September 20, 2013 – J.P. Morgan Chase Pays a $1 Billion Fine to the SEC and U.K Regulators: This story is important because the biggest bank in the world, J. P. Morgan Chase, paid a combined one billion dollar fine ($920M and $80M) for lack of internal controls and deceptive marketing practices. Our financial system is a disaster waiting to happen. The details follow:
J.P. Morgan agreed to pay more than $920 million to settle with the SEC, the Office of the Comptroller of the Currency, the Federal Reserve and the U.K.’s Financial Conduct Authority over a trading blunder that cost the bank more than $6 billion.
Yet the SEC is continuing a civil investigation of individual employees of J.P. Morgan who are connected to the matter, according to people familiar with the probes. Also, the agency refused to negotiate the amount of the fine, according to people familiar with the proceeding. That represents an unusually tough stance by the SEC, regulatory experts said.
The settlements came as J.P. Morgan separately agreed to pay $80 million to regulators to settle allegations of deceptive marketing practices related to identity-theft protection and other services sold to credit-card customers. That fine brought J.P. Morgan’s regulatory tab for Thursday to $1 billion.
In a rare move in such settlements, J.P. Morgan admitted to wrongdoing as part of its agreement with regulators. “We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them,” Mr. Dimon said in a statement.
Other agencies continue probes of the matter. A U.S. grand jury on Monday indicted two former traders in connection with the trades. Both men have denied wrongdoing. Bruno Iksil, dubbed the London whale after faulty trades prompted the losses in 2012, signed a non-prosecution agreement in June. Mr. Iksil’s lawyer couldn’t immediately be reached for comment.
The Commodity Futures Trading Commission is still investigating whether J.P. Morgan manipulated markets through its heavy trading in derivatives last year. J.P. Morgan disclosed in a securities filing on Thursday that it has received a “Wells notice” from the CFTC, indicating an enforcement action is possible.
The whale settlements come more than a year after the New York bank first acknowledged that a massive trading bet in London on credit derivatives had gone wrong. The losses, which ballooned to more than $6 billion from J.P. Morgan’s initial estimate of $2 billion, stemmed from bad bets in its Chief Investment Office, which manages risk for the bank.
The SEC is looking at individuals who might have been responsible for the alleged failures in internal controls and corporate governance at the center of the agency’s settlement with the firm, according to a person familiar with the probe. The continuing investigation is looking at whether J.P. Morgan officials were negligent in not fulfilling their duties, which is a less serious potential charge than intentional fraud, according to the person close to the probe.
A bipartisan group of Senate lawmakers urged regulators to bring additional charges against J.P. Morgan, saying the firm has yet to be held fully accountable for misstatements by senior executives about the trading fiasco. Sens. Carl Levin (D., Mich.), Jeff Merkley (D., Ore.) and Charles Grassley (R., Iowa) said the settlement doesn’t go far enough even though it involved substantial penalties.
Mr. Levin, who chairs the Senate Permanent Subcommittee on Investigations, which conducted a nine-month investigation of the London trades, said that while the size of the settlement “is testimony to the great damage risky derivatives bets can do,” the issue of “misinforming investors and the public is conspicuously absent from the SEC findings and settlement.”
The trading fiasco resulted in a hit to J.P. Morgan’s reputation as a stellar risk manager, and gave a black eye to Mr. Dimon, who has been known for close attention to details of the bank’s operation. It also triggered the departures of top executives.
The announcement of the civil settlement, which had been expected, marks one of the largest fines a bank has had to pay over a single trading strategy. The regulators charged the company with poor controls surrounding the London whale trades.
“While grappling with how to fix its internal-control breakdowns, J.P. Morgan’s 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,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.
The OCC, J.P. Morgan’s primary regulator, is receiving the biggest slice of the settlement, at $300 million. The SEC and the Fed are each getting $200 million, with the FCA getting £137.6 million ($222 million).
Among the lapses J.P. Morgan admitted to as part of its settlement with the SEC was keeping its board, particularly its independent audit committee, in the dark about the status of the trades even as losses mounted, a violation of the 2002 Sarbanes-Oxley law.
Another “woefully deficient” lapse J.P. Morgan acknowledged was having one person in charge of checking the books on the London whale trades.
Jason Hughes, who wasn’t identified by name in the settlement, was the bank’s only employee tasked with keeping some of the most powerful traders in the firm honest about how profitable their trades were, according to people familiar with the matter.
Mr. Hughes was responsible for checking the values traders assigned to 132 trading positions, many of which were complex, hard-to-value derivatives contracts in order to make sure the banks books and company filings were accurate, according to the bank’s settlement agreement with the SEC.
A lawyer for Mr. Hughes didn’t immediately respond to requests for comment. J.P. Morgan declined to comment on the accounting matter.
The SEC approved the settlement by a two-to-one vote, according to people close to the agency. Typically, the full five-member commission would have voted on the settlement. But in the case of J.P. Morgan, two voting members of the SEC recused themselves because of previous ties to the giant New York bank. (Credits – By Robin Sidel, Scott Paterson and Jean Eaglesham for the Wall Street Journal).
The Master of Disaster