JPMorgan to Pay $100 Million Fine on CFTC London Whale Claim

JPMorgan Chase & Co., the largest U.S. bank, agreed to pay $100 million to resolve Commodity Futures Trading Commission claims that the company’s London traders last year deployed a reckless strategy in derivatives.

The accord, which stems from the bank’s chief investment office’s conduct on Feb. 29, 2012, brings JPMorgan’s settlements from the London Whale trades to more than $1 billion, the CFTC said today in a statement.

JPMorgan’s traders tried to defend their position in credit derivatives “by dumping a gargantuan, record-setting, volume of swaps virtually all at once, recklessly ignoring the obvious dangers to legitimate pricing forces,” David Meister, the CFTC’s head of enforcement, said in the statement.

The New York-based bank agreed in September to pay $920 million to resolve related U.S. and U.K. probes into its internal controls and handling of the trades, which inflicted at least $6.2 billion in losses on the bank last year. The accords don’t end all of the investigations into the bets managed by Bruno Iksil, the trader known as the London Whale because his positions were large enough to move markets.

The selling cited by the CFTC was a “manipulative device” that disregarded consequences to the broader market, the agency said.

Joe Evangelisti, a spokesman for JPMorgan, said the bank neither admitted nor denied the CFTC’s legal conclusion that there was a violation, while admitting to “certain facts set out in the order.”

Middle Ground

The admission of the facts represents a middle ground between settlements where a party neither admits nor denies anything and those where a party admits to a violation of the law, Dan Waldman, a Washington-based partner at law firm Arnold & Porter LLP, said in a telephone interview. The accord preserves the bank’s ability to defend against future civil claims related to the London trades, he said.

The London Whale in a Nutshell

“It does make it easier for them to defend future cases,” said Waldman, a former CFTC general counsel who represents exchanges, brokerages and investment funds in regulatory matters before his former agency and the Securities and Exchange Commission.

The accord following the CFTC’s 17-month investigation relies on Dodd-Frank Act powers to combat market manipulation. The 2010 financial-regulatory law broadened the agency’s ability to bring enforcement cases, allowing lawyers to demonstrate reckless trading instead of a higher standard of intent and success at actual manipulation of a market.

Defending Position

JPMorgan traders on Feb. 29, 2012, tried to defend their position in credit-default swaps to stem losses, according to the CFTC. The bank sold more than $7 billion of swaps that day, including $4.6 billion in a three-hour period, the agency said. The sales accounted for more than 90 percent of the day’s net volume traded by the entire market, the agency said.

“The facts as admitted by the bank are that they acted recklessly with regard to the fundamental precept that prices in the swap market be established by legitimate forces of supply and demand,” CFTC Chairman Gary Gensler said in a telephone interview.

Bart Chilton, a Democratic CFTC commissioner, said in a statement that he wouldn’t have supported the order without the bank’s admission.

O’Malia Dissent

Scott O’Malia, a Republican commissioner, dissented from the decision and said the agency should have taken more time to demonstrate whether the bank is liable for price manipulation.

“The commission’s abbreviated investigation has failed to determine whether JPMorgan intentionally or recklessly manipulated the price of a particular type of credit default swap index,” O’Malia said in his statement.

The Securities and Exchange Commission has said its inquiry remains open while the U.S. Justice Department runs a parallel probe. Iksil, who prosecutors have said is cooperating with their case, hasn’t been charged. The CFTC’s enforcement division decided against recommending an enforcement against against JPMorgan traders, according to the order.

In April last year, JPMorgan Chief Executive Officer Jamie Dimon initially dismissed reports that the derivatives bets were distorting markets, calling the attention a “tempest in a teapot.” The bank disclosed mounting losses a month later.

The bank admitted in its SEC settlement that internal oversight of the trades suffered from lapses and that the firm violated federal securities laws. The company’s handling of the trades also has been faulted by Senate investigators, the U.S. Office of the Comptroller of the Currency, Federal Reserve and U.K. Financial Conduct Authority.

Resolving Probes

JPMorgan has sought in the past few months to resolve probes into businesses including energy trading, credit-card lending and bundling of mortgages into bonds. The bank said Oct. 11 it took a $7.2 billion charge for expenses tied to regulatory matters and litigation, leading to its first quarterly loss during Dimon’s tenure.

The company has yet to resolve state and federal probes into its mortgage-bond sales, including a criminal inquiry. JPMorgan has been discussing a potential $11 billion deal with authorities looking into that business, a person with knowledge of the talks said in September.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net

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