JPMorgan Ordered to Fix Controls, Pay Practices After Whale Bet

JPMorgan Chase & Co. was ordered by U.S. regulators to strengthen risk controls and enhance executive compensation practices after losing more than $6.2 billion on a wrong-way derivatives bet last year.

The Federal Reserve found deficiencies in JPMorgan’s risk controls, loss modeling and audit functions as well as the process for alerting the board of directors to problems. The central bank and the Office of the Comptroller of the Currency both issued cease-and-desist orders yesterday requiring JPMorgan to tighten its trading oversight, particularly in the chief investment office, and separate orders to bolster systems preventing clients from laundering money.

The orders show there are “significant control weaknesses beyond the CIO’s office that raises questions about whether JPMorgan is that much better than its peers at risk management,” said Josh Rosner, an analyst at New York-based Graham Fisher & Co.

They are the first regulatory sanctions against JPMorgan in response to the botched trades, which Chief Executive Officer Jamie Dimon, 56, said in May stemmed from “egregious” lapses. Bruno Iksil, the U.K. trader nicknamed the London Whale because his positions were big enough to move markets, made the wrong-way bet on credit derivatives that fueled the losses. As much as $51 billion in shareholder value had been erased at one point.

The sanctions are relatively light, allowing JPMorgan to avoid fines, Rosner said.

U.K. Probe

Other U.S. agencies investigating the trading loss include the Securities and Exchange Commission and Federal Bureau of Investigation. The U.K.’s Financial Services Authority said yesterday that it’s undertaking a formal enforcement probe, which typically indicates the agency found sufficient evidence of financial rule violations.

“Conclusions will be reached in the enforcement investigation in due course and any further appropriate action determined at that time,” the FSA said in a statement.

The Fed gave JPMorgan’s board 60 days to submit a plan to enhance oversight of risk-management, internal-audit and finance functions. The panel also must overhaul its system for compensating top executives, accounting for “adverse risk outcomes and control deficiencies,” according to a Fed order.

Internal Report

The bank’s board is considering releasing an internal report that faults Dimon’s oversight of the CIO when the company announces fourth-quarter results tomorrow, two people with direct knowledge of the matter have said.

That report, which builds on a preliminary analysis released in July, is critical of senior managers including Dimon, former Chief Financial Officer Doug Braunstein, 52, and ex-Chief Investment Officer Ina Drew, 56, for inadequately supervising traders in the U.K., according to the people.

The report will be presented to the board when it meets today. The directors will then vote on whether to disclose it, the people said.

JPMorgan didn’t admit or deny wrongdoing in consenting to the regulatory orders issued yesterday.

“We’ve been working hard to fully remediate the issues identified in the consent order” on the trading losses, Joe Evangelisti, a JPMorgan spokesman, said in a statement.

An OCC order found that the bank also “has an inadequate system of internal controls and independent testing” for anti-money-laundering compliance. The company “failed to identify significant volumes of suspicious activity” and to file required reports alerting regulators, according to the order.

Meeting those “responsibilities -- and going above and beyond -- is a top priority for us,” Evangelisti said. “We have already made progress addressing the issues cited in the consent orders, which contain no allegations of intentional misconduct by the firm or any of its employees.”

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