JPMorgan Pays $920 Million to Settle London Whale Probes

Sept. 19 (Bloomberg) -- JPMorgan Chase & Co., seeking to end probes of a trading debacle that damaged its reputation for risk-management, agreed to pay about $920 million for failing to implement adequate controls and providing incomplete information to regulators and its board. Peter Cook reports on Bloomberg Television's "In the Loop." (Source: Bloomberg)

JPMorgan Chase & Co. (JPM), settling U.S. and U.K. probes of a $6.2 billion trading loss, agreed to pay $920 million in penalties and admitted violating securities laws last year as top managers withheld information from the board.

Senior executives had evidence by late April 2012 that traders in the chief investment office in London were pricing a derivatives portfolio in a way that reduced reported losses, the Securities and Exchange Commission said yesterday in a cease-and-desist order. The losses at the unit, which was supposed to help reduce risk and manage excess deposits, forced the bank to restate results for last year’s first quarter.

The episode shows that after weathering the worst financial crisis since the Great Depression (INDU), executives at the biggest U.S. bank engaged in what watchdogs called a “pattern of misconduct” by maintaining poor internal controls, failing to keep their board informed and allegedly misleading regulators. The firm also is grappling with probes of its hiring practices in Asia and criminal inquiries tied to mortgage-bond sales and energy trading.

“The regulators were embarrassed, that’s why the fines are so big,” Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia, and former examiner for the Philadelphia Federal Reserve Bank, said on Bloomberg Television. “It should be a bigger concern to investors, but investors right now don’t really care because they feel it’s a drop in the bucket.”

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James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co. Close

James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co.

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Photographer: Chris Ratcliffe/Bloomberg

James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co.

JPMorgan fell 1.2 percent yesterday to $52.75 in New York. The shares have climbed 20 percent this year, trailing the 25 percent advance for the 81-company Standard & Poor’s Financials Index.

Jamie Dimon

The Office of the Comptroller of the Currency’s $300 million fine was the biggest levied yesterday against the New York-based bank, led by Chief Executive Officer Jamie Dimon. The U.K. Financial Conduct Authority fined JPMorgan 137.6 million pounds ($221 million), followed by $200 million each from the Federal Reserve and SEC.

The bank also agreed yesterday to pay $389 million in penalties and restitution to settle two regulators’ claims that it unfairly charged customers for credit-monitoring products, bringing the day’s total costs to more than $1.3 billion.

Dimon said in a statement the bank accepted responsibility from the start, and is now a “stronger, smarter, better” company.

Parallel Inquiries

The accords don’t end all of the investigations of the trades managed by Bruno Iksil, the Frenchman known as the London Whale because of the size of his bets. The SEC said its probe remains open while the U.S. Justice Department and Commodity Futures Trading Commission run parallel inquiries.

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The JPMorgan Chase & Co. office in the Canary Wharf business and shopping district in London, on Sept. 17, 2013. Close

The JPMorgan Chase & Co. office in the Canary Wharf business and shopping district in... Read More

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The JPMorgan Chase & Co. office in the Canary Wharf business and shopping district in London, on Sept. 17, 2013.

The bank received notice from the CFTC that its staff intends to recommend enforcement action as well, JPMorgan said yesterday. The agency has looked at whether the trades amounted to market manipulation, a person with knowledge of the matter said this week. The CFTC asked JPMorgan to pay $100 million, and the bank balked, the New York Times reported yesterday. Spokesmen for the bank and agency declined to comment.

Earlier this week, two former traders were indicted on five federal charges including securities fraud and conspiracy in connection with the loss.

“The settlement will not resolve the full extent of the bank’s liability and the consequences that could arise,” said Samuel Buell, a former prosecutor who now teaches at Duke University Law School.

Dimon, 57, hasn’t gone far enough in taking responsibility for the trading debacle, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York. Robert Diamond resigned as CEO of Barclays Plc after his bank was accused of manipulating interest rates last year. While JPMorgan’s board cut Dimon’s 2012 pay in half over the loss, its members backed his fight this year to remain chairman.

Reputation Tarnished

“I can’t think of an American bank that’s had as much trouble” as JPMorgan, Geisst said. Dimon has “been at the helm of the bank while all this has been going on.”

While the lender made admissions in yesterday’s SEC settlement that tarnish Dimon’s reputation, they may not make the firm very vulnerable to shareholder lawsuits, said Thomas Gorman, a partner at law firm Dorsey & Whitney LLP in Washington.

“There’s no real allegation of fraud here,” said Gorman, a former SEC attorney. “Internal controls is not something that’s going to get a class action a lot of damages.”

The FCA said the bank concealed the extent of its losses, initially failed to cooperate and “deliberately misled the Authority.”

‘Recklessly Unsafe’

Bloomberg News first reported on April 5, 2012, that Iksil had built an illiquid book of derivatives in the chief investment office so large that it was distorting credit indexes. About a week later, Dimon dismissed the attention on the bets as a “tempest in a teapot.”

By late April, senior management knew that the CIO had used aggressive valuations to calculate losses to be $767 million less than they would have been under methods in other parts of the bank, the SEC said. The top managers failed to adequately update the board’s audit committee on the situation before the first-quarter earnings report, the SEC said.

The bank’s credit derivatives trading “constituted recklessly unsafe and unsound practices, was part of a pattern of misconduct,” the OCC said in a consent order. The company failed to ensure that examiners received important information about the trading strategy and problems in internal controls, the regulator said.

‘No Impact’

Two investment-banking executives “initially expressed some reservations” at signing off on JPMorgan’s report, the SEC said. One of them, who was aware of the focus on the CIO, told senior managers he consulted with an outside lawyer before doing so, the agency said. Dimon and then-Chief Financial Officer Doug Braunstein certified the financial statements as required under the Sarbanes-Oxley Act.

The bank announced in July 2012 that it had found a “material weakness” in its internal controls and amended its first-quarter report.

“JPMorgan’s control breakdowns went far beyond the CIO trading book,” George S. Canellos, co-director of the SEC’s enforcement division, said in a statement. “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.”

‘Shame’ Needed

Fines such as those levied yesterday will have “no impact” on the bank’s conduct, said James Cox, a professor at Duke University School of Law in Durham, North Carolina.

“Rather than burden the company further with penalties, the SEC needs to shame the company for its behavior and go after key individuals in senior and middle management,” he said.

U.S. Senator Carl Levin, a Michigan Democrat, said the settlement fails to hold JPMorgan executives accountable for misinforming investors and the public as the London Whale losses mounted, a topic examined by his Permanent Subcommittee on Investigations. The panel, in a 301-page report, accused JPMorgan of hiding losses and referred its findings to the SEC and Justice Department in April.

Investigations Continuing

“Other civil and criminal proceedings apart from this settlement are continuing, so there is still time to determine any accountability on that matter,” Levin said in an e-mailed statement.

Senator John McCain, the subcommittee’s ranking Republican, sent a letter to the SEC yesterday, calling the government’s actions incomplete and urging the agency to “hold accountable those individuals who compromised the integrity of our nation’s financial markets.”

Canellos said the SEC’s probe “is continuing as to individuals.”

While the agency didn’t identify people involved, it said senior management includes one or more of the following as of May 10, 2012: Dimon, Braunstein, former Chief Risk Officer John Hogan, the company’s then-Controller Shannon Warren and the bank’s general auditor.

Iksil’s former boss, Javier Martin-Artajo, and junior trader Julien Grout were indicted Sept. 16 for allegedly seeking to hide losses as they began to mount. They have yet to appear in court. Prosecutors said Iksil, who wasn’t charged, is cooperating with the government.

‘Spreadsheet Miscalculations’

Grout, who reported to Iksil, was “totally dependent on Iksil’s instructions and relied in good faith on his expertise,” Grout’s attorney, Edward Little of Hughes Hubbard & Reed LLP, said in a Sept. 17 e-mailed statement that declared that Grout will be proven innocent.

A law firm representing Martin-Artajo said last month that he will be cleared of wrongdoing after the events at issue are fully examined.

“The trading losses occurred against a backdrop of woefully deficient accounting controls in the CIO, including spreadsheet miscalculations that caused large valuation errors and the use of subjective valuation techniques that made it easier for the traders to mismark the CIO portfolio,” the SEC said in its statement.

While the OCC and Fed censured JPMorgan this year and ordered it to strengthen internal controls, the agencies didn’t immediately assess fines.

Mounting Costs

JPMorgan increased spending on internal controls by about $1 billion this year and dedicated more than $750 million “to address several of our consent orders,” Dimon wrote in a memo to employees this week. At least 5,000 people at the company have been assigned to compliance, he said.

The cost for the bank is still “open-ended,” said Charles Peabody, an analyst at Portales Partners LLC in New York. Investors want some clarity on the seriousness of the criminal probe, he said. “I’m not sure that these settlements will conclude anything because you still have the CFTC, the DOJ and state AGs investigating.”

Former Chief Investment Officer Ina Drew and her head of international CIO, Achilles Macris, were among the top executives who left the bank after the losses were disclosed. Braunstein stepped down from the operating committee and became a vice chairman. JPMorgan clawed back more than $100 million in pay from Drew and other managers.

Drew, 57, told lawmakers at a March hearing that she wasn’t aware of what she called the “deceptive conduct” of her subordinates until after she left the bank.

JPMorgan’s board cut Dimon’s pay by 50 percent for 2012 after concluding that he bore some responsibility for the debacle. It also credited his leadership for the lender’s performance. JPMorgan reported a third straight year of record profit in 2012 with $21.3 billion in net income.

FBI Probe

The Federal Bureau of Investigation and SEC have been scrutinizing public statements, calls with investors and an April 2012 earnings presentation by Dimon and Braunstein, Bloomberg News reported in June, citing five people with knowledge of the probes.

The criminal investigation has looked at, among other issues, whether traders painted the tape, a form of market manipulation that allows them to inflate the value of their positions, three of the people said at the time.

The criminal case is U.S. v. Martin-Artajo, 13-cr-00707, U.S. District Court, Southern District of New York (Manhattan).

The SEC case is Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net

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