Federal authorities have opened a bribery investigation into whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation, according to a confidential United States government document.
In one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, which was reviewed by The New York Times, as well as public records. After the chairman's son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.
The Hong Kong office of JPMorgan also hired the daughter of a Chinese railway official. That official was later detained on accusations of doling out government contracts in exchange for cash bribes, the government document and public records show.
The former official's daughter came to JPMorgan at an opportune time for the New York-based bank: The China Railway Group, a state-controlled construction company that builds railways for the Chinese government, was in the process of selecting JPMorgan to advise on its plans to become a public company, a common move in China for businesses affiliated with the government. With JPMorgan's help, China Railway raised more than $5 billion when it went public in 2007.
The focus of the civil investigation by the Securities and Exchange Commission's anti-bribery unit has not been previously reported. JPMorgan—which has had a number of run-ins lately with regulators, including one over a multibillion-dollar trading loss last year—made an oblique reference to the inquiry in its quarterly filing this month. The filing stated that the S.E.C. had sought information about JPMorgan's "employment of certain former employees in Hong Kong and its business relationships with certain clients."
In May, according to a copy of the confidential government document, the S.E.C.'s anti-bribery unit requested from JPMorgan a battery of records about Tang Xiaoning. He is the son of Tang Shuangning, who since 2007 has been chairman of the China Everbright Group. Before that, the elder Mr. Tang was the vice chairman of China's top banking regulator.
The agency also inquired about JPMorgan's hiring of Zhang Xixi, the daughter of the railway official. Among other information, the S.E.C. sought "documents sufficient to identify all persons involved in the decision to hire" her.
The government document and public records do not definitively link JPMorgan's hiring practices to its ability to win business, nor do they suggest that the employees were unqualified. Furthermore, the records do not indicate that the employees helped JPMorgan secure business. The bank has not been accused of any wrongdoing.
Yet the S.E.C.'s request outlined in the confidential document hints at a broader hiring strategy at JPMorgan's Chinese offices. Authorities suspect that JPMorgan routinely hired young associates who hailed from well-connected Chinese families that ultimately offered the bank business. Beyond the daughter of the railway official, the S.E.C. document inquired about "all JPMorgan employees who performed work for or on behalf of the Ministry of Railways" over the last six-plus years.
A spokesman for JPMorgan said, "We publicly disclosed this matter in our 10-Q filing last week, and are fully cooperating with regulators."
The Ministry of Railways, which has since been restructured into various agencies, and the China Everbright Group did not respond to requests for comment. A spokeswoman for the S.E.C. declined to comment.
Attempts over the weekend to reach Ms. Zhang and Tang Xiaoning, both of whom have left JPMorgan, were unsuccessful.
Western companies have been aggressive in trying to snag a share of riches in China's fast-growing economy in recent years. Some have come under fire over their business practices there, including GlaxoSmithKline, whose employees are said by Chinese officials to have confessed to bribing doctors to increase pharmaceutical sales.
Global companies also routinely hire the sons and daughters of leading Chinese politicians. What is unusual about JPMorgan is that it hired the children of officials of state-controlled companies.
It is even less common for American authorities to scrutinize such practices. Only a handful of Wall Street employees have ever faced bribery accusations, including a former executive in China who pleaded guilty to criminal charges in 2012, admitting to "an effort to enrich himself and a Chinese government official."
In recent years, the S.E.C. and the Justice Department have each stepped up their enforcement of the Foreign Corrupt Practices Act, a 1977 federal law that essentially bans United States companies from giving "anything of value" to a foreign official to win "an improper advantage" in retaining business.
The S.E.C. created its own corrupt practices unit, which since 2010 has filed about 40 cases against companies like Tyco and Ralph Lauren. Over that same period, the Justice Department has leveled charges in more than 60 cases.
Legal experts note that there is nothing inherently illicit about hiring well-connected people. To run afoul of the law, a company must act with "corrupt" intent, or with the expectation of offering a job in exchange for government business.
"While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business," said Michael Koehler, an expert on the corrupt practices act who is an assistant professor at the Southern Illinois University School of Law.
The inquiry into JPMorgan comes when the bank is already the focus of investigations in the United States by at least eight federal agencies, a state regulator and two foreign nations. Many of the cases, including a civil and criminal investigation in California, involve JPMorgan's financial-crisis-era mortgage business.
The multitude of cases has led some lawmakers to question whether JPMorgan, which has operations in more than 60 countries, is too big to manage.
The potential perils of JPMorgan's size also came to light with a multibillion-dollar trading blowup last year that came to be known as the "London Whale." The trading losses, stemming from a bad bet on the exotic financial instruments known as derivatives, prompted Congressional hearings and wide-ranging investigations.
On Wednesday, federal prosecutors in Manhattan and the Federal Bureau of Investigation announced criminal charges against two of the bank's former traders in London, accusing them of masking the size of the $6 billion loss.
The S.E.C., conducting a parallel investigation, is seeking to extract a rare admission of wrongdoing from the bank related to the losses. A settlement, which could come as soon as this fall, will also include a hefty fine, according to people briefed on the matter.
The agency's bribery inquiry could pose an even steeper challenge to JPMorgan. Although banks are prone to the occasional trading blunder — JPMorgan produced record quarterly profits despite the losses in London last year — a corruption inquiry could leave a more lasting mark on its reputation. It might also spur the Justice Department to open a criminal investigation.
The families of the ruling elite in China see great value in finding work at Wall Street banks. While the jobs often pay token sums, finding such work bolsters the résumés of aspiring financiers and lends credibility in the Chinese business world.
In the case of Mr. Tang, the S.E.C. is seeking his salary, "employment file" and "communications" he has had with JPMorgan since he left in December 2012. The agency is also requesting documents that "identify all persons involved in the decision to hire" Mr. Tang, who is believed to have joined the bank in 2010.
The S.E.C.'s document appears to be looking for connections between his hiring and business JPMorgan won from the China Everbright Group and its banking subsidiary. In its confidential request, the S.E.C. asked the bank to "identify and produce all contracts or agreements between JPMorgan and China Everbright."
Before hiring Mr. Tang, JPMorgan appeared to do little if any business with China Everbright, based on a review of securities filings and news reports. Since then, though, China Everbright has emerged as one of its prized Asian clients. In 2011, its banking subsidiary hired JPMorgan as one of 12 financial advisers on its decision to become a public company. Amid global economic turmoil and questions about China's banking system, that deal was delayed.
Yet in 2012, JPMorgan was the only bank hired to advise China Everbright International, a subsidiary focused on alternative energy businesses, on a $162 million sale of shares, according to Standard & Poor's Capital IQ, a research service. JPMorgan, according to securities filings, owns a stake in the subsidiary.
The same year, JPMorgan guided China Everbright through its role in what was, according to Dealogic, the largest-ever private equity deal in China. The deal involved reshaping Focus Media, a digital advertising firm, into a private company owned, in part, by China Everbright.
The S.E.C. is investigating similar aspects of JPMorgan's hiring of Ms. Zhang, whose father is Zhang Shuguang, former deputy chief engineer of China's railway ministry. Before joining JPMorgan, Ms. Zhang attended Stanford University, according to her LinkedIn and Facebook pages.
In addition to requesting her employment file and compensation earned from JPMorgan, the S.E.C. is asking the bank to turn over "all contracts or agreements between JPMorgan and the Ministry of Railways of the People's Republic of China."
The Ministry of Railways has never hired JPMorgan directly, securities filings and news reports suggest. But those records indicate that the China Railway Group, the construction company whose largest customer is thought to be the Chinese government, hired JPMorgan to take it public in 2007. Ms. Zhang was hired around this time.
About four years later, when Ms. Zhang was an associate at the bank, JPMorgan won out again. This time, according to media reports, the operator of a high-speed railway from Beijing to Shanghai picked the bank to steer it through its own public offering. That deal fell apart after a 2011 train collision killed 40 people and injured hundreds. The incident — just a month after the Chinese government announced the project — spotlighted the dangers of corruption in China's railway system.
The railway minister at the time, Liu Zhijun, has since received a suspended death sentence for accepting bribes in exchange for government rail contracts over a 25-year period, according to reports. Ms. Zhang's father, the former deputy chief engineer, was also detained on suspicion of corruption, according to China's official state-run news agency. It is unclear whether that case is still pending.
The S.E.C., in its request to JPMorgan, questioned whether the bank had "investigated the reported arrest."