The rare admission of fault and one of the largest bank fines in history focus on an early 2012 episode in which the bank's London-based traders amassed large and risky investment positions in an effort to avoid losses in a credit portfolio. The positions were so big they drew attention from other firms' traders, who dubbed Bruno Iksil, the chief JPMorgan trader involved, "the London whale."
The bank initially asserted that the trades, which ultimately racked up an estimated $6.2 billion in losses, had been a hedge against risk. But the strategy instead morphed into proprietary trading for the bank's benefit — partly funded with federally insured deposits.
In trying to move past the incident, JPMorgan publicly acknowledged that it had violated federal securities laws and conceded that the losses occurred against a backdrop of deficient accounting controls. The bank also acknowledged that senior management knew that London traders were using a valuation system designed to minimize the size of the losses.
The settlements require improvements in internal oversight by the bank's board of directors, steps to remedy "unsafe and unsound" banking practices, plus upgraded audit functions.
"JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,"said George Canellos, co-director of the enforcement division at the Securities and Exchange Commission, one of the regulators involved in the settlements. "While grappling with how to fix its internal control breakdowns, JPMorgan's senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company's problems and determine whether accurate and reliable information was being disclosed to investors and regulators."
Investigators echoed a scathing Senate report that earlier this year concluded JPMorgan had kept bank regulators in the dark about the losses by withholding important information.
"Bank management must also ensure open and effective communication with supervisors so that we can effectively do our jobs," said Comptroller of the Currency Thomas Curry in a statement issued with his agency's settlement filing. "Anything less is unacceptable and will not be tolerated."
The Federal Reserve, and Financial Conduct Authority in Great Britain also settled their investigations with the bank.
"We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them," said JPMorgan CEO Jamie Dimon in a statement issued by the bank. "We will continue to strive towards being considered the best bank — across all measures — not only by our shareholders and customers, but also by our regulators."
In an unrelated issue, the Comptroller of the Currency announced enforcement actions against the bank Thursday for unfair billing practices related to identity-theft protection and for problems in connection with efforts to ensure that service members receive credit protection for their non-home loans. The bank said it had moved to redesign its practices.
The Consumer Financial Protection Bureau also ordered JPMorgan and its consumer and commercial division to pay $309 million in refunds for improper credit card practices. The bank said it had already issued credits or refunds to customers who were affected.
JPMorgan shares closed down 1.2% at $52.75 in Thursday trading.
Despite the new London whale settlements, JPMorgan still faces a criminal investigation of the trading episode by federal prosecutors and a separate civil probe by the Commodity Futures Trading Commission.
Iksil, who no longer works for the bank, is cooperating with the criminal investigation by the Manhattan U.S. Attorney's office in New York. In a federal affidavit filed last month, two other former JPMorgan Chase employees directly involved in the London whale trades were charged with conspiracy, falsifying books and records, wire fraud and making false filings with the SEC.
The two, Javier Martin-Artajo and Julien Grout, were formally indicted Monday on charges they manipulated and inflated the value of the trading positions to cover up the true size of the deepening losses.
London-based lawyers for Martin-Artajo have said they were confident he would be cleared of any wrongdoing. New York defense attorney Edward Little this week said Grout "was a junior trader's assistant acting under the direct instructions of his managers and has been unjustly used as a pawn in the government's attempt to settle its highly politicized case against JPMorgan Chase."
In announcing the charges against the two traders, Manhattan U.S. Attorney Preet Bharara signaled that senior bank officials had been aware of what the London traders had been doing. While declining to discuss the continuing investigation, he said, "They definitely knew they (bank traders) were cooking the books."
Sen. Carl Levin, D.Mich., whose Senate subcommittee issued the report critical of JPMorgan, said the issue of misinforming investors and the public was "conspicuously absent" from the SEC's part of the settlement.
John Coffee, a securities law expert at Columbia University Law School in New York, questioned why regulators imposed fines that would ultimately be borne by JPMorgan shareholders without finding any top bank officials at fault. "It is not a triumph without being able to identify who is responsible above the level of low-ranking officers," Coffee said.
Dan Marchon, a senior equity research associate at Raymond James & Co., said he was not surprised by the relatively muted stock market reaction to the settlement because JPMorgan CFO Marianne Lake recently disclosed a more than $1.5 billion third-quarter increase in the bank's reserves for litigation costs.
Marchon said he did "not necessarily expect to see a dramatic move," in the price of JPMorgan shares unless something unexpected arose from the settlement.
usatoday.com 19 Sep 2013