The Senate Drafts the SEC's Case Against JPMorgan

A wealth of evidence in the Senate’s London Whale report
Workers raise a flag at JPMorgan Chase’s headquarters in New York before an annual Investor Day conference on Feb. 26 Photograph by Victor J. Blue/Bloomberg

The Senate probe of JPMorgan Chase did more than conclude that the bank hid the full damage of last year’s trading losses from investors and regulators. It delivered 900 pages of evidence that could help the Securities and Exchange Commission make the case that bank executives broke the law.

Former SEC Chairman Mary Schapiro said last year that her agency was investigating whether JPMorgan adequately disclosed the losses that eventually swelled to $6.2 billion on a derivatives portfolio. SEC officials will now be able to draw on the 300-page report by the Senate’s Permanent Subcommittee on Investigations—chaired by Michigan Democrat Carl Levin—as well as more than 90,000 e-mails and other documents, 200 transcribed telephone calls, and 25 interviews with bank officials compiled by the committee.

The case may become an early test for incoming SEC Chairman Mary Jo White, the former U.S. Attorney for the Southern District of New York whom President Obama picked to help the agency shed a reputation for failing to prosecute Wall Street wrongdoing. “The report puts tremendous pressure on the SEC to address the responsibilities of JPMorgan and its top officers for what is happening in the trenches,” Robert Hillman, a securities law professor at the University of California at Davis School of Law, said in an e-mail. “This gives the SEC a chance to respond to the many questions that have been raised as to whether the agency can be an effective regulator or will continue to be a potted plant.”

Senate investigators found that JPMorgan’s portfolio of credit derivatives began to lose money in the first quarter of 2012. The positions, which tripled in size during that three-month period, were so large they swayed international credit markets and earned the U.K.-based trader the nickname “London Whale.” The portfolio lost $415 million on a single day three days before JPMorgan Chief Executive Officer Jamie Dimon told investors on an April earnings call that stories about the losses were a “tempest in a teapot,” according to the Senate findings. The bank’s communications and securities filings about the trades “were incomplete, contained numerous inaccuracies, and misinformed investors, regulators, and the public” about the losses, according to the report.

The SEC enforces laws that require public companies to disclose information that affects an investor’s willingness to buy, sell, or hold securities. Courts have held that such information includes earnings estimates or events likely to change the company’s share price, the Senate report says. SEC spokesman John Nester declined to comment. The agency, which began its investigation under Schapiro, will soon have a new leader. The Senate banking committee approved White’s nomination nearly unanimously, and a vote by the full Senate could come anytime. White might have to recuse herself from any commission action on an enforcement case against JPMorgan because the bank is listed as a client of her former law firm, Debevoise & Plimpton, on her financial disclosure form.

The Senate report accuses bank officials of taking actions to lower loss estimates as well as improperly changing risk models that gauge potential losses. John Coffee Jr., a securities law professor at Columbia Law School, says the report could provide a road map for prosecuting bank officials and that he expects the bank to settle a case soon with the SEC. “The SEC can say, in doing those things without full disclosure, you misled investors,” Coffee says. “That would be the natural conclusion.” Mark Kornblau, a JPMorgan spokesman, declined to comment.

Other regulators may also respond to the Senate committee’s findings. The Office of the Comptroller of the Currency last month ordered JPMorgan to strengthen its risk and auditing controls in connection with the botched derivatives trades. Thomas Curry, the OCC chief, told Levin’s subcommittee that his agency could take further action based on the Senate findings. “We will continue to investigate this matter,” he said. “Be assured that I will not hesitate to take additional action if warranted in response to any new information we learn from the report.”


    The bottom line: A 300-page Senate report and more than 90,000 e-mails could help the SEC sue JPMorgan.

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