JPMorgan Chase (JPM): apparently not too-big-to-fess-up.
In what’s shaping up to be a huge snag for regulators, the mega-bank has agreed to pay upward of $750 million to resolve U.S. and U.K. probes of its record $6.2-billion London-whale trading loss, people with knowledge of the negotiations said. Critically, the U.S. Securities and Exchange Commission and other regulators are on the verge of wresting an actual admission of wrongdoing from Morgan—in sharp contrast to the “neither admit nor deny” wording that most often accompanies such actions.
It all adds insult to what’s already been stinging financial and reputational injury from the bad trades. In an e-mail today to employees, Chief Executive Officer Jamie Dimon said the bank has increased spending on internal controls by about $1 billion this year in an “unprecedented effort” to shore up regulatory compliance. “We have re-prioritized our major projects and initiatives, deployed massive new resources and refocused critical managerial time on this effort,” he wrote.
While $750 million is a digestible fine for the hugely profitable multinational—the country’s biggest bank by assets—a rare admission of wrongdoing may leave it vulnerable to private litigation. Yesterday, a pair of former Morgan traders, Javier Martin-Artajo and Julien Grout, were charged with five criminal counts in a federal indictment, including securities fraud, conspiracy, filing false books and records, wire fraud, and making false filings with the SEC. The securities fraud charge carries a maximum term of 20 years in prison.
The two “manipulated and inflated the value of position markings in the Synthetic Credit Portfolio in order to achieve specific daily and month-end profit and loss objectives,” the government alleged in the indictment. “In other words, they artificially increased the marked value of securities in order to hide the true extent of significant losses in that trading portfolio.”
The agreement with the SEC, the Office of the Comptroller of the Currency, the Federal Reserve, and the U.K. Financial Conduct Authority could come as early as this week, reported the Wall Street Journal. Morgan still faces action from the Commodity Futures Trading Commission for allegedly mispricing the derivative positions behind its disastrous London trades. The bank is looking to settle as many inquiries as possible before the end of the month, according to people familiar with the negotiations.
Bruno Iksil, the trader at the center of the case who became known as the London Whale because his portfolio was so big, wasn’t named in yesterday’s filing. He signed a non-prosecution agreement with the U.S. in June where he pledged to cooperate with prosecutors as part of the deal.
The damage to JPMorgan so far appears limited, with no executive perp walks. Its chief financial officer told investors last week that the money the bank is adding to legal reserves would be partially offset by money it is releasing from consumer loan reserves.
But the criminal complaints against the rogue traders depict the bank as deficient in compliance, internal controls, and executive oversight—with more such dirty laundry in the offing if and when the traders’ case goes to trial. That could well stoke the animal spirits of the shareholder-lawsuit bar.
“Martin-Artajo claimed that this was what ‘New York’—that is, the bank’s senior management in New York—wanted, explaining that those JPMorgan officials did not want to see day-to-day market volatility,” according to the indictment.
A lawyer for Grout said his client will be shown to be “innocent of any wrongdoing. A spokesman for JPMorgan declined to comment on the charges. Attorneys for Martin-Artajo could not be reached.
“The penalty still looks paltry, compared to JPMorgan’s profits, and can be viewed as an operating expense of sorts,” says Bloomberg Law’s Lee Pacchia. “Still, forcing an admission of wrongdoing has allowed that sum room to grow, if we start seeing more and more private litigation arise out of the London Whale incident. All in all, it’s an incrementally more severe penalty from what we’ve seen before.”
Indeed, in today’s e-mail, CEO Dimon told employees to brace themselves for further legal and regulatory challenges in the coming weeks and months.