Bank tabulated business linked to China hiring

Ben Protess and Jessica Silver-Greenberg
Adam Jeffery | CNBC

Federal authorities have obtained confidential documents that shed new light on JPMorgan Chase's decision to hire the children of China's ruling elite, securing emails that show how the bank linked one prominent hire to "existing and potential business opportunities" from a Chinese government-run company.

The documents, which also include spreadsheets that list the bank's "track record" for converting hires into business deals, offer the most detailed account yet of JPMorgan's "Sons and Daughters" hiring program, which has been at the center of a federal bribery investigation for months. The spreadsheets and emails — recently submitted by JPMorgan to authorities — illuminate how the bank created the program to prevent questionable hiring practices but ultimately viewed it as a gateway to doing business with state-owned companies in China, which commonly issue stock with the help of Wall Street banks.

The hiring practices seemed to have been an open secret at the bank's headquarters in Hong Kong, according to the documents, copies of which were reviewed by The New York Times. In the email citing the "existing and potential business opportunities," a senior JPMorgan executive in Hong Kong emphasized that the father of a job candidate was the chairman of the China Everbright Group, a state-controlled financial conglomerate. The executive also extolled the broader benefits of the hiring program, telling colleagues in another email: "You all know I have always been a big believer of the Sons and Daughters program — it almost has a linear relationship" with winning assignments to advise Chinese companies. Until now, the indications of a connection between the hires and business deals have not been so explicit.

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In addition to the documents, interviews with current and former JPMorgan employees suggest that some people inside or affiliated with the bank bristled at the hiring strategy. At least two whistle-blowers have raised concerns, with one filing a complaint in April 2011 with the Hong Kong stock exchange and another coming forward to American authorities this year. Underscoring the worries, a junior banker in Hong Kong resigned from JPMorgan in December 2011, writing in an email that "I do not think my family is in a position to help you to the extent as others did: bring their family business to the firm."

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The scrutiny of JPMorgan, which has not been accused of any wrongdoing, could provide a template for federal authorities as they expand their investigation to include the hiring practices of at least five other Wall Street banks conducting business in China, according to interviews with people briefed in the inquiry who were not authorized to speak publicly. Those investigations from the Securities and Exchange Commission, which are at an early stage, involve Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley. All five banks declined to comment.

(Read more: JPMorgan's fruitful ties to a member of China's elite)

JPMorgan is cooperating with the government inquiries from the S.E.C. and the United States attorney's office in Brooklyn, which are examining whether the bank improperly swapped job offers and consulting contracts for business with state-owned Chinese companies. China's economy is highly regulated, and many of its biggest companies are state-controlled.

There is no indication that executives at JPMorgan's headquarters in New York were aware of the hiring practices described in the documents. And authorities might ultimately conclude that the bank's hiring, while aggressive, did not cross a legal line.

JPMorgan declined to comment.

The S.E.C. and the prosecutors in Brooklyn also declined to comment.

The breadth of the investigations underscore how pervasive the hiring practices may have become in China. For two decades, Wall Street banks have sought out China's so-called princelings, turning family and friends of senior officials into bank employees and consultants.

The documents reviewed by The Times, along with the interviews, suggest that some executives at JPMorgan felt a need to scramble to compete with Wall Street rivals that already had footholds in China. JPMorgan may have adopted some of their hiring strategies — and even shared employees and consultants.

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Fullmark Consultants, a firm that JPMorgan hired in 2006 to help improve its standing in China, also did business with Credit Suisse, according to interviews. Fullmark, which received a $75,000-a-month contract over two years from JPMorgan, was run by Wen Ruchun, the only daughter of Wen Jiabao, who at the time was China's prime minister, with ultimate responsibility over state-owned companies. In the contract with JPMorgan and other clients, which is now at the center of the federal bribery investigation, Ms. Wen used the alias "Lily Chang."

The S.E.C. and prosecutors are building their investigation around the Foreign Corrupt Practices Act, a 1977 law that makes it illegal for United States companies to exchange "anything of value" with foreign officials to win "an improper advantage" in obtaining business. Federal authorities have adopted a tougher stance in recent years, taking aim at American companies suspected of acting with "corrupt intent," or with an expectation of trading a job for government business.

It is unclear whether JPMorgan ever reached an upfront agreement with Chinese government officials. And the records reviewed by The Times do not suggest that the employees were unqualified. According to documents and interviews with current and former employees, JPMorgan created the "Sons and Daughters" program in 2006 with the expectation that the hires would receive heightened scrutiny.

But by 2009, the "Sons and Daughters" program was putting the job candidates on the fast track to employment. The documents show that applicants from prominent Chinese families faced less stringent hiring standards — and fewer job interviews — than the average junior-level hire.

The bank once proposed another program for "full-time referrals" that would have offered the well-connected hires a one-year contract worth $70,000 to $100,000. The program, internal documents said, might offer "directly attributable linkage to business opportunity."

JPMorgan also briefly kept "historical deal conversion" spreadsheets, according to interviews with people briefed on the investigation. In one column, JPMorgan listed job candidates; in another, the bank recorded its "track record" for winning business from companies tied to those candidates. Other spreadsheets listed well-connected hires and the revenue JPMorgan earned from deals with private and state-owned Chinese companies linked to those hires, documents show.

In discussions with authorities, the people briefed on the investigation said, JPMorgan has explained that it did not connect revenue to the "Sons and Daughters" program. Instead, the bank has said, the spreadsheets were meant to assess whether JPMorgan bankers, in hopes of securing full-time jobs for some interns in the program, had exaggerated the revenue received from state-owned companies.

The spreadsheets included about 30 employees with ties to state-owned companies or Communist Party officials, including the daughter of the deputy minister of propaganda, a relative of a Chinese financial regulator and the nephew of the executive chairman at Sinotruk, which is part of a state-owned trucking enterprise.

JPMorgan also tracked the revenue it received from private Asian companies that referred job candidates to the bank, a practice that would not fall under the Foreign Corrupt Practices Act. One hire was connected to Fubon Financial Holding, a financial services conglomerate in Taiwan that, according to the spreadsheet, produced 2009 revenue of $900,000 for JPMorgan.

JPMorgan bankers in Hong Kong coveted the business with Fubon. In an August 2010 email reviewed by The Times, a JPMorgan banker in Hong Kong explained that the bank had "picked up a new mandate in Taiwan today," but that holding onto the deal would depend on securing a job for someone related to a company executive.

"All we have to do," the banker said, is secure the relative "a full-time analyst job at JPM in N.Y."

The problem, another employee in Hong Kong acknowledged, was that the candidate's "napping habit will be an eye-opening experience for our N.Y. colleagues."

While the email appears to suggest a quid pro quo, the message is unlikely to alarm federal authorities, because it involves a private company rather than a state-owned enterprise.

But the bank's hiring of Tang Xiaoning, a onetime Goldman and Citigroup employee whose father is the chairman of the China Everbright Group, appeared to encapsulate the spirit of the "Sons and Daughters" program for state-owned clients.

The father, Tang Shuangning, approached a JPMorgan executive in Hong Kong in March 2010 about a position for his son, records and interviews show. The executive, who led JPMorgan's China investment banking unit, welcomed the request and urged his colleagues in an email a day later to discuss "how we can leverage more on this account going forward." But in an internal compliance form, the executive played down the significance of hiring Mr. Tang, documents show, saying there was "no expected benefit."

By that point in March 2010, JPMorgan appeared to do little if any business with China Everbright, according to securities filings and news reports.

But shortly after Mr. Tang's father approached JPMorgan, a China Everbright subsidiary hired the bank to advise on a $300 million private offering of shares, according to interviews. And in 2011, after Mr. Tang worked at JPMorgan for several months, China Everbright's banking subsidiary hired JPMorgan as one of several financial advisers on its decision to become a public company, a deal that was delayed amid turmoil on the world's markets.

About that time, JPMorgan offered a second one-year contract to Mr. Tang, who was prevented from having any role in working on China Everbright deals. Mr. Tang, executives said at the time, had received generally positive performance reviews. He also had previously earned a master's degree in international affairs from Columbia University.

While Mr. Tang worked at JPMorgan, the assignments from his father's company continued to pile up for the bank. In 2012, China Everbright International, a subsidiary focused on alternative energy businesses, hired JPMorgan to advise on a $162 million sale of shares, according to Standard & Poor's Capital IQ, a research service.

In May of that year, as Mr. Tang's contract was expiring, JPMorgan faced a turning point. But at the urging of the JPMorgan investment banking executive, Mr. Tang received another extension.

"Given where we are on China Everbright, I think we may need another contract for Xiaoning," the executive wrote.

Zhang Rong, the junior banker who resigned from JPMorgan in December 2011, also highlighted the bank's hiring strategy. On an overnight flight from Hong Kong to the United States, Mr. Zhang drafted a resignation letter that lamented how "All of my efforts seemed meaningless to you and you tend to judge me solely on the relation part of me."

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Mr. Zhang said he was quitting because he could no longer "live under the shadow of my father." The father, he indicated, had ties to the China Post Group, which runs the Chinese postal service and other subsidiaries.

In a statement, the China Post Group denied that Zhang Rong was connected to the company or its top executives. The company declined to provide further details.

Mr. Zhang promised in the email that his father would still "try his best to coordinate the meeting" between JPMorgan and China Post. And Mr. Zhang, who sent the email just days before Christmas, assured JPMorgan that he did not harbor any hard feelings.

"Wish you and your family merry Xmas and happy New Year!!!"

—By The New York Times' Ben Protess and Jessica Silver-Greenberg; David Barboza contributed reporting.