Wall Street’s $1 billion messaging ‘nightmare’

Wall Street’s $1 billion messaging ‘nightmare’
Wall Street’s $1 billion messaging ‘nightmare’

In 2018 and 2019, as JPMorgan Chase bankers chased lucrative mandates from a booming WeWork, they messaged one of their most high-profile clients at breakneck speed. But in doing so, they broke the rules governing communications on Wall Street.

The US Securities and Exchange Commission – in an early flashpoint of an investigation that has spread to Wall Street – found JPMorgan failed to track more than 21,000 text messages and emails , sent and received on personal phones or through unapproved apps, linked to the operating joint venture, according to people familiar with the matter.

The investigation, made public last year, has ensnared a growing number of banks, which are preparing to pay more than $1 billion in fines to the SEC and the Commodity Futures Trading Commission, eclipsing sanctions records for record keeping violations.

It has also raised questions about banks’ ability to monitor traders in a time when messages are disappearing. As the investigation spread, individual bankers hired their own lawyers, according to people familiar with the matter, for fear of personal liability and to prevent their employers from accessing their private phones to verify professional messages. Others refused to be represented by lawyers hired by their firms.

“The messaging thing is a nightmare,” said a senior Wall Street banker.

JPMorgan agreed in December to pay a $200 million fine to resolve the case, including $125 million for the SEC and $75 million for the CFTC. The SEC order referred to JPMorgan’s work for “an investment banking client,” which was WeWork, according to people familiar with the matter.

The bank’s relationship with WeWork was one of several cases cited by the SEC to show insufficient record keeping, including poor retention of WhatsApp messages, text messages and emails. Other examples include a group of credit traders exchanging over 1,000 messages in a WhatsApp group titled “Portfolio Trading/auto ex”.

JPMorgan and the SEC declined to comment. WeWork did not respond to a request for comment.

Now a group of other banks, including Morgan Stanley, Barclays and Credit Suisse, have earmarked similar amounts to cover possible settlements with US regulators.

“It’s a pretty significant crackdown,” said David Rosenfeld, an associate professor at Northern Illinois University and a former SEC attorney, noting that Morgan Stanley and Merrill Lynch paid $15 million and $2.5 million, respectively. for record keeping violations in 2006.

“In 2006, $15 million was considered a pretty big number. . . but it is still a leap forward,” he added.

The fines, which could be announced as early as this month, caught some banks off guard. Credit Suisse chief financial officer David Mathers told investors in July that the Swiss lender was “not anticipating the $200 million charge related to unapproved electronic communications.”

The use of personal phones to conduct business has also revealed differences between bankers and their counterparts when it comes to risk and compliance.

At Deutsche Bank, customer-facing staff had for years complained of being disadvantaged by rivals because they were barred from using WhatsApp for work – both to talk with customers or colleagues. — according to a person familiar with the matter. Many customers now prefer WhatsApp as an easier and more immediate means of communication.

Compliance would not approve the use of WhatsApp or WeChat without a formal way to monitor messages, but some bankers have decided to start using the apps anyway despite the lack of software robust enough to monitor communications, said the person.

An unsuccessful attempt was made to use the Symphony messaging platform run by Goldman Sachs, but staff found it too cumbersome and later called it “unnecessary,” the person added. As a result, many have started using WhatsApp and texting despite their use being expressly prohibited. Internal watchdogs found evidence of this by detecting words and phrases in the recorded emails.

In July, Deutsche took a 165 million euro “regulatory enforcement” provision related to WhatsApp investigations by the SEC and CFTC. Chief executive Christian Sewing and his management team have also offered to forfeit €75,000 each of their bonuses to show contrition at their responsibility for the lax internal culture.

By doing so voluntarily, they avoided the risk of a Deutsche supervisory board investigation into their own potential text and WhatsApp communications that could have resulted in more serious penalties, the person said.

Deutsche acted more decisively this summer, requiring some employees to install an app called Movius on their phones that allows compliance staff to monitor calls, texts and WhatsApp conversations with customers, the Financial Times reported.

Deutsche said “statements relating to alleged interactions between investment banking employees and compliance are incorrect, as is your description of the board’s rationale.”

The bank added that it “responded at an early stage to indications that private short message services were being used for commercial communications in the industry and the board immediately took action to ensure, in particular, documentation appropriateness of business transactions and compliance with retention requirements. ”.

The SEC argued that lax record keeping has hampered several investigations over the years. In its order sanctioning JPMorgan, the regulator said inadequate record-keeping practices meant the bank had repeatedly given incomplete responses to subpoenas and government requests for information.

After JPMorgan paid its $200 million fine, the SEC told other banks under investigation that penalties would be commensurate with any wrongdoing found, people familiar with the matter said.

However, regulators have struggled to quantify wrongdoing at different institutions, leading to the anticipation of $200 million in fixed fines at several major banks, the people said.

Some smaller banks should pay lower fines. Jefferies has set aside $80 million to cover penalties for the investigation.

“What can they impose that does not make them go to court? There are always back and forths about why the numbers are unfair. . . but they have quite wide discretion,” said a lawyer involved in the case.

Unauthorized use of personal cellphones for doing business was a problem before the Covid-19 pandemic, but the practice became widespread during government-mandated shutdowns when many workers, including bankers, walked through at work from home.

Now, as fines increase, banks are cracking down and bankers have to find new ways to work.

Credit Suisse and HSBC have fired employees found guilty of using unapproved messaging apps with customers. JPMorgan promised to hire a compliance consultant to review and assess its record keeping practices.

WhatsApp and apps such as Signal, where messages can be pre-programmed to disappear after a certain time, are banned by many employers. And when bankers receive a work-related message on their personal phone, banks such as Goldman Sachs now require employees to take a picture of the message and forward it to compliance for retention.

Goldman declined to comment.

But the problem is far from being solved. Ultimately, if banks want to end the use of an ever-changing list of unapproved apps, they’ll have to change the mindset of employees, according to Dan Nardello, a former federal prosecutor in Manhattan and now managing director of global survey company Nardello. & Co.

“If people want to communicate off-channel, they will,” he said. “You can implement all the software you want, but it’s not foolproof. It is a cultural change.

Additional reporting by Eric Platt in New York

. Wall Streets billion messaging nightmare

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