The U.S. Securities and Exchange Commission, in settling claims with JPMorgan Chase & Co. over its handling of a $6.2 billion trading loss, landed its biggest victory yet in fulfilling a pledge to force wrongdoers to admit guilt.
As part of the $920 million agreement with regulators in the U.S. and U.K., New York-based JPMorgan admitted yesterday that it violated federal securities laws when it failed to catch traders hiding losses in 2012.
“It’s no small thing to go from getting no admissions six months ago to this,” said James Cox, a law professor at Duke University School of Law in Durham, North Carolina. “It’s a useful shaming process. It has an impact on the behavior of other people.”
Under SEC Chairman Mary Jo White, 65, the enforcement division has shifted its long-standing policy of allowing defendants to settle matters without admitting or denying any wrongdoing. The practice had been thrown into question when U.S. District Judge Jed Rakoff rejected a settlement with Citigroup Inc. in part because the bank didn’t admit to any misconduct.
George Canellos, 49, co-chief of SEC enforcement, said in a statement that the admissions were central to the agreement.
“While not every case will be appropriate for admissions of wrongdoing, the SEC required JPMorgan to admit the facts in the SEC’s order -- and acknowledge that it broke the law -- because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings,” Canellos said.
Not all SEC commissioners supported the settlement, which was approved by a 2-1 vote, according to two people with knowledge of the matter. Michael Piwowar, 45, a Republican commissioner who joined the agency last month, voted against it, while Democrats Luis Aguilar, 59, and Kara Stein, 49, supported the agreement, said the people, who asked not to be identified because the matter isn’t public.
White and Republican commissioner Daniel Gallagher were recused. White had previously represented the bank, according to public disclosures, and Gallagher’s former law firm -- Wilmer Cutler Pickering Hale and Dorr LLP -- was lead counsel for JPMorgan in the case. Piwowar didn’t immediately respond to an e-mail requesting comment.
Jaret Seiberg, an analyst at Guggenheim Partners, said in a note that JPMorgan’s admission of wrongdoing will help the bank restore its public image.
“Bank executives can rightly say they have taken responsibility for what went wrong,” Seiberg said.
Senator Carl Levin, a Michigan Democrat who headed a subcommittee investigation that concluded that JPMorgan senior executives misled investors, criticized the SEC for failing to hold individual managers accountable.
The Senate investigation “showed that senior bank executives made a series of inaccurate statements that misinformed investors and the public as the London Whale disaster unfolded,” Levin said in a statement. “Other civil and criminal proceedings apart from this settlement are continuing, so there is still time to determine any accountability on that matter.”
Senator Charles Grassley, an Iowa Republican, criticized the SEC’s decision not to sanction individual managers.
“The SEC says it’s still investigating individuals in this case,” Grassley said in a statement. “Maybe we’ll see more enforcement action on how the bank communicated with investors.”
Defense attorneys have argued that seeking admissions as part of settlements would unfairly open corporations up to private class-action lawsuits. Recognizing how reluctant corporations would be to admit wrongdoing, the SEC has previously argued that seeking admissions would lead to protracted litigation, draining the agency of scarce resources.
In this case, JPMorgan was accused of having insufficient internal controls, not of committing fraud. The lesser violation doesn’t necessarily expose the bank to private lawsuits, which typically need to prove there was an intentional fraud, according to Adam Pritchard, a University of Michigan law professor who previously worked as a lawyer for the SEC.
“This is the SEC trying to make a show of an admission, but that admission isn’t going to disadvantage JPMorgan in a private lawsuit,” Pritchard said.
The SEC’s share of JPMorgan’s penalty was $200 million, while JPMorgan agreed to pay $300 million to the Office of the Comptroller of the Currency, $200 million to the Federal Reserve and $137.6 million pounds ($221 million) to the U.K.’s Financial Conduct Authority.
Paul Atkins, a former Republican SEC commissioner who is now the chief executive officer of Patomak Global Partners, a consulting firm in Washington, said extracting large financial penalties only harms the shareholders who were the victims of JPMorgan’s trading loss.
“This is the same old, same old,” Atkins said. “Investors have to bear the burden of not only the original loss but now this fine as well.”
Similarly, JPMorgan’s agreements with the Fed and OCC omitted such disclaimers. The two regulators, like SEC, have previously allowed companies to settle claims without admitting or denying wrongdoing.
“The bank’s CEO admitted to egregious control failures; the bank’s internal review confirmed the control failures” and the Senate report documented the shortcomings as well, said Bryan Hubbard, an OCC spokesman. “Our own investigation reached the same conclusion. Given these facts, we determined that neither-admit-nor-deny language was not appropriate in this case.”
According to Duke’s Cox, the case shows how regulators are turning an important corner in holding Wall Street to account.
“There’s a lot to be said for shining a light on behavior and labeling it wrong,” Cox said. “The vector has changed.”