It was a trading debacle so large it took the name of the biggest animal on earth. Now regulators have levelled a penalty suitable in size.
JPMorgan Chase & Co. agreed to pay a total of $920-million (U.S.) to American and British authorities to resolve multiple probes into its “London Whale” fiasco, a fine that represents one of the heftiest settlements ever paid by a financial institution.
In a rare admission, the bank acknowledged that it had violated securities laws by allowing traders to misrepresent the value of their bets and by neglecting to convey important information to its board of directors.
The bank “failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,” said George S. Canellos, a senior official at the U.S. Securities and Exchange Commission, in a statement on Thursday. JPMorgan’s top management “broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems.”
The settlement marks an aggressive turn for the SEC. Its prior strategy allowed banks to neither admit nor deny its allegations when paying fines, a policy its new chief had called into question.
Thursday’s announcement is also a humbling moment for the U.S.’s biggest bank, which has grappled with the fallout from the trading disaster for more than a year. The positions, which involved a portfolio of credit derivatives in London, cost the bank $6-billion in losses and damaged the reputation of CEO Jamie Dimon, previously considered one of the savviest risk managers on Wall Street.
The disaster also led to criminal charges against two London-based traders.
Ever since the extent of the losses emerged last spring, JPMorgan has been subject to a torrent of regulatory scrutiny. Thursday’s settlement involved four regulators, three in the U.S. and one in the U.K. But it does not mean that JPMorgan’s legal troubles have been put to rest. Another regulator, the U.S. Commodity Futures Trading Commission, is continuing its probe into the trades. And there’s still a criminal investigation under way by federal prosecutors in Manhattan.
In a statement, the bank called the settlements “a major step in the firm’s ongoing efforts to put these issues behind it.” Mr. Dimon added that JPMorgan “accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them.”
In its settlement order, the SEC noted that the accounting controls in the unit responsible for the London Whale trades were “woefully deficient.” A single employee was in charge of verifying the value of the positions, it said; one of the spreadsheets involved in pricing the trades had data that was manually entered and contained errors. One such error produced a $237-million discrepancy in the way the trades were valued, the SEC said.
The settlement also revealed that the internal reviews of the “London Whale” positions were so troubling that some of the bank’s senior executives expressed reservations about endorsing its first-quarter financial statements. One executive even contacted an outside lawyer, the SEC said, to discuss the scope of his obligations in signing off on the statements.
The three other regulators involved in Thursday’s agreement – the U.S. Federal Reserve, the Office of the Comptroller of the Currency and the U.K. Financial Conduct Authority – also weighed in. The trading activity in question was “recklessly unsafe and unsound” and formed “part of a pattern of misconduct,” the OCC said in its findings. For its part, the Financial Conduct Authority said that the bank’s executives in London “deliberately misled” the British regulator with reassurances even as they struggled with what they knew was a growing crisis.
Experts said that the admission of wrongdoing by JPMorgan marked a turning point. Paying penalties had become “just the cost of doing business,” said Cornelius Hurley, director of the Center for Law, Finance and Policy at Boston University. “The fact that they admitted to the underlying offences means they didn’t skate on the issues.” It also could open the door to other lawsuits from private parties, he said.
The settlement caps a remarkable evolution for Mr. Dimon, who has gone from flippant to defiant to repentant over the course of the scandal (in its earliest days, he memorably dismissed the trades as a “tempest in a teapot”). He later apologized for the trading blunder, describing it in a letter to investors as the “stupidest and most embarrassing situation I have ever been a part of.”
Earlier this week, Mr. Dimon wrote a lengthy memo to JPMorgan’s staff in which he said that ensuring the bank complies with regulations is “priority #1.” The bank has begun an “unprecedented effort” to make that happen, he wrote, which includes Mr. Dimon personally meeting with the bank’s examiners on a regular basis.
The London Whale episode is not the only recent regulatory woe for the bank. On Thursday, regulators also ordered the bank to refund $300-million to customers and pay further fines of $80-million over faulty practices in its credit-card division. Meanwhile, federal prosecutors are reportedly investigating whether the bank obstructed a recent probe into its alleged manipulation of electricity markets.