions had been held by the IB.  IB-VCG also reviewed the price-

testing work that had been done by CIO-VCG at the end of March 2012.  The IB-VCG review 

was conducted under the supervision of the IB’s Chief Financial Officer. 

IB-VCG Valuation “In Line with the Counterparties” 

43. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ 

marks.  On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG 

that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market 

differences you see on the collateral calls. . . .  In terms of dollar value, the number seems pretty 

much in line . . . with the counterparties.”  In other words, IB-VCG’s preliminary valuation of 

the SCP positions was in line with those of CIO’s trading counterparties, who had valued the 

SCP at several hundreds of millions of dollars less than the SCP traders did. 

44. During the conference call, CIO-VCG explained to IB-VCG staff that in setting 

thresholds around independent prices during its month-end price-testing process, it often 

consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they 

have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et 

cetera.”  CIO-VCG also informed IB-VCG that, when completing its price-testing process, it 

used dealer quotes selected by SCP traders.  IB-VCG staff believed that this process of 

consulting the traders had the potential to significantly impair the independence and 

effectiveness of the CIO-VCG process. 

45. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior 

Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP 

traders’ marks.  He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to 

date (“IB-VCG Spreadsheet”).  At that meeting, at least one of the positions in the IB-VCG 

Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in 

each individual column. 

46. As of this time, JPMorgan Senior Management and CIO management knew that 

the SCP traders’ marks were $275 million greater than independent mid-market prices computed 

by CIO-VCG based on a combination of broker quotes and data from consensus pricing services.  

IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet 

calculated that the SCP traders’ marks were approximately $767 million greater than the values 

placed on the SCP positions by consensus mid-market prices published by Markit and Totem. 

47. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, 

based on market information from March 30, 2012, for six SCP positions, including several of 

the largest positions and some with the greatest total dollar value differences between trader 

marks and IB-VCG’s consensus pricing.  The IB-VCG Spreadsheet contained data regarding 133 



   

12 

positions and reflected, among other things, that for the six positions for which it calculated an 

approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads 

that IB-VCG had approximated.    

48. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit-

and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather 

than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell 

at prices that are inferior to the consensus, mid-market Markit or Totem prices).  This analysis 

showed that adjusting marks to the conservative end of the bid-offer spread would have further 

reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion 

difference between the traders’ marks and a price-taker’s marks at the conservative end of the 

bid-offer spread.  JPMorgan Senior Management elected not to pursue this marking methodology 

with respect to the March 2012 quarter-end marks because, among other reasons, it understood 

that using mid-market prices was acceptable under GAAP. 

Spreadsheet Errors 

49. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ 

quarter-end marks.  During this review, IB-VCG learned that in March 2012 CIO-VCG used a 

spreadsheet in its price-testing process into which data had been manually entered, and that this 

spreadsheet contained certain errors and reflected differences from the IB-VCG methodology 

that may have had the effect of understating the difference between the traders’ marks and the 

independent mid-market prices derived by CIO-VCG.  On May 8, 2012, IB-VCG forwarded an 

email to one member of JPMorgan Senior Management explaining these issues.  IB-VCG and 

CIO-VCG were instructed to work together to address the errors and other issues. 

50. The next day, IB-VCG corrected one such error, which involved the calculation of 

the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s 

independent prices.  Before the correction, the difference was believed to be approximately $275 

million.  After the correction, the difference increased to $512 million.  IB-VCG informed 

JPMorgan Senior Management of the correction and the quantitative impact it had.   

51. Based on the price-testing work of IB-VCG and other information, the 

management of the IB expressed concerns to JPMorgan Senior Management about the potential 

for mismarking of the SCP and whether CIO VCG was an effective control over the SCP.  On 

May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior 

Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., 

could effectively be priced in the marketplace) and that he could not recall a variance between 

trader marks and independent prices in the IB “greater than $50mm that remained at any month 

end across the ENTIRE IB’s positions.”  

52. In light of their concerns relating to CIO, two senior IB executives initially 

expressed some reservations regarding the scope of their sub-certifications that JPMorgan 

required officers in the various business lines to provide in connection with its quarterly and 

annual filings.
  
One of the executives apprised JPMorgan Senior Management that in light of the 

CIO related information to which he was privy, he had a conversation with an outside lawyer 

concerning the scope of his certification obligations.  After relaying that conversation to the 



   

13 

other Investment Bank executive with certification obligations, both executives signed their sub-

certifications. 

The Internal Audit Review 

53. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior 

Management instructed Internal Audit to review the CIO-VCG process, including whether it had 

been applied consistently over past quarters.
  
Also on May 2, at the end of a meeting of the Audit 

Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed 

of the losses recently suffered, separately requested that Internal Audit review CIO. 

54. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG 

had applied at March 30.  As noted above, JPMorgan policy required that CIO-VCG set a 

threshold around its independent price for each SCP position that was representative of the 

average spread between the bids and the offers received from dealers for the position.  Because 

the threshold was applied on each side of the independent price, in order to reflect the bid-offer 

spread the threshold on each side would be one-half of the entire spread. 

55. By May 9, 2012, the Internal Audit team learned that in validating the SCP 

traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid-

offer spread (rather than one half of the spread) on each side of its independent prices.
  
The result 

was a threshold that was twice the size of the bid-offer spread and beyond the range of 

reasonable fair value estimates.  The Internal Audit team calculated that, had CIO-VCG applied 

the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by 

$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made 

at month end. 

56. On May 10, the Internal Audit team collected its work in a draft memo (“Internal 

Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the 

application of [its] own thresholds.” 

57. Although Internal Audit completed this work in the days prior to May 10, it did 

not fully share this information with JPMorgan Senior Management and did not circulate the 

Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. 

The Controller’s Review 

58. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to 

assess whether the traders’ quarter-end marks complied with GAAP and to review the 

effectiveness of CIO-VCG’s quarter-end internal control process. 

59. The Controller’s staff made several significant observations.  One was that, as 

losses in the SCP increased in March 2012, the traders departed from their historical practice of 

marking the positions close to the mid-point between the bids and offers received from dealers.  

Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they 

marked the positions in a manner that resulted in smaller mark-to-market losses.  JPMorgan 

Senior Management was informed of this fact in late April 2012.  The traders justified their 

marks to the Controller’s staff by explaining that the market had become volatile and dislocated.  



   

14 

This volatility, the SCP traders claimed, caused significant intraday price movements that may 

help explain the difference between the SCP traders’ marks and consensus pricing services.  To 

test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and 

determined that the difference between the SCP traders’ marks and the mid-market prices was 

less than the average daily price movement.  While accepting the SCP traders’ justification, 

however, the Controller’s staff failed to adequately assess whether CIO could transact at the 

price where the SCP was marked. 

60. For two quarter end marks assigned by the SCP traders, the Controller’s staff also 

detected significant differences from mid-market consensus pricing that were not supported by 

pricing data received by the SCP traders on the date that the mark was assigned.  When the 

Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide 

as compared to the mid-market price.  This fact had not been adequately considered by CIO-

VCG during its actual price testing process in connection with the first quarter of 2012, nor was 

this fact given appropriate scrutiny by the Controller’s staff.  Consequently, the Controller’s staff 

did not escalate this information to JPMorgan Senior Management. 

The Special Review by Outside Counsel 

61. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan 

retained an outside law firm to provide advice regarding disclosure and to review, among other 

things, whether the independence of the CIO-VCG process had been improperly compromised 

by the involvement of the SCP traders.
 
 By May 10, 2012, when JPMorgan filed its first quarter 

report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP 

marks, the executive to whom he reported, and other members of CIO management.
  
The law 

firm also had collected and reviewed a limited number of the relevant emails and Bloomberg 

chats from the first quarter of 2012. 

The Process for Synthesizing and  

Escalating Information from the Various Reviews 

62. JPMorgan Senior Management led a process that involved daily—sometimes 

twice daily—meetings and calls in which participants involved in the different reviews discussed 

what they and their teams were doing and learning. Despite that process, a number of significant 

facts learned in the course of the various reviews were not shared in these group meetings and 

calls and were not otherwise escalated to JPMorgan Senior Management.  This in turn led to 

JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March 

2012.   

63. JPMorgan Senior Management’s emphasis on confidentiality and sharing 

information on a need-to-know basis contributed to this incomplete understanding.  JPMorgan 

Senior Management was concerned about sensitive information relating to CIO’s positions being 

widely distributed and imposed restrictions on the creation and sharing of work product relating 

to those positions.  These instructions affected the ability of those conducting the reviews to 

share, learn from, and build upon each other’s work. 



   

15 

64. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] 

with people outside the immediate group” and to exercise caution in committing its findings to 

writing. 

65. A member of JPMorgan Senior Management also instructed IB-VCG to “keep 

[its] analysis in a relatively tight group.”
  
On April 29, 2012, an IB executive confirmed to the 

member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the 

Controller’s staff, “without getting my express approval first.”
  
 

66. Finally, the Internal Audit team was instructed to maintain strict confidentiality in 

connection with its review.
 
  

67. JPMorgan Senior Management did not receive all relevant information for another 

reason: some employees conducting the reviews failed to appreciate the significance of certain of 

the facts they had learned and their relevance to the quarterly report that was about to be filed.  

For example, in looking back on his work after learning in late June that the integrity of the 

traders’ marks was in question, a London-based employee primarily responsible for the 

Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better 

understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP 

traders’ quarter-end marks and Markit and Totem consensus, mid-market prices.
  
The employee 

further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) 

were determined” and “should have picked up that the tolerances determined by adding whole 

bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012.  

Although executives were in contact with those responsible for the various reviews, some of 

those employees failed to timely analyze and escalate to JPMorgan Senior Management 

important facts that they had discovered. 

JPMorgan Senior Management’s  

Response to the Information It Received 

68. Despite the inadequate information sharing and escalation described above, 

significant information learned in the management-commissioned reviews was escalated to 

JPMorgan Senior Management.  This information, which related to the adequacy of the CIO-

VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end 

marks, included the following: 

a. As losses began to mount, SCP traders began consistently marking at or 

near the very edge of the advantageous side of the bid-offer spread. 

b. There was a collateral dispute of over $500 million. 

c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks 

was “in line with . . . the counterparties.”  Specifically, the value of the 

SCP based on trader marks was approximately $767 million more than the 

value based on mid-point consensus pricing. 

69. Management also learned of the following facts that directly related to CIO-VCG 

and the processes it was using in March 2012:  



   

16 

a. The CIO-VCG process relied on manual spreadsheets that contained 

errors, one of which caused CIO-VCG to understate the disparity between 

its independent prices and the traders’ marks by $237 million. 

b. The SCP traders provided some of the quotes that were used in CIO-

VCG’s price-testing process and this process “need[ed] to be enhanced to 

ensure independence.” 

70. In response to what it was learning prior to May 10, JPMorgan Senior 

Management decided to enhance CIO-VCG’s valuation policies.
  
To assist with this task, the 

persons conducting the reviews recommended certain changes, and a member of JPMorgan 

Senior Management drafted revisions to CIO-VCG procedures, which were shared with 

JPMorgan Senior Management and CIO management on May 5, 2012.
  
On May 7, 2012, a senior 

CIO executive circulated a “proposed operational approach to VCG price testing” that contained 

additional policy revisions.  Both sets of changes were implemented before May 10, 2012. 

71. Collectively, the new policies were intended to remediate several of the issues 

discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: 

a. Disparity between CIO-VCG independent prices and traders’ marks.  The 

revised policies significantly curtailed the size of thresholds that CIO-VCG 

could apply, directing that the difference between a trader’s mark and CIO-

VCG’s independent price could not exceed $500,000 for an index position 

and $2,000,000 for a tranche position. 

b. Trader involvement in the VCG process.  The revised policies required CIO-

VCG to “source broker quotes independently from the market,” rather than 

through the traders, thereby “eliminating any reliance on [the traders] for 

sourcing of market data.”
  
 

c. Variance between Markit and CIO-VCG’s independent prices.  The revised 

policies stated that, for positions where CIO-VCG could rely on dealer 

quotes in calculating independent prices, CIO-VCG must obtain at least two 

quotes and, if two are not available, it must use Markit or Totem as an input.  

The revised policies also provided that, even when dealer quotes are 

obtained, “mid prices derived from selected dealer quotes should be 

compared . . . to Markit/Totem sourced data and any material differences . . . 

must be reported to the CFO of CIO and must be reconciled.” 

d. Inadequate oversight over sole CIO-VCG price-tester.  The revised policies 

introduced a new protocol for escalating to management valuation disputes 

between CIO-VCG and the traders, requiring the involvement of JPMorgan 

risk personnel and the Chief Financial Officer of CIO. 

72. In addition to these policy changes, in early May the staff of IB-VCG prepared a 

remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing 

process, and to ensure proper review of the spreadsheets.
  
On May 8, 2012, after CIO finance 



   

17 

management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan 

Senior Management. 

The Reviews of CIO-VCG Are Not 

Addressed with the Audit Committee 

73. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s 

stockholders—including oversight of management’s responsibilities for internal controls—

ultimately rests with JPMorgan’s Board of Directors.
  
The Board, in turn, discharges its oversight 

function through several Board committees.  One of the principal committees is the Audit 

Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective 

internal controls, which are critical to the integrity of the firm’s financial reports and compliance 

with applicable policies and laws. 

74. To assist the Audit Committee in carrying out its responsibility, the Audit 

Committee’s Charter requires JPMorgan management to provide updates to the Committee on all 

“significant operating and control issues in internal audit reports,” the “initiation and status of 

significant special investigations,” the “identification and resolution status of material 

weaknesses” in controls, and any “reportable conditions in the internal control environment, 

including any significant deficiencies.”  These updates serve an important internal control 

function, allowing the Audit Committee to fulfill its oversight role by, among other things, 

keeping the Board up-to-date on significant matters, assessing whether to approve the filing of 

quarterly and annual reports, and evaluating whether the Committee should conduct its own 

independent investigation of any issues raised with it. 

75. In late April and early May 2012, while JPMorgan’s Senior Management was 

devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure 

to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also 

was in contact with members of the Audit Committee. 

76. However, while JPMorgan Senior Management was informed of, and was 

addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management 

did not engage in a considered assessment, before the firm filed its first quarter report on May 

10, 2012, to determine if these matters constituted a significant deficiency or material weakness 

in the firm’s internal control over financial reporting and therefore had to be disclosed to the 

firm’s Audit Committee.  Nor, more broadly, did JPMorgan Senior Management disclose to the 

Audit Committee its concerns regarding the operation of CIO-VCG. 

77. On May 2, 2012, the Audit Committee met with some members of JPMorgan 

Senior Management.  The focus of the meeting was on the mounting losses in the SCP portfolio. 

Despite the requirement to keep the Audit Committee apprised of the significant control issues 

that were under review, there was no discussion of the IB-VCG or Controller reviews related to 

CIO-VCG and the traders’ marks, although that work was underway.  There was also no 

discussion of the fact that an outside law firm had been retained to advise on disclosures to be 

made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO-

VCG process, including whether the SCP traders exercised undue influence on the process.
  
 



   

18 

78. During a full meeting of the Board of Directors hours before the filing of 

JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that 

reviews of what occurred in CIO were underway, including by Internal Audit, legal, the 

Controller’s staff, and risk management.  But, JPMorgan Senior Management did not discuss the 

details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. 

79. Because the Audit Committee was not apprised of the initiation of the reviews or 

facts learned as a result of those reviews, it was unable to provide input on the issues before the 

filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to 

ensure that it was sufficient from the perspective of the Audit Committee. 

80. As noted above, the Audit Committee was not made aware before JPMorgan filed 

its first quarter report of the facts learned by various members of the review teams, including that 

CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors,
 
that SCP 

traders may have exerted influence over that process,
 
or that CIO-VCG applied valuation 

thresholds that were in some instances twice the applicable spread. 

81. Other information learned by various members of the review teams that further 

called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with 

the Audit Committee.  At the end of the first quarter, CIO-VCG made a fair value adjustment of 

$17 million to the traders’ marks.  However, certain facts raised issues as to the adequacy of this 

adjustment and the process through which it was made, including the $520 million in collateral 

disputes over SCP positions,
 
the $767 million disparity between the SCP traders’ marks and 

consensus, mid-market prices,
 
the fact that the traders marked some of the largest notional SCP 

positions outside the bid-offer spread approximated by IB-VCG,
 
and the fact that the traders 

began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. 

82. Finally, the Audit Committee was not apprised of, or included in, JPMorgan 

Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation 

policies to ensure proper oversight by CIO management.
  
As a result, the Audit Committee did 

not have any input into the proposed changes or an understanding of the reasons that motivated 

them. 

Subsequent Disclosures by JPMorgan 

83. Based on the information available to it, the Audit Committee approved of the 

content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012.  On July 

13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over 

financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of 

the synthetic credit portfolio.”  In its amended Form 10-Q for the first quarter of 2012 filed on 

August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues 

in certain interrelated and interdependent control elements comprising that process, including 

insufficient engagement of CIO senior finance management in the valuation control process in 

light of the increased size and heightened risk profile of the synthetic credit portfolio during the 

first quarter of 2012, and in the effectiveness of certain procedures employed during the first 

quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” 



   

19 

84. JPMorgan also corrected prior statements concerning its disclosure controls and 

procedures.  In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by 

this report, an evaluation was carried out under the supervision and with the participation of the 

Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial 

Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-

15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Chairman and 

Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls 

and procedures were effective.”  On August 9, 2012, when JPMorgan disclosed that it had 

determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, 

“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief 

Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined 

in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, 

2012.” 

V. 

As a result of the conduct described above, JPMorgan violated Sections 13(a), 

13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 

thereunder. 

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in JPMorgan’s Offer. 

Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: 

A. JPMorgan cease and desist from committing or causing any violations and any 

future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 

13a-11, 13a-13, and 13a-15 thereunder. 

 

B. JPMorgan shall, within ten (10) business days of the entry of this Order, pay a 

civil money penalty in the amount of $200,000,000 to the Securities and Exchange Commission.  

If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. 

Payment must be made in one of the following ways: 

 

(1)  JPMorgan may transmit payment electronically to the 

Commission, which will provide detailed ACH transfer/ 

Fedwire instructions upon request; 

(2)  JPMorgan may make direct payment from a bank account via 

Pay.gov through the SEC website at 

http://www.sec.gov/about/offices/ofm.htm; or 

(3)  JPMorgan may pay by certified check, bank cashier’s check, or 

United States postal money order, made payable to the Securities 

and Exchange Commission and hand- delivered or mailed to: 

 

 



   

20 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying 

JPMorgan Chase & Co. as Respondent in these proceedings, and the file number of these 

proceedings; a copy of the cover letter and check or money order must be sent to Andrew M. 

Calamari, Regional Director – New York Regional Office, Division of Enforcement, Securities 

and Exchange Commission, 3 World Financial Center, Suite 400, New York, NY 10281. 

C. Such civil money penalty may be distributed pursuant to Section 308(a) of the 

Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”).  Regardless of whether any 

Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to 

this Order shall be treated as penalties paid to the government for all purposes, including all tax 

purposes.  To preserve the deterrent effect of the civil penalty, JPMorgan agrees that in any 

Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or 

reduction of any award of compensatory damages by the amount of any part of JPMorgan’s 

payment of a civil penalty in this action (“Penalty Offset”).  If the court in any Related Investor 

Action grants such a Penalty Offset, JPMorgan agrees that it shall, within 30 days after entry of a 

final order granting the Penalty Offset, notify the Commission's counsel in this action and pay 

the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the 

Commission directs.  Such a payment shall not be deemed an additional civil penalty and shall 

not be deemed to change the amount of the civil penalty imposed in this proceeding.  For 

purposes of this paragraph, a “Related Investor Action” means a private damages action brought 

against Respondent by or on behalf of one or more investors based on substantially the same 

facts as alleged in the Order instituted by the Commission in this proceeding. 

 

D. JPMorgan shall pay all reasonable administrative costs and expenses of any 

distribution, including the fees and expenses of a tax administrator, within thirty (30) days after 

receipt of an invoice for such services. 

 

By the Commission. 

 

 

 

      Elizabeth M. Murphy 

      SecretaryANNEX A 
 

 JPMorgan Chase & Co. (“JPMorgan”) admits to the facts set forth below and 

acknowledges that its conduct violated the federal securities laws: 

 

RELEVANT ENTITIES AND PERSONS 

1. JPMorgan, a Delaware corporation headquartered in New York, New York, 

is a global banking and financial services firm whose common stock is registered with the 

Commission under Section 12(b) of the Exchange Act and traded on The New York Stock 

Exchange under the symbol “JPM.” 

2. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity 

reporting segment.  Among other things, CIO is responsible for investing excess deposits from 

JPMorgan’s banking arm.  CIO maintains offices in New York, New York and London, United 

Kingdom.  

3. JPMorgan “Senior Management,” as that term is used herein, refers to one or 

more of the following individuals who held the listed positions as of May 10, 2012:  the 

JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief 

Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. 

THE MISMARKING OF JPMORGAN’S 

SYNTHETIC CREDIT PORTFOLIO 

JPMorgan, CIO, and the Synthetic Credit Portfolio 

4. In 2007, CIO created an investment portfolio, the SCP, which was designed to 

provide a hedge against adverse credit events.  It invested in derivatives that could be expected to 

generate profit during adverse credit events, such as widespread corporate defaults.  The 

positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those 

indices, both of which were constructed to track a collection of credit default swaps (“CDS”) 

referencing the debt of corporate issuers. 

5. The SCP was invested in two primary index groups: CDX, a group of North 

American and Emerging Markets indices, and iTraxx, a group of European and Asian indices.  

Some indices referenced companies considered to be investment grade and others referenced 

companies considered to be high-yield (which generally means that their credit risk is viewed as 

higher).  Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is 

equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a 

buyer of CDS protection. 

6. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a 

net short risk position in high-yield indices and tranches, which meant that the SCP was 

positioned to realize gains if high-yield companies were to default on their corporate debt.  The 

composition of the book changed from time to time in response to CIO’s assessment of market 

conditions. 



   

2 

7. In December 2011, in preparation for complying with the capital adequacy 

standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of 

regulatory capital.  To achieve this—and, in light of improving economic conditions, to reduce 

the SCP’s credit protection profile—CIO management and the traders in charge of the SCP 

considered reducing the size of the SCP’s short risk position in high-yield investments.  There 

were substantial costs associated with this strategy.  To avoid these costs, CIO management and 

traders therefore decided to add investments to the SCP’s existing long risk investment-grade 

positions to offset the short risk high-yield position.  However, as CIO built its long risk 

investment-grade positions, which included a large investment in an index known as the CDX 

North American Investment Grade Index Series 9 10-year, it also added substantially to its 

existing high-yield short position.  JPMorgan did not have risk limits restricting the notional size 

of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP.  

During the first quarter of 2012, CIO tripled the net notional amount of the SCP.  As of March 

31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately 

$157 billion. 

Traders Mismark the SCP as Losses Mount 

8. Like many other public companies, JPMorgan reported its results, which 

incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in 

accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  Under JPMorgan 

policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the 

SCP at fair value.  Both GAAP and JPMorgan’s accounting policy required that the SCP traders 

do so by making a good-faith estimate of the fair value of each SCP position based on 

information available in the marketplace.  Under GAAP, the positions in the SCP had to be 

marked “within the bid-ask spread” at the point that is “most representative of fair value in the 

circumstances,” with a particular emphasis on the price where the traders could reasonably 

expect to transact.  GAAP also allows for the use of mid-market pricing “as a practical expedient 

for fair value measurements within a bid-ask spread.”  

9. At the end of each business day, the SCP traders had to mark the positions in the 

SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and 

losses for the day.  Additionally, the traders had to provide their valuations for the SCP to the 

middle office at CIO so that the information could be incorporated into the books and records of 

JPMorgan. 

10. The SCP generated sizeable profits for JPMorgan over the period from 2007 to 

2011.  In the first quarter of 2012, however, it began experiencing substantial mark-to-market 

losses.  By early March 2012, the most senior SCP trader, who was a managing director within 

CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there 

was a market-moving event that could easily explain the losses.  In response, a junior SCP trader 

changed his daily marking methodology for the SCP.  Previously, he had derived for each SCP 

position a bid-offer spread from dealer quotes he had received and then assigned a mark that was 

generally equivalent to the mid-point in that spread.  In response to the most senior trader’s 

instruction, the junior trader began to assign marks that often were at the most aggressive point 

in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the 

SCP positions).  For some SCP positions, the junior trader assigned marks in March that were 



   

3 

altogether outside every dealer’s bid and offer received that day. As a result of these marking 

practices, the SCP traders intentionally understated mark-to-market losses in the SCP. 

11. In March 2012, the junior trader began to maintain a spreadsheet which showed 

that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and 

the average mid-market point between the best bids and offers he had received from dealers had 

grown to $292 million.  Within a few days, the difference had grown further to $432 million.  

The traders, however, revealed significantly smaller losses in daily reports to CIO management 

about the portfolio’s performance than were indicated by mid-market pricing. 

12. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP 

traders informed the most senior trader in the morning that losses for that day alone could reach 

$250 million.  In response, the most senior trader directed the junior trader not to mark the SCP 

at the close of business in London, as JPMorgan policy required, but instead to wait for the 

markets in New York to close because trading information from New York might support higher 

valuations for the SCP positions. 

13. The most senior trader also instructed the junior trader to use the “best” prices 

(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP.  On March 

30, the junior trader marked the SCP positions in accordance with these instructions, and 

reported to CIO management an estimated loss of $138 million.  Over the next several weeks, the 

traders continued to understate mark-to-market losses in the SCP until their authority over the 

portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior 

Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take 

responsibility for the portfolio. 

JPMorgan Issues Its First Quarter  

Results and Subsequently Issues a Restatement 

14. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending 

March 31, 2012, which was filed on Form 8-K with the Commission.  Also on April 13, 

JPMorgan Senior Management conducted an earnings call with analysts and investors.  The 

earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax 

expense was $7.641 billion.  These results included the understated losses for the SCP, which 

was based on the SCP traders’ marks as of March 30, 2012. 

15. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for 

the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced 

significant mark-to-market losses in the SCP during the second quarter to date.  Also on May 10, 

2012, JPMorgan Senior Management conducted a call with analysts, during which the firm 

disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to 

date and that there could be additional losses, that the trading strategy that resulted in the losses 

was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve 

had teams from audit, legal, risk, and various control functions . . . involved in extensive review 

of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there 

are many errors, sloppiness, and bad judgment.”  The $2 billion calculation was based on marks 

for positions in the SCP that were derived from independent pricing sources and not from the 



   

4 

SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent 

conclusions concerning the integrity of the SCP traders’ marks. 

16. Two months later, on July 13, 2012, JPMorgan announced that it would restate its 

results for the first quarter of 2012 because it had discovered “information that raises questions 

about the integrity of the [SCP] marks” and was no longer confident that the marks used to 

prepare the first quarter results “reflect good faith estimates of fair value at quarter end.”  On 

August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter.  

The restatement had the effect of moving certain SCP losses from the second quarter to the first 

quarter.  Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private 

Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 

billion, and the firm’s consolidated quarterly income before income tax expense from the 

previously-reported $7.641 billion to $6.981 billion. 

JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS  

AND DISCLOSURE CONTROLS AND PROCEDURES 

17. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial 

statements for the first quarter of the year, management’s discussion of the firm’s various 

businesses, and other information.  In addition, the report stated that JPMorgan’s management 

evaluated the effectiveness of its disclosure controls and procedures and concluded that they 

were effective. 

18. As discussed below, between late April and May 10, 2012, JPMorgan engaged in 

an extensive process involving work performed by the Controller’s office, the Internal Audit 

department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), 

and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to 

understand the CIO valuation control process and the differences between that process and the 

valuation control process of the IB.  As a result, by May 10, various executives and employees of 

the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls.  Due to 

failures to timely escalate information and instructions that had the effect of hindering the 

sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior 

Management prior to May 10, 2012.  And, as to the information that was escalated, JPMorgan 

Senior Management did not make a considered assessment as to whether critical facts existed—

including any significant deficiency or material weakness in internal controls—that had to be 

disclosed to the Audit Committee.  Consequently, JPMorgan Senior Management did not 

disclose the existence of any significant deficiencies or material weaknesses to the Audit 

Committee before JPMorgan filed its quarterly report on May 10, 2012. 

19. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would 

restate its results for the first quarter of 2012, the firm announced that a material weakness in 

internal control over financial reporting had existed at CIO as of March 31, 2012.  As a result of 

the material weakness, JPMorgan also announced that its management had concluded that 

JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. 



   

5 

CIO Internal Controls in the First Quarter of 2012 

20. As part of fulfilling the requirements to devise and maintain systems of internal 

accounting controls, financial institutions such as JPMorgan need to have internal controls that 

adequately monitor and test the accuracy and integrity of, among other things, the valuations of 

the firm’s trading portfolios such as the SCP.  CIO-VCG served as a significant control for 

ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were 

measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the 

quarterly and annual reports the firm filed with the Commission. 

21. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks 

that the SCP traders assigned to the portfolio’s positions on the last business day of every month.  

Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price-

testing function by undertaking the following steps: 

a. First, CIO-VCG had to calculate, as a benchmark, an independent price for 

each of the SCP positions.  A CIO-VCG policy and procedure document 

indicates that, for index positions, these independent prices were to be 

obtained from Markit Limited Group (“Markit”), a service that provides 

consensus-based prices for indices.  For tranches, CIO-VCG obtained 

independent prices from dealer quotes, which it checked against Totem, 

another consensus pricing service offered by Markit, for any significant 

discrepancies. 

b. After calculating an independent price for each SCP position, CIO-VCG 

had to establish and apply a threshold (or tolerance) around each price that 

represented the average bid-offer spread for the security based on quotes 

received from dealers.  While it had authority to make an adjustment to 

trader marks that fell within these thresholds, CIO-VCG considered such 

marks to be presumptively marked at fair value and would not make any 

adjustment to those marks. 

c. If the SCP traders’ mark for a given position fell outside of the threshold, 

CIO-VCG would record the excess as a loss (or profit) and make a 

corresponding adjustment to the mark-to-market profit and loss for the 

SCP. 

d. Finally, if CIO-VCG determined that the market for a particular position 

had become illiquid, CIO-VCG applied a pre-established formula to 

calculate and record a liquidity reserve to account for the risk that certain 

SCP positions could not be sold at fair value due to reduced liquidity in 

the marketplace. 

22. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at 

the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office.  

That person was also responsible for price testing all of CIO’s other London-based portfolios. 



   

6 

23. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for 

the end of March 2012.  It applied the relevant thresholds to adjust downward the fair value of 

the SCP by approximately $17 million compared to the traders’ marks and maintained the 

previous month’s liquidity reserve of approximately $31 million.   

24. During its price-testing process for quarter-end marks, CIO-VCG observed that 

most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread.  CIO-

VCG questioned one of the SCP traders about this shift.  The trader did not explain the shift but 

merely stated, “Talk to management.”  CIO-VCG did not disclose to anyone its observations 

concerning the shift in the SCP traders’ marking methodology until questions were being raised 

about a collateral dispute, which is summarized below, on April 20, 2012.  CIO-VCG also did 

not share the details of its exchange with the SCP trader. 

25. CIO-VCG calculated a significant difference between its independent prices and 

the SCP traders’ marks.  During its price-testing process, it calculated that the mid-market value 

of the SCP based on its independent prices was approximately $192 million less than the value 

based on the SCP traders’ marks.  It subsequently identified an error in its calculations, which 

increased the difference from $192 million to approximately $275 million.  A March 30, 2012 

Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should 

disclose this discrepancy to CIO management.  However, that action plan was not required to be 

fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value 

adjustment based on marks that fell outside of its thresholds.  Consequently, CIO management 

was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG 

calculated mid-market valuations, which warranted further analysis. 

26. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management 

and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 

million, based on a determination that certain tranches in the SCP portfolio had become illiquid 

as of March 30.  The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the 

financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in 

the firm’s May 10, 2012 report for the first quarter of 2012.   

Large Collateral Calls and Increasing Losses Prompt  

Multiple Reviews of CIO-VCG and the Traders’ Marks 

27. On April 20, 2012, JPMorgan Senior Management was informed that the firm had 

received several collateral calls—requests from trading counterparties for payment or the posting 

of collateral based on their differing views of the fair value—concerning positions in the SCP.  

The total amount in dispute was approximately $520 million. 

28. A collateral dispute with a CDS counterparty can sometimes be an indication that 

a firm’s internal price for an instrument does not accurately reflect its fair value.  Accordingly, in 

April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior 

Management about the pricing of the SCP positions.  In an April 20, 2012 email, a member of 

JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our 

valuation process” in the SCP. 



   

7 

29. At the same time that the collateral disputes were being escalated to JPMorgan 

Senior Management, the SCP was also sustaining large daily losses.  This development was 

inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April 

13 earnings release, and JPMorgan Senior Management was concerned about the losses and the 

traders’ explanations of what was happening to the SCP positions and their strategy for dealing 

with the risks to the SCP.  On or about April 27, JPMorgan Senior Management asked a senior 

trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis.  Shortly 

afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in 

the SCP, and the SCP traders were relieved of all trading and pricing responsibilities.  

Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus 

mid-market prices published by Markit. 

30. In late April and early May, JPMorgan Senior Management mobilized resources 

from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior 

experience with CIO-VCG’s price-testing process, and the Controller’s office, which included 

JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law 

firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process.  At the 

time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 

in early May 2012.  In part due to the questions being raised about the valuation of the SCP, 

JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the 

filing to May 10.  JPMorgan Senior Management delayed the filing so that it had additional time 

to assess whether CIO’s first quarter results, which had been publicly released on April 13, were 

in fact compliant with GAAP and should be disclosed again in the quarterly report. 

The Investment Bank’s Review 

31. On April 25, 2012, a member of JPMorgan Senior Management asked the 

Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for 

March 30, 2012 as if the positions had been held by the IB.  IB-VCG also reviewed the price-

testing work that had been done by CIO-VCG at the end of March 2012.  The IB-VCG review 

was conducted under the supervision of the IB’s Chief Financial Officer. 

IB-VCG Valuation “In Line with the Counterparties” 

32. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ 

marks.  On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG 

that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market 

differences you see on the collateral calls. . . .  In terms of dollar value, the number seems pretty 

much in line . . . with the counterparties.”  In other words, IB-VCG’s preliminary valuation of 

the SCP positions was in line with those of CIO’s trading counterparties, who had valued the 

SCP at several hundreds of millions of dollars less than the SCP traders did. 

33. During the conference call, CIO-VCG explained to IB-VCG staff that in setting 

thresholds around independent prices during its month-end price-testing process, it often 

consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they 

have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et 

cetera.”  CIO-VCG also informed IB-VCG that, when completing its price-testing process, it 



   

8 

used dealer quotes selected by SCP traders.  IB-VCG staff believed that this process of 

consulting the traders had the potential to significantly impair the independence and 

effectiveness of the CIO-VCG process. 

34. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior 

Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP 

traders’ marks.  He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to 

date (“IB-VCG Spreadsheet”).  At that meeting, at least one of the positions in the IB-VCG 

Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in 

each individual column. 

35. As of this time, JPMorgan Senior Management and CIO management knew that 

the SCP traders’ marks were $275 million greater than independent mid-market prices computed 

by CIO-VCG based on a combination of broker quotes and data from consensus pricing services.  

IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet 

calculated that the SCP traders’ marks were approximately $767 million greater than the values 

placed on the SCP positions by consensus mid-market prices published by Markit and Totem. 

36. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, 

based on market information from March 30, 2012, for six SCP positions, including several of 

the largest positions and some with the greatest total dollar value differences between trader 

marks and IB-VCG’s consensus pricing.  The IB-VCG Spreadsheet contained data regarding 133 

positions and reflected, among other things, that for the six positions for which it calculated an 

approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads 

that IB-VCG had approximated.    

37. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit-

and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather 

than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell 

at prices that are inferior to the consensus, mid-market Markit or Totem prices).  This analysis 

showed that adjusting marks to the conservative end of the bid-offer spread would have further 

reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion 

difference between the traders’ marks and a price-taker’s marks at the conservative end of the 

bid-offer spread.  JPMorgan Senior Management elected not to pursue this marking methodology 

with respect to the March 2012 quarter-end marks because, among other reasons, it understood 

that using mid-market prices was acceptable under GAAP. 

Spreadsheet Errors 

38. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ 

quarter-end marks.  During this review, IB-VCG learned that in March 2012 CIO-VCG used a 

spreadsheet in its price-testing process into which data had been manually entered, and that this 

spreadsheet contained certain errors and reflected differences from the IB-VCG methodology 

that may have had the effect of understating the difference between the traders’ marks and the 

independent mid-market prices derived by CIO-VCG.  On May 8, 2012, IB-VCG forwarded an 

email to one member of JPMorgan Senior Management explaining these issues.  IB-VCG and 

CIO-VCG were instructed to work together to address the errors and other issues. 



   

9 

39. The next day, IB-VCG corrected one such error, which involved the calculation of 

the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s 

independent prices.  Before the correction, the difference was believed to be approximately $275 

million.  After the correction, the difference increased to $512 million.  IB-VCG informed 

JPMorgan Senior Management of the correction and the quantitative impact it had.   

40. Based on the price-testing work of IB-VCG and other information, the 

management of the IB expressed concerns to JPMorgan Senior Management about the potential 

for mismarking of the SCP and whether CIO VCG was an effective control over the SCP.  On 

May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior 

Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., 

could effectively be priced in the marketplace) and that he could not recall a variance between 

trader marks and independent prices in the IB “greater than $50mm that remained at any month 

end across the ENTIRE IB’s positions.”  

41. In light of their concerns relating to CIO, two senior IB executives initially 

expressed some reservations regarding the scope of their sub-certifications that JPMorgan 

required officers in the various business lines to provide in connection with its quarterly and 

annual filings.
  
One of the executives apprised JPMorgan Senior Management that in light of the 

CIO related information to which he was privy, he had a conversation with an outside lawyer 

concerning the scope of his certification obligations.  After relaying that conversation to the 

other Investment Bank executive with certification obligations, both executives signed their sub-

certifications. 

The Internal Audit Review 

42. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior 

Management instructed Internal Audit to review the CIO-VCG process, including whether it had 

been applied consistently over past quarters.
  
Also on May 2, at the end of a meeting of the Audit 

Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed 

of the losses recently suffered, separately requested that Internal Audit review CIO. 

43. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG 

had applied at March 30.  As noted above, JPMorgan policy required that CIO-VCG set a 

threshold around its independent price for each SCP position that was representative of the 

average spread between the bids and the offers received from dealers for the position.  Because 

the threshold was applied on each side of the independent price, in order to reflect the bid-offer 

spread the threshold on each side would be one-half of the entire spread. 

44. By May 9, 2012, the Internal Audit team learned that in validating the SCP 

traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid-

offer spread (rather than one half of the spread) on each side of its independent prices.
  
The result 

was a threshold that was twice the size of the bid-offer spread and beyond the range of 

reasonable fair value estimates.  The Internal Audit team calculated that, had CIO-VCG applied 

the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by 

$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made 

at month end. 



   

10 

45. On May 10, the Internal Audit team collected its work in a draft memo (“Internal 

Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the 

application of [its] own thresholds.” 

46. Although Internal Audit completed this work in the days prior to May 10, it did 

not fully share this information with JPMorgan Senior Management and did not circulate the 

Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. 

The Controller’s Review 

47. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to 

assess whether the traders’ quarter-end marks complied with GAAP and to review the 

effectiveness of CIO-VCG’s quarter-end internal control process. 

48. The Controller’s staff made several significant observations.  One was that, as 

losses in the SCP increased in March 2012, the traders departed from their historical practice of 

marking the positions close to the mid-point between the bids and offers received from dealers.  

Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they 

marked the positions in a manner that resulted in smaller mark-to-market losses.  JPMorgan 

Senior Management was informed of this fact in late April 2012.  The traders justified their 

marks to the Controller’s staff by explaining that the market had become volatile and dislocated.  

This volatility, the SCP traders claimed, caused significant intraday price movements that may 

help explain the difference between the SCP traders’ marks and consensus pricing services.  To 

test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and 

determined that the difference between the SCP traders’ marks and the mid-market prices was 

less than the average daily price movement.  While accepting the SCP traders’ justification, 

however, the Controller’s staff failed to adequately assess whether CIO could transact at the 

price where the SCP was marked. 

49. For two quarter end marks assigned by the SCP traders, the Controller’s staff also 

detected significant differences from mid-market consensus pricing that were not supported by 

pricing data received by the SCP traders on the date that the mark was assigned.  When the 

Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide 

as compared to the mid-market price.  This fact had not been adequately considered by CIO-

VCG during its actual price testing process in connection with the first quarter of 2012, nor was 

this fact given appropriate scrutiny by the Controller’s staff.  Consequently, the Controller’s staff 

did not escalate this information to JPMorgan Senior Management. 

The Special Review by Outside Counsel 

50. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan 

retained an outside law firm to provide advice regarding disclosure and to review, among other 

things, whether the independence of the CIO-VCG process had been improperly compromised 

by the involvement of the SCP traders.
 
 By May 10, 2012, when JPMorgan filed its first quarter 

report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP 

marks, the executive to whom he reported, and other members of CIO management.
  
The law 



   

11 

firm also had collected and reviewed a limited number of the relevant emails and Bloomberg 

chats from the first quarter of 2012. 

The Process for Synthesizing and  

Escalating Information from the Various Reviews 

51. JPMorgan Senior Management led a process that involved daily—sometimes 

twice daily—meetings and calls in which participants involved in the different reviews discussed 

what they and their teams were doing and learning. Despite that process, a number of significant 

facts learned in the course of the various reviews were not shared in these group meetings and 

calls and were not otherwise escalated to JPMorgan Senior Management.  This in turn led to 

JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March 

2012.   

52. JPMorgan Senior Management’s emphasis on confidentiality and sharing 

information on a need-to-know basis contributed to this incomplete understanding.  JPMorgan 

Senior Management was concerned about sensitive information relating to CIO’s positions being 

widely distributed and imposed restrictions on the creation and sharing of work product relating 

to those positions.  These instructions affected the ability of those conducting the reviews to 

share, learn from, and build upon each other’s work. 

53. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] 

with people outside the immediate group” and to exercise caution in committing its findings to 

writing. 

54. A member of JPMorgan Senior Management also instructed IB-VCG to “keep 

[its] analysis in a relatively tight group.”
  
On April 29, 2012, an IB executive confirmed to the 

member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the 

Controller’s staff, “without getting my express approval first.”
  
 

55. Finally, the Internal Audit team was instructed to maintain strict confidentiality in 

connection with its review.
 
  

56. JPMorgan Senior Management did not receive all relevant information for another 

reason: some employees conducting the reviews failed to appreciate the significance of certain of 

the facts they had learned and their relevance to the quarterly report that was about to be filed.  

For example, in looking back on his work after learning in late June that the integrity of the 

traders’ marks was in question, a London-based employee primarily responsible for the 

Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better 

understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP 

traders’ quarter-end marks and Markit and Totem consensus, mid-market prices.
  
The employee 

further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) 

were determined” and “should have picked up that the tolerances determined by adding whole 

bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012.  

Although executives were in contact with those responsible for the various reviews, some of 

those employees failed to timely analyze and escalate to JPMorgan Senior Management 

important facts that they had discovered. 



   

12 

JPMorgan Senior Management’s  

Response to the Information It Received 

57. Despite the inadequate information sharing and escalation described above, 

significant information learned in the management-commissioned reviews was escalated to 

JPMorgan Senior Management.  This information, which related to the adequacy of the CIO-

VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end 

marks, included the following: 

a. As losses began to mount, SCP traders began consistently marking at or 

near the very edge of the advantageous side of the bid-offer spread. 

b. There was a collateral dispute of over $500 million. 

c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks 

was “in line with . . . the counterparties.”  Specifically, the value of the 

SCP based on trader marks was approximately $767 million more than the 

value based on mid-point consensus pricing. 

58. Management also learned of the following facts that directly related to CIO-VCG 

and the processes it was using in March 2012:  

a. The CIO-VCG process relied on manual spreadsheets that contained 

errors, one of which caused CIO-VCG to understate the disparity between 

its independent prices and the traders’ marks by $237 million. 

b. The SCP traders provided some of the quotes that were used in CIO-

VCG’s price-testing process and this process “need[ed] to be enhanced to 

ensure independence.” 

59. In response to what it was learning prior to May 10, JPMorgan Senior 

Management decided to enhance CIO-VCG’s valuation policies.
  
To assist with this task, the 

persons conducting the reviews recommended certain changes, and a member of JPMorgan 

Senior Management drafted revisions to CIO-VCG procedures, which were shared with 

JPMorgan Senior Management and CIO management on May 5, 2012.
  
On May 7, 2012, a senior 

CIO executive circulated a “proposed operational approach to VCG price testing” that contained 

additional policy revisions.  Both sets of changes were implemented before May 10, 2012. 

60. Collectively, the new policies were intended to remediate several of the issues 

discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: 

a. Disparity between CIO-VCG independent prices and traders’ marks.  The 

revised policies significantly curtailed the size of thresholds that CIO-VCG 

could apply, directing that the difference between a trader’s mark and CIO-

VCG’s independent price could not exceed $500,000 for an index position 

and $2,000,000 for a tranche position. 



   

13 

b. Trader involvement in the VCG process.  The revised policies required CIO-

VCG to “source broker quotes independently from the market,” rather than 

through the traders, thereby “eliminating any reliance on [the traders] for 

sourcing of market data.”
  
 

c. Variance between Markit and CIO-VCG’s independent prices.  The revised 

policies stated that, for positions where CIO-VCG could rely on dealer 

quotes in calculating independent prices, CIO-VCG must obtain at least two 

quotes and, if two are not available, it must use Markit or Totem as an input.  

The revised policies also provided that, even when dealer quotes are 

obtained, “mid prices derived from selected dealer quotes should be 

compared . . . to Markit/Totem sourced data and any material differences . . . 

must be reported to the CFO of CIO and must be reconciled.” 

d. Inadequate oversight over sole CIO-VCG price-tester.  The revised policies 

introduced a new protocol for escalating to management valuation disputes 

between CIO-VCG and the traders, requiring the involvement of JPMorgan 

risk personnel and the Chief Financial Officer of CIO. 

61. In addition to these policy changes, in early May the staff of IB-VCG prepared a 

remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing 

process, and to ensure proper review of the spreadsheets.
  
On May 8, 2012, after CIO finance 

management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan 

Senior Management. 

The Reviews of CIO-VCG Are Not 

Addressed with the Audit Committee 

62. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s 

stockholders—including oversight of management’s responsibilities for internal controls—

ultimately rests with JPMorgan’s Board of Directors.
  
The Board, in turn, discharges its oversight 

function through several Board committees.  One of the principal committees is the Audit 

Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective 

internal controls, which are critical to the integrity of the firm’s financial reports and compliance 

with applicable policies and laws. 

63. To assist the Audit Committee in carrying out its responsibility, the Audit 

Committee’s Charter requires JPMorgan management to provide updates to the Committee on all 

“significant operating and control issues in internal audit reports,” the “initiation and status of 

significant special investigations,” the “identification and resolution status of material 

weaknesses” in controls, and any “reportable conditions in the internal control environment, 

including any significant deficiencies.”  These updates serve an important internal control 

function, allowing the Audit Committee to fulfill its oversight role by, among other things, 

keeping the Board up-to-date on significant matters, assessing whether to approve the filing of 

quarterly and annual reports, and evaluating whether the Committee should conduct its own 

independent investigation of any issues raised with it. 



   

14 

64. In late April and early May 2012, while JPMorgan’s Senior Management was 

devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure 

to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also 

was in contact with members of the Audit Committee. 

65. However, while JPMorgan Senior Management was informed of, and was 

addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management 

did not engage in a considered assessment, before the firm filed its first quarter report on May 

10, 2012, to determine if these matters constituted a significant deficiency or material weakness 

in the firm’s internal control over financial reporting and therefore had to be disclosed to the 

firm’s Audit Committee.  Nor, more broadly, did JPMorgan Senior Management disclose to the 

Audit Committee its concerns regarding the operation of CIO-VCG. 

66. On May 2, 2012, the Audit Committee met with some members of JPMorgan 

Senior Management.  The focus of the meeting was on the mounting losses in the SCP portfolio. 

Despite the requirement to keep the Audit Committee apprised of the significant control issues 

that were under review, there was no discussion of the IB-VCG or Controller reviews related to 

CIO-VCG and the traders’ marks, although that work was underway.  There was also no 

discussion of the fact that an outside law firm had been retained to advise on disclosures to be 

made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO-

VCG process, including whether the SCP traders exercised undue influence on the process.
  
 

67. During a full meeting of the Board of Directors hours before the filing of 

JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that 

reviews of what occurred in CIO were underway, including by Internal Audit, legal, the 

Controller’s staff, and risk management.  But, JPMorgan Senior Management did not discuss the 

details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. 

68. Because the Audit Committee was not apprised of the initiation of the reviews or 

facts learned as a result of those reviews, it was unable to provide input on the issues before the 

filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to 

ensure that it was sufficient from the perspective of the Audit Committee. 

69. As noted above, the Audit Committee was not made aware before JPMorgan filed 

its first quarter report of the facts learned by various members of the review teams, including that 

CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors,
 
that SCP 

traders may have exerted influence over that process,
 
or that CIO-VCG applied valuation 

thresholds that were in some instances twice the applicable spread. 

70. Other information learned by various members of the review teams that further 

called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with 

the Audit Committee.  At the end of the first quarter, CIO-VCG made a fair value adjustment of 

$17 million to the traders’ marks.  However, certain facts raised issues as to the adequacy of this 

adjustment and the process through which it was made, including the $520 million in collateral 

disputes over SCP positions,
 
the $767 million disparity between the SCP traders’ marks and 

consensus, mid-market prices,
 
the fact that the traders marked some of the largest notional SCP 



   

15 

positions outside the bid-offer spread approximated by IB-VCG,
 
and the fact that the traders 

began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. 

71. Finally, the Audit Committee was not apprised of, or included in, JPMorgan 

Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation 

policies to ensure proper oversight by CIO management.
  
As a result, the Audit Committee did 

not have any input into the proposed changes or an understanding of the reasons that motivated 

them. 

Subsequent Disclosures by JPMorgan 

72. Based on the information available to it, the Audit Committee approved of the 

content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012.  On July 

13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over 

financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of 

the synthetic credit portfolio.”  In its amended Form 10-Q for the first quarter of 2012 filed on 

August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues 

in certain interrelated and interdependent control elements comprising that process, including 

insufficient engagement of CIO senior finance management in the valuation control process in 

light of the increased size and heightened risk profile of the synthetic credit portfolio during the 

first quarter of 2012, and in the effectiveness of certain procedures employed during the first 

quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” 

73. JPMorgan also corrected prior statements concerning its disclosure controls and 

procedures.  In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by 

this report, an evaluation was carried out under the supervision and with the participation of the 

Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial 

Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-

15(e) under the Securities Exchange Act of 1934).  Based on that evaluation, the Chairman and 

Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls 

and procedures were effective.”  On August 9, 2012, when JPMorgan disclosed that it had 

determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, 

“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief 

Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined 

in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, 

2012.”