J.P. Morgan Chase paid more than $300 million a year ago to resolve regulators' claims that the bank had failed to tell wealthy clients it was steering them into its own funds. Now it may have unfinished business with the IRS.
The bank, in its settlement with securities and commodities regulators, admitted to the disclosure lapses, which it said were unintentional, and promised to be more transparent. A whistleblower now claims that J.P. Morgan's misdeeds went beyond a failure to disclose. Because a portion of clients' money was in tax-advantaged pension funds, the bank also ran afoul of IRS rules and shirked its fiduciary responsibility by favoring its own funds, the whistleblower said.
The whistleblower, an unidentified former J.P. Morgan employee who began working with the Securities and Exchange Commission early in its investigation, has filed a previously unreported claim to the IRS over the bank's handling of retirement funds. The whistleblower's lawyer, Dean Zerbe, said the bank might be on the hook for hundreds of millions of dollars in tax penalties.
Under the IRS whistleblower program, the claim filed by Mr. Zerbe's client isn't public. J.P. Morgan spokesman Darin Oduyoye said the bank hadn't had the benefit of reviewing the filing. “Our management of retirement accounts is designed to comply with applicable rules and regulations, so these accounts may not engage in prohibited transactions,” Mr. Oduyoye said, referring to IRS rules requiring that the benefits of a retirement account go to its owner.
Given Mr. Zerbe's track record, J.P. Morgan might find the petition to the IRS difficult to dismiss as litigious opportunism. As a legal counsel for the Senate Finance Committee in 2006, Mr. Zerbe helped to draft provisions to the IRS whistleblower law that increased rewards for reporting violations.
There's no indication whether the IRS, which must endorse the whistleblower's claim for any legal action to move forward, will act. An agency spokesman, Bruce Friedland, declined to comment.
The case illustrates the legal perils that asset managers face as their employees turn into whistleblowers. It also tests the IRS' appetite for using the self-dealing provision, which until now has been used largely to punish retirement account abuses by individuals, against big banks.
“Congress gave the IRS a big stick to stop pension managers from carrying out prohibited transactions,” said William Sweetnam, a former Treasury tax official who is now legislative director for the Employers Council on Flexible Compensation, an employer-led non-profit group that advocates for tax-advantaged employee benefits.
Mr. Zerbe claims that under IRS rules the underlying conflicts should subject the bank to substantial tax penalties because they involved pension funds. As with tax-exempt charities, the IRS imposes guidelines on how tax-advantaged pension funds are handled and can impose significant penalties on managers who fail to comply.
“Many of the dollars in the J.P. Morgan case were retirement dollars,” Mr. Zerbe said. “Given the admissions they've made to the SEC, it should be a T-ball shot for the IRS.”
Roughly 5% to 10% of the $1.8 trillion managed by J.P. Morgan Asset Management, a subject of the regulatory settlement, involves tax-advantaged retirement plans, including private pension funds governed by ERISA, according to records filed with the Labor Department in 2015.
Mr. Zerbe said his IRS claim against J.P. Morgan, which he initially filed in August and refiled this week with additional information, is bolstered by a 2012 warning issued by the Office of the Comptroller of the Currency, which specifically stated that the bank had managed its pension funds in violation of ERISA.
The whistleblower claim also points a finger at J.P. Morgan's outside partners. It flags the SEC's finding a year ago that virtually all of the outside funds in which J.P. Morgan invested had paid a large portion of their fees back to J.P. Morgan in an arrangement called a retrocession. It's not known whether such payments were tied to retirement accounts.
Zerbe argues that the IRS should hold the outside funds liable for taxes on any retrocessions they paid to J.P. Morgan, for pension funds or any other clients, and then claimed as legitimate business expenses on their tax returns.
The SEC found that all but one of the outside funds paid retrocessions to J.P. Morgan, averaging about half of the 2% fee charged by the funds.
