10-16-2013 05:00 AM

JPMorgan to Admit Wrongdoing and Pay $100 Million to Settle 'London Whale' Inquiry

Charles Dharapak/Associated Press Jamie Dimon, the chief of JPMorgan Chase, met with President Obama earlier this month on the fiscal crisis.
JPMorgan Chase has agreed to pay $100 million and make a groundbreaking admission of wrongdoing to settle an investigation into market manipulation involving the bank’s multibillion-dollar trading loss in London, a federal regulator announced on Wednesday, underscoring how far the bank was willing to go to put the blunder behind it.
The regulator, the Commodity Futures Trading Commission, took aim at JPMorgan for trading activity that was so large and voluminous that it violated new rules under the Dodd-Frank Act, the financial regulatory overhaul passed in response to the financial crisis.
The trading commission charged the bank with recklessly “employing a manipulative device” in the market for swaps, financial contracts that allowed the bank to bet on the health of companies like American Airlines. The bank sold “a staggering volume of these swaps in a concentrated period,” the trading commission said.
Article Tools

Related Links

Unlike other regulatory actions involving the loss, which focused on porous controls and governance practices at the bank, the pact with the trading commission exposed the bank’s actual trading activity. And the case, which brings JPMorgan’s tally of fines in the trading loss case to more than $1 billion, was a first for the trading commission. Until now, the commission had never exercised its authority under Dodd-Frank to combat manipulation.
“In Dodd-Frank, Congress provided a powerful new tool enabling the C.F.T.C. for the first time to prohibit reckless manipulative conduct,” David Meister, the agency’s enforcement director, said in a statement. “As this case demonstrates, the commission is now better armed than ever to protect the market from traders, like those here, who try to ‘defend’ their position by dumping a gargantuan, record-setting, volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces.”
The bank’s admission of wrongdoing made the case all the rarer. Banks are typically loath to make such admissions, fearing that an acknowledgment of bad behavior will open the floodgates to litigation from shareholders. But to resolve the investigation, JPMorgan took the unusual step of admitting to facts that the trading commission outlined in its order. In doing so, the bank acknowledged that its traders acted recklessly.
The concession was the latest, and perhaps most significant, phase of a broader policy shift in Washington, where federal regulators are reversing a practice of allowing banks to “neither admit nor deny” wrongdoing. That practice, in place for decades, rankled consumer advocates and lawmakers, who questioned why Wall Street misdeeds generated only token settlements that banks could easily afford.
JPMorgan’s admission to the trading commission – coupled with its acknowledgment to the Securities and Exchange Commission last month that “severe breakdowns” had allowed a group of traders in London to run up more than $6 billion in losses – could provide a template for pursuing other admissions in Wall Street cases.
“Admitting to these findings of fact needs to be something part and parcel to these types of settlements,” said Bart Chilton, a Democratic member of the trading commission. “All too often, a firm will neither admit nor deny any wrongdoing. That needs to stop.”
The trading commission still provided the bank some cover from private litigation. JPMorgan noted that, although it admitted to facts in the order, it “neither admitted nor denied the C.F.T.C.’s legal conclusion that there was a violation.” While it is a small and technical distinction, it could save the bank from an onslaught of shareholder lawsuits.
The trading commission was the sole holdout in settling cases arising from the trading loss, a debacle last year that has come to be known as the London Whale episode. In September, to resolve accusations that the bank allowed a group of traders to go unchecked as they racked up losses, JPMorgan paid $920 million to four other regulatory agencies — the S.E.C., the Federal Reserve and the Office of the Comptroller of the Currency in the United States, and the Financial Conduct Authority in Britain. The bank, also blamed for nor alerting its board and regulators to the gravity of the problem, admitted to the S.E.C. that it had violated federal securities laws. The agency, however, continues to investigate whether senior executives at the bank ran afoul of any civil regulations.
The London Whale case also features a criminal component. In August, federal prosecutors and the Federal Bureau of Investigation in Manhattan announced criminal charges against two of the former traders: Javier Martin-Artajo and Julien Grout, who were accused of covering up the size of their losses. The traders deny wrongdoing. Bruno Iksil, a third trader known as the London Whale for his role in the outsize derivatives bet, reached a nonprosecution deal that requires him to testify against his two former colleagues.
The flurry of federal activity cast a pall over the bank. And the trading commission, by striking out on its own, frustrated JPMorgan’s efforts to resolve the regulatory cases all at once.
The settlement hinged on whether the bank would admit wrongdoing. JPMorgan, arguing that its trading was legitimate, initially resisted an admission. That prompted the trading commission to draft a potential lawsuit. But talks reopened in recent weeks, paving the way for the admission.
For years, the agency was hamstrung in its pursuit of market manipulation cases. Under existing laws, it had to prove that a trader intended to manipulate the market, and successfully created artificial prices.
That high hurdle deterred the agency from taking action in manipulation investigations. And even when cases were filed, they rarely panned out. In fact, according to Mr. Chilton, the agency has successfully litigated only one manipulation case in the agency’s 38-year history.
But under Dodd-Frank, the agency must show only that a trader acted “recklessly.” The agency harnessed that new authority to pursue the JPMorgan trading, where it was unclear whether the traders had intended to distort the market. The broader authority also enabled the agency to accuse the bank of “employing a manipulative device,” without proving that the bank actually manipulated the price of swaps.
The agency’s sole Republican commissioner, Scott D. O’Malia, objected to the narrower design of the case under Dodd-Frank. In a dissent published on Wednesday, he argued that the agency “should have taken more time to investigate whether the company is liable for a more serious violation, namely price manipulation.”
Mr. Chilton, in contrast, praised the $100 million fine as an “appropriate amount” He argued, however, that the agency still lacked authority to impose huge fines.
“I still seek a statutory change from our current puny penalty regime,” he said.
While the case was a first for the agency, it could be one of the last for Mr. Meister, a former federal prosecutor and defense lawyer who recently announced that he would depart the agency this fall.



Continue Reading >>