JPMorgan Expected to Admit Fault in ‘London Whale’ Trading Loss
For JPMorgan Chase, fines totaling billions of dollars are no longer sufficient to placate the government. Now the bank's regulators want something stiffer: a mea culpa.
A month after JPMorgan acknowledged that "severe breakdowns" had allowed a group of traders in London to run up $6 billion in losses, the bank has preliminarily reached a rare agreement to admit that the trading blowup itself represented reckless behavior, according to people briefed on the negotiations.
The bank could settle with the Commodity Futures Trading Commission as soon as this week, according to the people briefed on the negotiations, who were not authorized to discuss the private settlement talks. Aside from admitting some wrongdoing, the bank is expected to pay about $100 million to resolve the case, a trading debacle last year that has come to be known as the London Whale episode.
Unlike a settlement last month with the Securities and Exchange Commission, which largely took aim at porous controls and governance practices at the bank, the pact with the Commodity Futures Trading Commission zeros in on the bank's actual trading practices. The agency, using new authority under the Dodd-Frank Act of 2010, argues that the bank's trading was so large and voluminous that it violated a law preventing banks from recklessly using a "manipulative device" in the market for credit derivatives, financial contracts that let the bank bet on the health of companies like American Airlines.
JPMorgan's concession, part of a broader policy shift in Washington that emerged in fits and starts over the last year, is the most aggressive step in reversing a decades-long practice of allowing banks to "neither admit nor deny" wrongdoing. The deal also could set a precedent that potentially exposes a bank to scrutiny — from the government and from shareholder lawsuits — whenever it builds a huge trading position that alters the market.
The change in regulators' approach traces in part to criticism that Wall Street misdeeds generated only token settlements that banks could easily afford. When Mary Jo White took over the S.E.C. this year, she outlined a new policy for extracting admissions in certain cases.
For the government, an admission by JPMorgan could provide a template for pursuing other admissions in Wall Street cases. Already, according to people briefed on the matter, the Justice Department is pushing JPMorgan to admit that from 2005 to 2007, it sold mortgage securities to investors without fully warning of the risks.
Yet the regulatory crackdown is not comprehensive. The fine print of JPMorgan's admission — in both the S.E.C. and C.F.T.C. cases — provides the bank some cover from private litigation. Rather than admitting market manipulation, the bank is expected to acknowledge a series of facts that the C.F.T.C. will characterize as "recklessly employing manipulative devices." While it is a small and technical distinction, it could save the bank from an onslaught of shareholder lawsuits.
The bank also won some ground on the breadth of its wrongdoing. It agreed, the people briefed on the negotiations said, to admit wrongdoing stemming from trading on one particular day. The trading commission is likely to refer to other trading in its order against the bank, but JPMorgan is expected to neither admit nor deny wrongdoing in those instances.
The aggressive policy can have repercussions for regulators. If a bank balked at making an admission, for example, it could lead to costly litigation that government agencies can ill afford.
The JPMorgan case nearly highlighted this risk.
The bank, arguing that its trading was legitimate, resisted an admission. And the trading commission drafted a potential lawsuit. Talks reopened in recent weeks, paving the way for the admission.
JPMorgan declined to comment on the settlement talks.
The people briefed on the negotiations cautioned that the settlement could face delays since the government is now shut down. The trading commission is operating with about 30 employees, a fraction of its roughly 700-person staff.
David Meister, the agency's enforcement chief, is among those working. If a settlement emerges in the coming days, it could be his last at the agency. Mr. Meister recently announced plans to depart the agency after overhauling the enforcement unit.
Despite the recent push, the agency had yet to charge a big Wall Street bank over a "manipulative devices" violation. For years, the agency had to prove that a trader intended to manipulate the market, and successfully created artificial prices.
But under Dodd-Frank, the financial regulatory overhaul passed after the crisis, the agency must show only that a trader acted "recklessly." The agency harnessed that new authority to pursue the JPMorgan trading, where it was unclear whether the traders had intended to distort the market. All together, the bank's traders increased their position in a credit derivative index by $34 billion in early 2012, according to a Senate report.
"The commission is trying to flex its muscle under the Dodd-Frank standard and is also going an extra yard to get an admission," said Hugh J. Cadden, a former enforcement official at the C.F.T.C.
The trading commission was the sole holdout in settling London Whale cases. In September, JPMorgan paid $920 million to four other regulatory agencies — the S.E.C., the Financial Conduct Authority of Britain, the Federal Reserve and the Office of the Comptroller of the Currency. The bank also admitted to the S.E.C. that it had violated federal securities laws. The agency, however, continues to investigate the trading loss.
(Read more: JPM pays hefty cost for 'Whale')
Even before a settlement, federal prosecutors and the Federal Bureau of Investigation in Manhattan have brought criminal charges against two of the traders: Javier Martin-Artajo and Julien Grout, who were accused of covering up the size of their losses. The traders deny wrongdoing. A third trader, Bruno Iksil, sidestepped charges, striking a nonprosecution deal.
(Read more: 'London Whale' deputy: I am innocent)
As JPMorgan faces a broader wave of scrutiny — at least seven federal agencies, several state regulators and two foreign countries are investigating the bank — its legal bills have mushroomed. On Friday, JPMorgan announced that it would have to set aside $9.2 billion to cover those legal expenses at a cost that led the bank to report its first quarterly loss under Jamie Dimon, its chief executive.
A portion of that money is expected to cover a settlement with the Justice Department over questionable mortgage practices. So far, the discussions for that deal have languished, said people familiar with the matter. JPMorgan has offered to pay a roughly $7 billion fine and provide a billion dollars in relief for struggling homeowners, the people said.
—By Ben Protess and Jessica Silver-Greenberg, The New York Times.