Loyalty on Wall Street: Not To the Customer

In the realm of financial services especially, a product originator, salesperson, broker, consultant or analyst owes a duty of loyalty to the customer. This is a bedrock first principle for us. Today, the New York Times reports that JPMorgan was pulling its funds out of Madoff's Fairfield funds in the autumn of 2008 without notifying their customers to whom they had sold a leveraged note product. The performance of the notes was directly tied to the Fairfield funds performance.

Worse still are the reasons for pulling the money out. "...the bank became concerned about the lack of transparency to some questions we (JPMorgan) posed as part of our review," according to the New York Times. This information clearly needed to be disclosed, as it was information that a prudent person would need to know in order to make an informed investment decision about the notes. Presumably, this was a complete change from the (presumed) due diligence that JPMorgan had undertaken prior to presenting the note product to their high net worth customers. There is no way that it should not have been disclosed, and the bank should not have been front-running their customers.

The completely inane, nonsensical excuse? "...under the sales agreements, the issues (?) did not meet the threshold necessary to permit the bank to restructure the notes....we (JPMorgan) did not have the right to disclose our concerns." (New York Times, 1/29/09, Business Day)

Despite having Chief Ethics Officers and compliance departments, the most basic ethical business principles continue to be flouted with impunity on Wall Street.